2012 Year-End False Claims Act Update

January 8, 2013

For years, the Department of Justice (“DOJ”) has sought recoveries under the False Claims Act, 31 U.S.C. §§ 3729-33 (the “FCA” or the “Act”), with a torrid pace.  In 2012, those efforts remained unabated.  The federal government recovered approximately $5 billion in the last fiscal year alone from settlements and judgments in cases filed under the FCA.[1]  This record amount marks the third consecutive fiscal year in which the government recovered more than $3 billion[2] and brings total recoveries under the FCA during the last four years up to $13.3 billion, the largest four-year total ever.[3]

Although staggering, the monetary values of these settlements and judgments tell only part of a much bigger story:  Today, FCA resolutions frequently entail significant non-monetary components requiring companies to implement enhanced compliance practices that can compound corporate trauma and disruption.  Moreover, the DOJ continues to advocate novel recovery theories–pushing the envelope past the statute’s historic roots.  We have pounded the drum consistently about the onslaught of FCA cases. And all available evidence shows that as the government’s recoveries under the FCA continue to grow, the DOJ continues to devote more resources to investigating and enforcing the Act, and plaintiffs’ lawyers representing “whistleblowers” (called qui tam relators) continue to file more qui tam lawsuits.  As Acting Associate Attorney General Tony West recently stated, the government views the FCA as the primary weapon in its arsenal:  “The False Claims Act is, quite simply, the most powerful tool we have to deter or redress fraud.”[4]

2012 was no exception.  As in prior years, the government’s enforcement of the FCA–in cases brought either directly by the government or by qui tam relators–spread across the pharmaceutical, health care, defense, government procurement, mortgage, financial, and educational industries, among others.  In the last fiscal year alone, for example, the government trumpeted FCA recoveries of more than $3 billion in the pharmaceutical and health care industries and, as part of the government’s February 2012 record settlement with five banks over the 2008 mortgage crisis, $900 million related to alleged mortgage fraud.[5]  Theories of FCA liability continue to expand, as the DOJ selectively and surgically seeks test cases through which to envelop the entire government contracting process–from bid through performance–in potential FCA liability, with damages potentially equal to three times the full contract price.  Indeed, despite the Supreme Court’s warnings,[6] the FCA truly has become an “all-purpose anti-fraud statute”–with any entity receiving any federal funding in any fashion potentially subject to an FCA suit.

FCA whistleblowers also fared well in 2012.  As you know, these relators, empowered by the Act to file suits on the government’s behalf, can receive as much as 30% of any recovery obtained in the suit by the government (the exact amount depending upon whether the government intervenes in the suit).[7]  In 2012, qui tam relators earned more than $439 million in share awards.[8]  More than 60% of the government’s recoveries in 2012 ($3.3 billion) derived from cases initiated under the FCA’s qui tam provisions, and whistleblowers initiated more new matters in 2012 than in any prior year on record (647, or 82.7% of the 782 new matters).[9]  In all, private individuals initiated more than 8,489 qui tam actions since 1986, when statutory amendments markedly expanded whistleblowers’ rights and protections and increased the percentage of their potential recoveries.[10]  Total recoveries since 1986 from whistleblower suits now exceed $24 billion.[11]

These ever increasing bounties, along with rapidly expanding theories of liability under the FCA, make it easy to see why the number of qui tam cases continues to increase, why qui tam cases account for most new FCA matters opened each year, and why a thriving cottage industry of plaintiffs’ lawyers and qui tam resources has developed.

Although qui tam relators initiate far more FCA lawsuits than the government, and although the government declines to intervene in most, the DOJ continues to actively prosecute FCA cases.  In our 2012 Mid-Year False Claims Act Update, we discussed how the Obama Administration increased the focus on the FCA and sought large monetary and non-monetary settlements from potential FCA defendants.  The Administration’s “relentless focus” on eliminating fraud and waste in government programs is achieving considerable results.[12]  More than 99% of the $4.9 billion recovered under the FCA in fiscal year 2012 arose from cases where the government either filed the case directly or intervened in an action filed by a qui tam relator; less than 1% of that amount was recovered in actions in which the DOJ declined to intervene.[13]  Clearly, as we have reiterated in our earlier Alerts, the government’s determination whether to intervene in an FCA qui tam case represents one of the most crucial junctures in the entire proceeding.

The federal government is not alone in pursuing recoveries under the FCA; as of this writing, twenty-nine states and the District of Columbia have adopted their own false claims laws.  Several states recently strengthened their laws, and at least seven states currently have legislation pending to either enact or expand a false claims law.  (A number of municipalities, including New York City, also have their own false claims laws.)  As budgetary pressures at the state and local level drive state officials to weed out “waste, fraud, and abuse,” we expect to see a significant increase in enforcement activity by states using both their own false claims laws and other related consumer protection laws.

In this year-end update, as we have in years past, we first summarize FCA enforcement activity from the fiscal year ending September 30, 2012.  We also provide substantive summaries of activity that occurred in the second half of calendar year 2012.  Next, we discuss important judicial decisions and trends occurring during the second half of the year.  And finally, we discuss legislative activity relating to the Act in the last six months.  The first half of 2012 was discussed in our 2012 Mid-Year False Claims Act Update.  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.          FCA Enforcement Activity

A.        Total Recovery Amounts:  The DOJ Sets a New Record with Nearly $5 Billion in Civil Recoveries

For the 2012 fiscal year, the federal government secured nearly $5 billion in civil settlements and judgments under the FCA–a record amount for recoveries in a single year.  The end of fiscal year 2012 also marked the end of a “record-setting four-year period,” in which the federal government recovered $13.3 billion from FCA cases;[14] an amount representing more than one-third of the total recoveries under the FCA since the 1986 amendments.

Fiscal year 2013 promises to be a banner year as well.  The DOJ already has announced more than 15 FCA settlements for the first quarter of fiscal year 2013 (October through December 2012), including a $762 million civil and criminal settlement billed by the DOJ as the largest in history involving a biotechnology company[15] and a $109 million civil settlement with a pharmaceutical company.[16]  And although the DOJ has yet to make an official announcement, yet another pharmaceutical company reported recently that it had reached an agreement-in-principle to enter a $491 million settlement (including $257 million to settle civil allegations).[17]  

B.        Qui Tam Activity

As in years past, whistleblowers were a key driver of the record-breaking 2012 recoveries under the FCA.  Of the $4.9 billion in fiscal year 2012 recoveries, a record $3.3 billion–or two-thirds–was recovered in whistleblower suits.[18]  As noted above, 647–82.7%–of the 782 new FCA matters opened during the 2012 fiscal year were initiated by complaints filed pursuant to the FCA’s qui tam provisions.[19]  This stands in contrast to fiscal year 1987, when relators initiated only 30–8%–of 373 new matters.[20]  The increase is both stark and accelerating.  Of the nearly 8,500 qui tam suits filed since the 1986 amendments, nearly 2,200 were filed after January 2009.[21]  These qui tam cases have led to over $24.2 billion in government recoveries since 1986, with almost half ($10.5 billion) of that amount recovered in the last four years.[22]  Further, for these 8,500 suits, whistleblowers have been awarded nearly $4 billion, with $439 million in awards in fiscal year 2012 alone.[23]  Overall, nearly 70% of all FCA recoveries since 1986 can be attributed to qui tam matters, and all indicators suggest this proportion will continue to grow.[24]  It is no wonder that the government is “extremely grateful” for these whistleblowers.[25]

The chart below demonstrates both an increase in overall FCA activity and a distinct shift from largely government-driven investigations and enforcement to qui tam-initiated activity.

FCA New Matters, Including Referrals, Investigations, and Qui Tam Actions

            *Source: DOJ “Fraud Statistics – Overview” (October 24, 2012)

The FCA authorizes the government to intervene in and take control over any qui tam action.  In practice, the government rarely does so: for every ten cases filed by relators, the government ultimately intervenes in only two.[26]  As we have noted in our prior alerts, the government’s decision whether to intervene in a matter remains a key indicator of the government’s subsequent recovery.  Of the $4.9 billion recovered in fiscal year 2012, only $29.3 million–a miniscule .06%–was obtained from actions in which the government declined intervention.[27]  Historically, this proportion has been slightly larger (it was 5.6% in 2011), as can be seen in the chart below.[28]  Either way, the data confirms our advice from past years: companies facing whistleblower claims should not underestimate the importance of persuading the government not to intervene.

            *Source: DOJ “Fraud Statistics – Overview” (October 24, 2012)

C.        Noteworthy Settlements Announced During the Second Half of 2012

In our 2012 Mid-Year False Claims Act Update we discussed several notable settlements and judgments announced during the first half of 2012, including a $1.5 billion settlement–$800 million civil–with a pharmaceutical company, which was accused of unlawful marketing and off-label promotion of its drug;[29] a $3 billion settlement with a different pharmaceutical company, which was accused of providing unlawful kickbacks and promoting its prescription drugs for off-label uses;[30] and a $1 billion settlement with two mortgage companies to resolve allegations that they inflated home appraisals on government-backed loans and falsely certified that certain borrowers met federal eligibility criteria.[31]  The following are significant settlements announced during the second half of the year (some of which are included in the government’s 2013 fiscal year):

• On July 2, 2012, the DOJ announced that an Arizona company with a chain of urgent-care facilities agreed to a $10 million settlement.  The company was accused of billing Medicare and other health coverage plans for unnecessary tests as well as inflating billings, or “upcoding.”[32]
• On July 3, 2012, an energy company paid more than $4 million to settle allegations that it made false or misleading statements to the Department of the Interior to receive a discounted price on natural gas.  The company had a contract to buy natural gas from the federal government.  The contract included a discount only when there was a major constraint in the pipeline that interfered with the transport of oil, but the company allegedly obtained the discount even when there was no constraint in the pipeline.[33]
• On July 31, 2012, three individuals in Oklahoma agreed to pay $5.3 million to settle allegations that they knowingly made false statements as part of a mortgage refinancing scheme to the Department of Housing and Urban Development (“HUD”) about three nursing homes they were refinancing under a HUD-insured program–in particular, they allegedly made false statements about the “eligible existing indebtedness” of the homes.[34]
• On August 24, 2012, the DOJ announced a $16.5 million settlement with a hospital group accused of participating in a kickback scheme in which medically unnecessary treatments were billed to Medicare and Medi-Cal. Under the alleged scheme, the hospitals paid
  “recruiters” to bring homeless individuals from Skid Row in Los Angeles to hospitals by ambulance for medically unnecessary treatment that was then billed to Medicare or Medi-Cal.[35]
• On September 19, 2012, one of the nation’s largest for-profit hospital chains agreed to pay $16.5 million to settle allegations that it gave financial benefits to doctors in exchange for patient referrals.  For example, the hospital chain allegedly paid above-market rent amounts for office space owned by a doctor group to help the group pay its mortgage and to encourage the group to refer patients to the hospital.  The claim was initially brought in a qui tam action in the Eastern District of Tennessee.[36]  The relator received 18.5% of the settlement and the state of Tennessee received less than $1 million of the settlement, with the remainder going to the federal government.  The hospital group also entered a five-year Corporate Integrity Agreement (“CIA”) with the Department of Health and Human Services (“HHS”) Office of Inspector General (“OIG”).[37]
• On September 21, 2012, a global telecommunications provider agreed to pay $4.2 million to settle allegations that it gave the government misleading information in connection with a $250 million contract to design and build an emergency response system in Iraq.  The company allegedly falsely certified that it had successfully tested the system to ensure that the system functioned properly.  The former contract manager for the project brought the underlying whistleblower suit and received $758,000 in the settlement.[38]
• On October 1, 2012, the DOJ announced a $5 million settlement with a manufacturing company accused of submitting false certifications to participate in a government program that creates employment opportunities for people with certain disabilities.  The company allegedly employed many non-disabled people to work on the contract and did not appropriately report their hours in certified reports to the government.  A former employee of the manufacturer initiated the qui tam action.[39]
• As we reported in our 2012 Mid-Year False Claims Act Update, in May 2012 a pharmaceutical company agreed to resolve criminal and civil allegations of unlawfully marketing and promoting a prescription drug to treat dementia and schizophrenia, uses not approved by the Food and Drug Administration (“FDA”) (i.e., off-label promotion).  On October 2, 2012, the company was sentenced and ordered to pay a $500 million criminal fine, plus a forfeiture of $198.5 million.[40]  This is only part of the $1.5 billion total settlement–which included an $800 million civil award, with $560.5 million to the federal government and $239.15 million to states.[41]  Four whistleblowers received a total of $84 million from the federal settlement.  Notably, the DOJ insisted on numerous non-monetary penalties in the settlement as well: among other things, the company entered into a CIA with HHS OIG, it 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.[42]
• On October 15, 2012, a prescription drug plan provider agreed to pay $5 million to settle civil allegations that the provider advertised false drug pricing information to Medicare Part D participants.  The government operates a tool called “Plan Finder” to help Medicare Part D participants choose a prescription provider and estimate and minimize their prescription drug costs.  The defendant allegedly gave false information about its pricing for use on Plan Finder, despite certifying that the information was accurate, and received payments for some drugs that were higher than the prices it submitted for use on Plan Finder.  This settlement–one of the first involving Medicare Part D–stemmed from two qui tam actions filed in 2008 and 2009 and consolidated in 2011.[43]
• On October 25, 2012, a Connecticut-based pharmaceutical company agreed to pay $95 million to resolve allegations of off-label drug promotion and illegal kickbacks involving four of its prescription drugs.  Nearly $80 million of the settlement was allocated to the federal government.  The relator who initiated the underlying qui tam action received more than $17 million.[44]
• On November 2, 2012, a medical device company agreed to pay $30 million to settle civil allegations that the company’s subsidiary paid kickbacks to surgeons in exchange for using its products.  In particular, the company allegedly paid spinal surgeons to use its products by employing sham consulting and royalty agreements, as well as fake research grants and travel and entertainment.  The relator who initiated the qui tam action received $8 million.[45]  As part of the settlement, the company also entered into a CIA with HHS OIG.[46]
• On November 5, 2012, a Missouri-based healthcare provider and hospital system agreed to pay $9.3 million to resolve allegations that it violated the Stark Act and the FCA by knowingly billing Medicare for services referred to the provider by physicians that had a financial relationship with the provider.  The provider allegedly gave incentive pay to approximately seventy physicians based on the revenue generated by the physicians’ referrals for certain diagnostic testing and other services performed at provider-owned clinics, and then billed Medicare for the services.[47]
• On November 9, 2012, a pharmaceutical company reported that it had reached an agreement-in-principle to enter into a $491 million settlement that included a misdemeanor guilty plea.  The company allegedly promoted an organ transplant drug for off-label uses, targeted marketing to African American patients even though this was considered a high-risk population, and paid kickbacks to doctors.  Of the settlement amount, $257 million is allocated to resolving the civil allegations, while $234 million satisfies the criminal allegations.  The agreement is the result of a government investigation into allegations made in whistleblower lawsuits.  The company disclosed the $491 million payment in its 2012 third-quarter earnings announcement, but the DOJ has not yet formally announced the agreement.[48]
• On November 20, 2012, a group of Florida hospitals agreed to pay $10.1 million to the federal government to resolve allegations that they violated the FCA by submitting false claims for services rendered to Medicare patients.  The hospital group allegedly overbilled for certain interventional cardiac and vascular procedures as inpatient when they should have been billed as less costly outpatient or observational care matters.  The settlement resolved a qui tam lawsuit filed by a former employee, who will receive more than $1.8 million as her relator’s share.[49]
• Also on November 20, 2012, Florida’s Technological Research and Development Authority (“TRDA”) agreed to pay $15 million and wind down its operations to resolve allegations that it violated the FCA in connection with grants from NASA and the Economic Development Administration (“EDA”) of the Department of Commerce.[50]  The settlement was a result of a lawsuit, brought by the United States, alleging that construction of a TRDA office building was outside the scope of the awarded NASA grants and contrary to the terms of an EDA grant.[51]  Relatedly, the Melbourne International Airport and its governing body, the Melbourne Airport Authority, agreed to pay $4 million to the United States to resolve allegations based on the same underlying facts.[52]
• Again on November 20, 2012, a South Carolina-based hospice care provider and its CEO/Owner agreed to pay the United States almost $1.3 million and submit to federal monitoring to settle allegations that the company knowingly submitted false claims to Medicare.  The CEO/Owner is individually liable for $200,000 of the settlement amount.  Medicare beneficiaries are entitled to hospice care if they have a terminal prognosis of six months or less, but the hospice care provider allegedly submitted claims to Medicare for patients who did not qualify.  This payment settles a lawsuit filed under the qui tam provisions of the FCA by two former employees.[53]  They will together receive $244,529.87 as their share of the government’s recovery.[54]
• On December 5, 2012, two Kentucky-based defense contractors and their owners agreed to pay $6.25 million to resolve allegations that they made false statements to the Small Business Administration to obtain certification as a HUBZone company.  Under the HUBZone program, small businesses that maintain their principal office in a designated low-income, high-unemployment zone can obtain HUBZone certification and thereby gain advantage in bidding on government contracts.  To gain an advantage in Army contract bidding, the defense contractors at issue submitted documentation that allegedly falsely represented a vacant office building in a HUBZone as their principal place of business.  The companies and their owners will pay $3.74 million and forfeit $2.5 million seized by federal agents during the investigation.[55]
• On December 6, 2012, a Texas-based pharmaceutical company agreed to pay up to $48 million to resolve allegations that it caused false claims to be submitted to Medicare and Medicaid for an unapproved skin ointment drug.[56]  The company allegedly marketed the drug in the United States without FDA approval even though the safety and efficacy data for the drug was insufficient.[57]  The company then allegedly misrepresented the unapproved status of the drug in quarterly reports to the government by claiming that the drug was FDA-approved and eligible for Medicare and Medicaid reimbursement.  As part of the settlement, the company will pay $28 million, plus another $20 million if there is a change of ownership in the next three years.  Although this settlement was to resolve allegations against the company in the entirety of a multi-defendant, multi-state whistleblower action,[58] on December 19, 2012, state officials in Indiana asked a Massachusetts federal court to reopen one of the underlying whistleblower suits, as they had not yet signed on to the settlement.[59] 
• On December 17, 2012, a Japan-based ink company and two of its U.S. affiliates agreed to pay $45 million to settle allegations that it knowingly misrepresented the country of origin for its products, thereby evading its responsibility to pay antidumping and countervailing duties.  The president of a domestic competitor brought these allegations against the company in a whistleblower suit.[60]  He will receive more than $7.8 million as his share.[61]
• On December 18, 2012, a roofing contractor agreed to pay $3 million to settle allegations that it paid kickbacks to NASA contracting officers to win roofing contracts at the Johnson Space Center.[62]  Two former employees brought these allegations in a whistleblower suit in which the DOJ intervened in 2009.[63]
• On December 19, 2012, an American biotechnology company agreed to pay $762 million to resolve criminal and civil allegations related to its marketing of an anemia drug and other products.  The company allegedly promoted the use of the anemia drug for off-label doses and uses that the FDA had previously considered and rejected, and the government alleged that the company specifically instructed its sales representatives to create a smokescreen of “reactive marketing” by inducing doctors to ask about off-label uses.[64]  In the civil settlement, which resolves claims contained in ten separate qui tam lawsuits, the company will pay $612 million ($587.2 million to the United States, $24.8 million to individual states) to resolve allegations that also include false Medicare and Medicaid claims, illegal physician kickbacks, and false price-reporting practices.[65]  The criminal settlement includes a guilty plea, as well as a criminal fine of $136 million and a $14 million criminal forfeiture.  According to the DOJ, this is the single largest civil and criminal FCA settlement involving a biotechnology company in U.S. history.[66]
• In a separate but related civil settlement, a national physician services network agreed to pay $15 million to resolve civil liability resulting from its role in marketing the anemia drug.  The network allegedly offered illegal kickbacks to induce health care providers to select the drug for kidney disease treatment, and in doing so caused false price reporting for the drug.[67]  This settlement resolves a single qui tam action.[68]
• On December 19, 2012, two U.S. subsidiaries of a French pharmaceutical company agreed to pay $109 million to resolve allegations that the company, facing pressure from a lower-priced competitor, provided its sales representatives with samples of a product, which the representatives then gave free to doctors as purchase incentives.[69]  This alleged scheme purportedly allowed the manufacturer to increase prescriptions of the product without lowering its price and triggering a price war, and allegedly kept the price at which Medicare reimbursed for the product elevated above the true market price.  The settlement resolves a qui tam lawsuit filed by a former sales representative, who will receive $18.5 million as his share of the recovery.[70]
• On December 20, 2012, an education company admitted wrong and agreed to pay $10 million to settle allegations that it fabricated attendance records to seek federal reimbursement from a federal program for underprivileged children for tutoring services it did not provide.[71]  The payment resolves a whistleblower suit brought by a former employee.[72]
• Also on December 20, 2012, a North Carolina-based healthcare provider agreed to pay $8 million to resolve allegations that it submitted false claims to Medicare.  The provider allegedly classified outpatient procedures as inpatient to garner greater reimbursement from government programs.[73]  An investigation into the provider showed that it had the state’s largest percentage of “zero-day stays,” cases in which claims are submitted for inpatient services despite patients leaving the hospital without staying one night.  The provider also entered into a deferred prosecution agreement under which it agreed to additional monitoring and oversight.
• On December 26, 2012, an Illinois-based hardware distributor agreed to pay $70 million to settle allegations that it submitted false claims regarding contracts with both the General Services Administration (“GSA”) and the U.S. Postal Service (“USPS”).  According to the DOJ, the company failed to provide required information to the GSA regarding pricing policies and discounts given to other private sector customers, causing the government to pay more than it should have.  Similarly, the company’s failure to give the USPS its contracted-for “most favored customer” status caused the USPS to pay more than it should have under the contract.[74]
• On December 27, 2012, a New York non-profit university and a for-profit online education provider paid a total of $4 million to resolve allegations that they submitted false claims in connection with federal student loans and grants.  The university allegedly contracted with the online education provider to allow the provider to use the university’s eligibility for federal student loan and grant funding allegedly in exchange for awarding degrees from the university to online students.  The provider then allegedly used recruiters who were paid according to the number of students they enrolled, in violation of the incentive compensation ban contained in the U.S. Department of Education’s regulations.[75]
• On December 28, 2012, a San Diego-based pharmaceutical company agreed to pay more than $11 million to settle allegations that it gave doctors illegal kickbacks to encourage them to prescribe the company’s products.  These kickbacks allegedly included tickets to sporting events, dinners, ski and spa outings, and “preceptorships,” in which doctors were paid to allow sales representatives to “shadow” them.  The action began with a whistleblower lawsuit in the Southern District of California, and the relator will receive $1.7 million as part of the settlement.[76] 

The various states have also been pulling their weight when it comes to enforcing their state-based false claims acts.  Two recent examples include:

• On July 26, 2012, a drug wholesaler entered into a $151 million settlement with twenty-eight states and the District of Columbia to resolve allegations that it reported inflated average wholesale prices of prescription drugs and thereby caused state Medicaid programs to overpay in reimbursing pharmacies.[77]  The settlement stemmed from a federal qui tam case filed in 2005.[78]  This settlement follows closely on the heels of the same defendant’s April 2012 resolution of a federal investigation for more than $187 million.[79]
• In a settlement announced on September 19, 2012, New York’s Attorney General resolved claims that a company that supplied food management services to New York schools and school districts received discounts from food vendors but failed to pass those along to the schools and school districts.[80]  The company agreed to pay $18 million and consented to creating a nutritional code of conduct.[81]

D.        Industry Breakdown

The FCA targets fraud in all government programs.  And with relators, the DOJ, and courts all broadening their views of the conduct that is actionable under the FCA and with the continued infiltration of government dollars into various parts of our economy, these targets continue to grow.  In 2012, however, most recoveries arose from the Health Care/Pharmaceutical, Defense/Procurement, and Mortgage/Financial industries.  As in years past and demonstrated by the following chart, by far the largest source of recovered funds in 2012 was the Health Care/Pharmaceutical industry. 

            *Source: DOJ “Fraud Statistics – Overview” (October 24, 2012)

            1.         Health Care/Pharmaceutical Industry

Most recoveries in fiscal year 2012–a record-breaking $3 billion–stemmed from settlements and judgments involving fraud allegedly committed against federal health care programs.[82]  Since January 2009, the DOJ has recovered $10.1 billion for health care fraud under the FCA.[83]  And in its most recent Semiannual Report to Congress, HHS OIG reported expected recoveries of about $6.9 billion, including $6 billion in “investigative receivables.”[84]  HHS OIG also reported commencing 367 civil actions in fiscal year 2012, which includes FCA and other civil and administrative actions.   

In July 2012, the Administration announced a new public-private partnership, its latest effort in the fight against health care fraud.  Described as “a ground-breaking partnership among the federal government, state officials, several leading private health insurance organizations, and other health care anti-fraud groups,” the new partnership is an effort to “share information and best practices in order to improve detection and prevent payment of fraudulent health care billings.”[85]  This new partnership will build on the work of the Health Care Fraud Prevention and Enforcement Action Team (“HEAT”), which was formed in 2009[86] and generated more than $8.8 billion in health care fraud recoveries for the government in the first three years of its existence.[87]  Acting Associate Attorney General West noted, “When you look at the largest top 10 pharmaceutical health care fraud recoveries in history, six of them were achieved in the last three and a half years.  We’ve opened more health care fraud investigations, charged more criminal health care fraud defendants and obtained more money on behalf of the public in those last three and a half years than ever before.”[88]

As Acting Associate Attorney General West noted, pharmaceutical and medical device companies continue to account for some of the largest FCA recoveries.  During fiscal year 2012 alone, the government recovered nearly $2 billion in pharmaceutical and medical device FCA cases, a significant portion of the more than $3 billion recovered in total from the pharmaceutical and health care industries.  And that number includes only federal recovery; the DOJ also recovered $745 million for state Medicaid programs.[89]  Moreover, the fiscal year 2012 recovery amount does not include the two largest settlements of calendar year 2012–settlements in which the civil payouts to the federal government alone (excluding state payments or criminal penalties) were $561 million and $587 million, respectively, with two separate pharmaceutical companies.[90]   

In addition to record-breaking monetary recoveries, the DOJ increased its use of non-monetary penalties in the last year.  Acting Associate Attorney General West explained non-monetary penalties “give companies the tools to build and maintain real change–tools that allow them to reduce recidivism and prevent and deter violations in the future.”[91]  These non-monetary penalties were prominent in both of the large settlements mentioned above: for example, one company entered into a CIA with HHS OIG, it will be subject to probation for five years, its chief executive and board of directors must make certain certifications of compliance, and it agreed not to compensate sales representatives for off-label sales.[92]   

The DOJ is not alone in emphasizing prospective compliance, acknowledging efforts by its “agency partners . . . [to] negotiate compliance agreements in connection with their administrative remedies that establish tough structures to help prevent further instances of fraud.”[93]  For example, HHS OIG requires CIAs as a condition of waiving its exclusion authority.  These agreements, which have long been a regular component of negotiated FCA resolutions, now often include what HHS OIG calls “enhanced compliance provisions.”[94]  One notable example is an “Executive Financial Recoupment Program” (mentioned in our Mid-Year False Claims Act Update), which requires the company to claw back up to three years of annual performance pay (i.e., bonus plus long term incentives) from executives who are discovered to have participated in significant misconduct.[95]  Other enhanced provisions relate to management certifications, compliance experts and outside consultants, compensation policies, transparency in journal article authorship, and cooperation with continuing government investigations.  As Daniel Levinson, the Inspector General of HHS, said, “We continue our two-pronged attack on alleged fraudulent corporate behavior.  Our investigations expose wrongdoing, and our Corporate Integrity Agreements monitor companies’ compliance with controls designed to prevent future problems.”[96]

State agencies, too, have placed a focus on prospective relief.  Using deceptive marketing and other similar laws, many states have pursued cases based on allegations similar to those underlying many FCA cases.  Settlements arising out of these cases have included not only monetary relief, but also affirmative commitments regarding how the defendant companies will market and promote their products.[97]  And they are not without teeth: in December 2012, a large pharmaceutical company agreed to conduct a corrective advertising campaign on national television and to pay $1 million to the state of Oregon after Oregon alleged that the company’s receipt of two regulatory letters from FDA reflected violations of its 2008 consumer protection settlement with the state.[98]

There is every indication that health care will continue to lead FCA recoveries going forward.  Then-Acting (and now Principal Deputy) Assistant Attorney General Stuart Delery explained,

As you all know, retiree rolls are swelling – a trend that (along with other legal and demographic changes) will steadily increase the number of people participating in federal health care programs and the number of claims for federal health care benefits.  At the same time, our country is broadly confronted with economic and fiscal challenges . . .  Given this reality, we must safeguard our public dollars, and we must increase our emphasis on identifying and punishing waste, fraud, and abuse.[99]

            2.         Defense/Procurement 

The defense and procurement industries remain an abundant source for FCA enforcement activity.  As then-Acting Assistant Attorney General Delery pronounced in a speech to the American Bar Association, the DOJ has been vigilant in its efforts to “root out fraud in connection with the procurement of goods and services used by our military and civilian agencies, including fraud affecting our men and women fighting in Iraq and Afghanistan.”[100]  To better uncover fraud, the DOJ cooperated with the Financial Fraud Task Force, established by President Obama in November 2009, to “hold accountable those who would claim illegal advantage through false claims for funds intended to stimulate economic recovery.”[101]  This cooperation proved fruitful.  In fiscal year 2012, the government recovered $427 million in false claims for goods and services purchased by the government, bringing total recoveries for procurement fraud since January 2009 to $1.7 billion.[102]

This amount includes $73 million recovered in cases related to the wars in Iraq and Afghanistan.[103]  Notable outcomes were a $37 million settlement with a government contractor, resolving allegations involving defective illuminating flares sold to the Army and Air Force,[104] and a $31.9 million settlement regarding allegations of inflated contractor billing.[105]  Regarding a $4.2 million settlement involving alleged fraud in setting up Iraq’s emergency communications system, a DOJ representative stated, “The integrity of our public contracting system is a matter of paramount concern to the Department of Justice, especially where contractors have been engaged to supply critical support for the work of stabilizing Iraq and Afghanistan.”[106]  This concern is reflected in the more than $226 million in total civil fraud recoveries related to the wars in Iraq and Afghanistan that the government has accumulated since January 2009.[107]

As noted in our 2011 Year-End False Claims Act Update, the Commission on Wartime Contracting, in its August 2011 Final Report to Congress, conservatively estimated that as much as $60 billion may have been lost to contract waste and fraud in America’s contingency operations in Iraq and Afghanistan (based on contract spending from Fiscal Year 2002 projected through the end of Fiscal Year 2011).[108]  Additionally, the Inspectors General at the Recovery Accountability and Transparency Board (a non-partisan agency created by the American Recovery and Reinvestment Act of 2009) have reported 3,929 complaints of wrongdoing associated with Recovery funds from February 2009 through September 2012.[109]  Nearly 2,000 of these complaints triggered investigations.  In that time period, Inspectors General also completed 2,661 reviews of activity involving Recovery funds, many of which resulted in recommendations to agencies for improving the management of these funds.[110]  So far, the level of activity in this industry has remained fairly constant over the last two years, with similar amounts of new matters and recoveries.[111]  The two reports above, however, coupled with the ongoing evolution of operations in Afghanistan from combat to rebuilding, point to an increase in DOJ policing efforts in this sector.[112]

            3. Mortgage/Financial

The federal government in 2012 was “actively pursuing financial fraud schemes, which can have devastating effects beyond just the Federal Government, often hitting ordinary Americans directly.”[113]  This focus yielded substantial returns.  Cooperation between the DOJ and the above-mentioned Financial Fraud Task Force resulted in the government’s recovery of $1.4 billion in housing and mortgage-related cases under the FCA.[114]

In February 2012, as noted in our 2012 Mid-Year False Claims Act Update, the federal government, the Attorneys General of 49 states and the District of Columbia, and the nation’s five largest mortgage servicers announced a landmark $25 billion settlement that addressed alleged mortgage loan servicing and foreclosure abuses.[115]  Among its provisions–which included significant relief for struggling homeowners–the settlement resolved claims under the FCA that returned more than $900 million to federal mortgage insurance programs, including programs designed to promote home ownership by families and veterans.[116]  In addition, the agreement provided substantial financial relief to homeowners and established significant new homeowner protections for the future.[117]  

Other significant settlements to redress false claims in connection with federally insured mortgages include settlements with three different banks in the amounts, respectively, of $202.3 million, $158.3 million, and $132.8 million, as again noted in our 2012 Mid-Year False Claims Act Update.

Going forward, the federal government has committed substantial resources to identifying and preventing schemes that can negatively affect fragile housing markets–including instances of fraud in the origination, securitization, and servicing of mortgage loans; foreclosure public auction bid rigging; and discriminatory lending practices.[118]  Further, as we also noted in our 2012 Mid-Year False Claims Act Update, the DOJ’s fiscal year 2013 budget request includes a $55 million increase for investigating and prosecuting financial and mortgage fraud.[119]  According to a press release, this will enable the DOJ to “increase its efforts to help restore confidence in our markets, protect the Federal Treasury, and defend the interests of the U.S. government.”[120]  Of the $55 million total increase requested, $37.4 million would increase criminal enforcement efforts and $17.6 million would fund civil undertakings that “complement ongoing efforts to root out various forms of fraud.”[121]

Overall, FCA enforcement activity in this sector has increased exponentially over the past few years, and we expect the upward trajectory to continue.

II.        Case Law Developments

During the last six months, courts have continued to issue many opinions involving the FCA, generally expanding theories of liability, but also potentially curbing qui tam actions.  Most notably, opinions issued in the second half of 2012 have addressed (or raised) the questions discussed in the following section.

A.        Can a bid or estimate really constitute a false claim under the FCA?

The federal government and qui tam relators continue to press expansive theories of liability under the FCA, and courts have often been receptive to enlarging the scope of the FCA’s purview.  A relator recently attempted to broaden the FCA’s bounds even further, arguing that a bid or an estimate of future costs can constitute a false claim.  In United States ex rel. Hooper v. Lockheed Martin Corp., 688 F.3d 1037, 1049 (9th Cir. 2012), the Ninth Circuit agreed.  In Hooper, the relator alleged that Lockheed “violated the FCA by submitting a fraudulently low bid, based on knowing underestimations of its costs,” to secure a contract with the Air Force.  Id. at 1047.  Lockheed, in response, argued that FCA liability cannot be predicated on allegedly false estimates because estimates are a form of opinion or prediction rather than a “false statement” within the meaning of the FCA.  Id.  The Ninth Circuit disagreed and joined the First and Fourth Circuits in holding that false estimates, including fraudulent underbidding (where the bid is less than what the defendant ultimately intends to charge the government) can be a basis of liability under the FCA.  Id. at 1048-49.  The Ninth Circuit reversed the district court’s grant of summary judgment and remanded the case to the district court to determine whether Hooper could prove the remaining elements of his FCA claim.  Id. at 1053.

This adoption of the underbidding theory of FCA liability should raise concerns for defense contractors and other businesses that bid on government projects.  These companies now have to ensure that every “bid”–even though it is just a bid–must be “accurate” enough to withstand later scrutiny under an FCA lawsuit should the bid end up being low, as is often the case for various reasons that have nothing to do with “fraud.”  The Ninth Circuit’s reminder in Hooper–consistent with its suggestion in other cases[122]–that a relator or the government still must establish other elements of FCA liability, id. at 1049, offers little comfort.  One of these elements–scienter–need not be pled with particularity under Rule 9(b) to survive a challenge under a motion to dismiss.  The other oft-cited element–materiality–has been greatly relaxed in many circuits with the most recent overhaul of the FCA such that the courts often deem a “false fact” material if it might have influenced the government’s decision to enter into a contract (as the “wrong price” in a bid often will).  As a result, if a relator or the government can show that a bid or estimate ended up being less than the price actually charged, little will prevent the relator or government from attempting to withstand a motion to dismiss based upon conclusory allegations that the underbidding was the result of “fraud.”  It is no secret that relator’s counsel seeks exactly this ticket to the discovery process, as they can then attempt to use the massive costs, risks, and disruption imposed by discovery to leverage settlements from FCA defendants.  This underbidding theory of liability–and similar expansive theories of FCA liability that presume falsity based upon facts that often occur absent any fraud–was the subject of an earlier article by Gibson Dunn attorneys, and we will continue to monitor this development closely.

B.        Can the entire value of a contract be subject to treble damages under the FCA?

Relators and the government often argue that the proper measure of “single” damages in an FCA case is not the “benefit of the bargain” (the difference between the value promised and the value received by the government or the beneficiaries of government programs), but instead the entire value of the contract.  The Second Circuit’s recent opinion in United States ex rel. Feldman v. Von Gorp, 697 F.3d 78 (2d Cir. 2012), illustrates an attempt to broaden acceptance of this argument.  In that case, the qui tam relator alleged that Cornell University Medical College and another defendant secured a T32 grant, which funds pre- and post-doctoral training in behavioral, biomedical, and clinical research, from the National Institutes of Health (“NIH”).  Id. at 80.  Cornell sought funding for a fellowship program entitled “Neuropsychology of HIV/AIDS Fellowship.”  Id. at 81.  During trial, the relator “presented evidence that the actual fellowship deviated in many ways from that described in [Cornell’s] Grant Application, and that [the defendants] failed to inform NIH of these deviations.”  Id. at 83.  The deviations included the failure of certain faculty members identified as “key personnel” to participate in the program, a failure to implement the curriculum identified in the grant application, and significant differences between the research and clinical training described in the grant application and the actual training the fellows received.  Id.  In addition, only a few of the 165 clinical cases involved HIV-positive patients despite the program’s emphasis on neuropsychology of HIV/AIDS.  Id.  The jury concluded that the defendants were not liable for false statements in the original application and the first renewal, but imposed liability based on the renewal applications for the third, fourth, and fifth years of the grant.  Id. at 85.  The district court trebled the total value of the three renewals and awarded damages for that amount plus statutory penalties, attorney’s fees, costs, and expenses.  Id. at 85-86.

On appeal, the Second Circuit joined the Fifth, Seventh, and Ninth Circuits, holding that the proper measure of damages is the full amount of the contract where the government provided funds for a specified good or service only to have the defendant substitute a non-conforming good or service.  Id. at 87-91.  After concluding that the government received no benefit from the grant (although third parties might have benefited) and that the government had lost its opportunity to award the grant money to a recipient that would have used it as the government intended, the Second Circuit rejected the defendants’ arguments that the proper measure of damages was the benefit of the bargain.  Id. at 90-91.

Feldman is the most recent decision to suggest that all funds a defendant receives under a government contract may constitute damages, subject to trebling under the FCA (even if someone received a benefit from the payment of government funds), in certain circumstances.  To be sure, the proper application of this measure of damages (the entire value of the contract) instead of the traditional benefit-of-the-bargain damages should be strictly limited to cases where the government has been provided no tangible benefit whatsoever.  In justifying its decision, the Feldman court cited, among other cases,  United States v. Science Applications International Corp., 626 F.3d 1257 (D.C. Cir. 2010).  In Science Applications, the D.C. Circuit rejected the district court’s award of damages because the district court’s “damages instruction essentially required the jury to assume that [the defendant’s] service had no value even in the face of possible evidence to the contrary.”  Id. at 1279.  The D.C. Circuit contrasted Science Applications from cases where, as in Feldman, “the defendant fraudulently sought payments for participating in programs designed to benefit third-parties rather than the government itself, [where] the government can easily establish that it received nothing of value from the defendant and that all payments made are therefore recoverable as damages.”  Id.  

We fully expect that relators will continue to press ever-expanding damages theories like the one the Feldman court adopted.  Drawing careful distinctions and analogies among these cases will be very significant for future FCA defendants and is another topic to closely monitor.

C.        Does Rule 9(b) require that the relator’s complaint include a specific false claim?

Courts continue to be divided about precisely what Federal Rule of Civil Procedure 9(b), which directs that parties “must state with particularity the circumstances constituting fraud or mistake” when “alleging fraud or mistake,” means for purposes of the FCA.  In particular, whether Rule 9(b) requires that the relator’s complaint include a specific false claim has been the subject of ongoing debate.  The answer to this question may depend on the jurisdiction in which the relator files suit.  The Tenth and Eleventh Circuits, for example, require that the plaintiff plead at least one specific false claim to survive a motion to dismiss pursuant to Rule 9(b).  See United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 727 (10th Cir. 2006); United States ex rel. Clausen v. Lab. Corp. of Am., Inc., 290 F.3d 1301, 1311 (11th Cir. 2002).  On the other hand, the Fifth Circuit has rejected such a requirement.  See, e.g., United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009).

This debate continues in the district courts as well.  The Northern District of Illinois recently held that a relator’s failure to identify a specific false claim was a fatal pleading defect, despite the fact that the relator had provided significant detail regarding the various schemes to defraud.  United States ex rel. Grenadyor v. Ukranian Village Pharmacy, Inc., No. 09 C 7891, 2012 WL 4742827, at *6 (N.D. Ill. Sept. 5, 2012).  On the other hand, in United States ex rel. Budike v. PECO Energy, ___ F. Supp. 2d. ___, 2012 WL 4108910, at *12 (E.D. Pa. Sept. 14, 2012), the district court denied, at least in part, a motion to dismiss because Rule 9(b)’s “requirement that a plaintiff plead with particularity serves to place the defendant on notice of the precise misconduct with which it is charged” and the court “fail[ed] to see how requiring Relator to provide a single claim example would put PECO in a better position to answer and defend against Relator’s claims.”  This conclusion was in keeping with United States ex rel. Streck v. Allergan, Inc., ___ F. Supp. 2d ___, 2012 WL 2593791, at *14 (E.D. Pa. July 3, 2012), in which the Eastern District of Pennsylvania allowed for other indicia of particularity in pleading but nevertheless dismissed the case as to one of two classes of defendants.

State courts interpreting their own false claims laws and procedural rules also have grappled with this issue recently.  In Utah v. Apotex Corp., 282 P.3d 66 (2012), for instance, the Utah Supreme Court held that “if [a plaintiff] cannot allege the details of an actually submitted false claim,” the plaintiff may nevertheless survive a motion to dismiss “‘by alleging particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted’ by each defendant.”  Id. at 75 (quoting Kanneganti, 565 F.3d at 190).  Meanwhile, in Massachusetts ex rel. Riedel v. Quest Diagnostics Inc., No. SUCV2007-05416-E, 2012 WL 5288130, at *3 (Aug. 24, 2012), the Superior Court of Massachusetts, Suffolk County, concluded that the relator “failed to meet [the] particularity standard because he vaguely referenced dates in his amended complaint and did not specify who within [the defendant] made the alleged false statements . . . .”

There is no sign that the split within the courts on this issue will be resolved soon.  FCA defendants would be wise to carefully scrutinize a relator’s complaint to ensure that it meets the standards established in the particular jurisdiction, especially where pleading at least one specific false claim is required.  Moreover, FCA defendants should consider pressing this argument in all jurisdictions, as the case law is split and courts–considering whether to dismiss an FCA case that does not pass the “smell test”–may nevertheless conclude that cases rejecting the requirement are factually distinguishable.

D.        Can a federal employee who investigates fraud as part of his or her job have standing to be a qui tam relator?

The Fifth Circuit’s recent decision in United States ex rel. Little v. Shell Exploration & Production Co., 690 F.3d 282 (5th Cir. 2012), is the latest addition to another disturbing trend towards vesting federal employees with standing to bring qui tam claims even when the employee’s job responsibilities include investigating fraud.  In that case, the Fifth Circuit followed the Sixth, Ninth, Tenth, and Eleventh Circuits and held that two federal auditors should be considered “persons” under the FCA and thus had standing to bring a qui tam action.  Id. at 286, 291.  The court rejected the government’s invitation to limit the type of federal employee that could serve as a qui tam plaintiff and indicated that any such limitations should be determined in the first instance by the legislative branch rather than by the courts.  Id. at 288.  The Fifth Circuit decision conflicts with precedent from the First Circuit, which has held that at least some federal employees may not have standing to bring qui tam suits.  See United States ex. rel. LeBlanc v. Raytheon Co., 913 F.2d 17, 19-20 (1st Cir. 1990).

As discussed in a recent article by Gibson Dunn attorneys, allowing federal auditors to serve as qui tam plaintiffs raises a variety of issues including, among others, conflicts of interest and the fact that government contractors may be much less willing to share information with the government (a horribly perverse incentive) when they believe that they might be talking to a potential “whistleblower.”  Nevertheless, the clear trend appears to be towards allowing such individuals to serve as relators, thus increasing the potential ranks of “private attorney generals” who can enforce the FCA.  We expect more of these types of cases, especially where the federal employee is unhappy with the internal response to his or her investigative efforts.  Cases like Little underscore the importance of involving experienced legal counsel in internal investigations or government inquiries that might involve potential FCA claims.

E.        How should a court determine whether an entity is a state agency and thus immune from FCA liability, and does that immunity extend to FCA retaliation claims brought after the 2009 amendments to the FCA?

The Fourth Circuit’s recent decision in United States ex rel. Oberg v. Kentucky Higher Education Student Loan Corp., 681 F.3d 575 (4th Cir. 2012), is an excellent illustration of how courts continue to analyze whether an entity should be considered a state agency immune from suit under the FCA.  Oberg brought a qui tam action alleging that corporations organized by four states (Arkansas, Kentucky, Pennsylvania, and Vermont) had defrauded the Department of Education.  Id. at 577.  The Fourth Circuit joined the Fifth, Ninth, and Tenth Circuits in adopting the arm-of-the-state analysis used in the Eleventh Amendment context to determine whether entities should be considered “state agencies” that are not subject to FCA suit.  Id. at 579-80.  The arm-of-the-state analysis considers four non-exclusive factors:  “(1) whether any judgment against the entity as defendant will be paid by the State or whether any recovery by the entity as plaintiff will inure to the benefit of the State; (2) the degree of autonomy exercised by the entity . . . ; (3) whether the entity is involved with state concerns as distinct from non-state concerns, including local concerns; and (4) how the entity is treated under state law.”  Id. at 580 (quoting S.C. Dep’t of Disabilities & Special Needs v. Hoover Universal, Inc., 535 F.3d 300, 303 (4th Cir. 2008)).  The Fourth Circuit remanded the case to the district court to determine, using the arm-of-the-state analysis, whether the defendants were subject to suit under the FCA.  Id. at 581.

A recent district court decision, however, questions the impact that the 2009 FCA amendments have on claims against state agencies when those claims are brought under the FCA provisions that generally protect whistleblowers from retaliation.  In United States ex rel. King v. University of Texas Health Science Center-Houston, ___ F. Supp. 2d ___, 2012 WL 5381714, at *8 (S.D. Tex. Oct. 31, 2012), the relator argued, among other things, that her retaliation claim under the FCA should be allowed to go forward even if the court considered the defendant an arm of the State of Texas because the 2009 amendments to 31 U.S.C. § 3730(h) removed the term “employer” from the FCA’s anti-retaliation provision.  (At least one other court had held that this amendment rendered inapposite cases holding that states are not “employers” under the FCA and thus could not be subject to FCA retaliation claims.  See Bell v. Dean, No. 2:09-CV-1082, 2010 WL 1856086, at *4-5 (M.D. Ala. May 4, 2010).)  The district court in King, however, rejected the relator’s argument, holding that her claim for monetary relief was barred by sovereign immunity and that the FCA’s amended anti-retaliation provision did not include a clear statement stripping state sovereign immunity.  2012 WL 5381714, at *8.

The clear trend remains towards adopting an arm-of-the-state analysis to evaluate whether entities are considered “state agencies” for FCA purposes.  But even those entities that are clearly “arms of the state” must recognize that there is–at least currently–a risk that the protection that usually accompanies that status may no longer exist when it comes to FCA retaliation claims.  This is a debate that plaintiffs’ lawyers will argue remains open, and it demonstrates yet another reason why employers must treat employees and their grievances and concerns fairly and with due care.

F.         Does the first-to-file bar prevent a subsequent qui tam action brought by the same relator?

As we have noted previously in our alerts, the exact contours of the first-to-file bar–which provides that “[w]hen a person brings an action under this subsection, no person other than the government may intervene or bring a related action based on the facts underlying the pending action,” 31 U.S.C. § 3730(b)(5)–are still being established.  One open question is whether the first-to-file bar prevents the same relator from bringing a subsequent qui tam action based on related facts.  A recent district court decision indicates that the preliminary answer to this question is yes.

In United States ex rel. Shea v. Verizon Business Network Services, Inc., ___F. Supp. 2d ___, 2012 WL 5554792 (D.D.C. Nov. 15, 2012), the court considered whether a relator’s second qui tam action was barred by an earlier qui tam case brought by the same relator.  The relator filed his first qui tam complaint against Verizon in 2007.  Id. at *1.  The government intervened and settled the case in 2011 for $93.5 million.  Id.  The relator filed a second qui tam complaint against Verizon on June 5, 2009, id., and argued that the first-to-file bar did not preclude him from bringing another related qui tam action against the same defendant.  Id. at *3-4.  The court rejected his argument and held that section 3730(b)(5)’s plain language (“no person other than the government”) prohibited subsequent related actions brought by any other person, including the same relator.  Id. at *4-5.

Applying the first-to-file bar to the same relator who previously brought a similar qui tam action based on substantially similar facts appears consistent with the FCA’s language and its intent.  Further, this reading of section 3730(b)(5) is an important step toward curtailing the apparent rise of “serial whistleblowers.”  And although the first-to-file bar has limits–i.e., it only applies if the previous case is “pending” at the time the latter case is filed and only if the two cases involve related allegations–it remains a potent defense.  We anticipate that other courts will follow the approach adopted in Shea.

G.        Can a claim that was not pleaded with the particularity required by Rule 9(b) nevertheless bar a subsequent claim that is properly pleaded?

The circuits continue to be split on the issue of whether the first-to-file bar applies in a situation where the first-filed suit that potentially bars a latter suit lacked the particularity required by Rule 9(b).  An opinion from the District of Massachusetts recently highlighted this split.  In United States ex rel. Heineman-Guta v. Guidant Corp., ___ F. Supp. 2d ___, 2012 WL 2582359, at *3 (D. Mass. July 5, 2012), the relator conceded that a previously filed action disclosed a scheme nearly identical to the one that her complaint detailed.  Relying on an exception to the first-to-file bar established by the Sixth Circuit, however, the relator argued that her claim should not be barred because the previously filed complaint lacked the particularity required by Rule 9(b) and thus was not legally capable of barring a latter complaint.  Id. at *3-4.  Rejecting the Sixth Circuit’s reasoning, the district court instead concluded that allowing this exception “would create a strange judicial dynamic” where a court would be required to evaluate the sufficiency of a complaint filed in another jurisdiction to determine whether to apply the first-to-file bar.  Id. at *4 (quoting United States ex rel. Batiste v. SLM Corp., 659 F.3d 1204, 1210 (D.C. Cir. 2011)).  The Heineman-Guta court followed the D.C. Circuit and held that the first-to-file bar should apply if the earlier complaint was sufficient to place the government on notice of the allegations raised in the latter complaint.  Id.

As the court in Heineman-Guta held, applying the first-to-file bar even when the first claim did not satisfy Rule 9(b) avoids “litigation within the litigation” where the court in the latter case attempts to determine whether a pleading in an earlier case satisfies Rule 9(b).  This is especially problematic when the earlier case is still pending and may even be awaiting decision on a motion to dismiss pursuant to Rule 9(b).  Should the court in the latter case wait until the court in the earlier case decides the Rule 9(b) motion?  Should it make its own determination on whether the earlier complaint satisfies Rule 9(b), even though that decision may be inconsistent with what the court in the earlier case ultimately concludes?  Should all the cases be decided by the same judge because only one of the two cases should be allowed to go forward, perhaps suggesting that these cases should be handled by the Judicial Panel on Multidistrict Litigation (which is what relators in some cases have argued)?  The holding in Heineman-Guta cuts through all of this: If the earlier case was sufficient to place the government on notice of the alleged fraud, allowing the government to investigate those allegations, then the first-to-file bar should apply to a latter action.  This–not whether the earlier complaint satisfies the technicalities of Rule 9(b), which may vary jurisdiction to jurisdiction, as we have seen–furthers the purpose of the first-to-file rule.

H.        Can a defendant that is found to have violated the FCA bring counterclaims against relators who participated in the alleged wrongdoing?

At least one court has concluded that a defendant cannot bring “dependent counterclaims”–i.e., claims that depend upon a finding of FCA liability and seek contribution or indemnity from the relator.  In United States ex rel. Battiata v. Puchalski, ___F. Supp. 2d ___, 2012 WL 5363375, at *4 (D.S.C. Oct. 30, 2012), the District of South Carolina, without the benefit of previous Fourth Circuit case law on the matter, analyzed whether defendants could bring dependent counterclaims.  The court dismissed the counterclaims, holding that an FCA defendant found liable of FCA violations may not pursue counterclaims that have the effect of contribution or indemnification, which would be inconsistent with one of the ideas behind the FCA:  “setting a rogue to catch a rogue.”  Id. at *3-7.

This case is a disappointment for defendants, who might like to pursue relators who were responsible for their FCA liability.  Battiata is but one decision, and its significance should not be overstated.  But under its reasoning, “bad apple” relators’ only punishment may be a smaller portion of the government’s recovery, which is little solace to companies that find themselves embroiled in FCA lawsuits in part because of the relator’s actions.

I.          Are the results of an internal investigation into potential FCA wrongdoing protected from discovery by the attorney-client privilege or the work product doctrine if outside counsel does not actively participate in the internal investigation?

Although the protection a court will provide the results of an internal investigation depends significantly upon the facts of the specific case, the recent decision in United States v. ISS Marine Services, Inc., ___ F. Supp. 2d ___, 2012 WL 5873682 (D.D.C. Nov. 21, 2012), indicates that defendants are unlikely to successfully protect from discovery the results of an internal investigation into potential FCA wrongdoing if the investigation was conducted without the direct involvement of counsel.  In ISS Marine Services, the court found that outside counsel did not direct the investigation, participate in any interviews, or review relevant documents.  Accordingly, the court concluded that an internal audit report examining alleged FCA violations was not privileged and must be produced.  Id. at *4-14, 17.

This case serves as a not-so-gentle reminder that “[w]hen a company fails to involve lawyers directly in an internal investigation, the company faces a higher burden to demonstrate that the attorney-client privilege applies to the results of that investigation.”  Id. at *6.  As ISS Marine Services makes clear, companies should carefully consider the proper role of external and internal counsel in conducting internal investigations.  Certainly, the protections afforded by the attorney-client privilege and the attorney work product doctrine should be one of the facts that companies consider when determining the role they wish external counsel to play.  Indeed, the decision to exclude external counsel from meaningful involvement in the internal investigation could reduce the possibility that the internal investigation and its results will be protected from discovery in any later litigation.  At a minimum, making sure that lawyers are managing the investigation from the outset will help ensure the privilege remains intact.

J.         Will the First Amendment curb the onslaught of off-label marketing cases, which often allege nothing more than truthful statements regarding the unapproved use of an approved product?

As discussed above, a significant portion of the more than $3 billion that the government recovered in health care FCA cases during the last year resulted from cases based on the promotional activities of pharmaceutical and medical device manufacturers.[123]  A recent decision from the Second Circuit Court of Appeals in a closely watched criminal appeal, United States v. Caronia, ___ F.3d ___, 2012 WL 5992141 (2d Cir. Dec. 3, 2012), may have an impact on some of these cases.  We reported on the Caronia decision in a recent client alert.

In Caronia, the Second Circuit reviewed a pharmaceutical sales representative’s criminal conviction under the Federal Food, Drug, and Cosmetic Act (“FDCA”), 21 U.S.C. § 301 et seq., for promoting a drug off-label–i.e., for uses not included in its FDA-approved labeling.  Following the Supreme Court’s recent decision in Sorrell v. IMS Health, 131 S. Ct. 2653, 2659 (2011), which held that speech in aid of pharmaceutical marketing is protected by the First Amendment, a split panel of the Second Circuit vacated the conviction as constitutionally impermissible, concluding that the FDCA does “not prohibit[] and criminaliz[e] the truthful off-label promotion of FDA-approved prescription drugs” and that “the government cannot prosecute pharmaceutical manufacturers and their representatives under the FDCA for speech promoting the lawful, off-label use of an FDA-approved drug.”  Caronia, slip op. at 51.

Off-label FCA cases–premised on the DOJ’s view that a manufacturer’s promotion of a drug or medical device for unapproved uses causes providers to submit claims that are legally “false”[124]–continue to represent some of the largest trophies in the government’s FCA display case.  In fiscal year 2012, this category included FCA recoveries of $2 billion and $628 million; and the DOJ already has announced off-label settlements with separate companies for $800 million and $612 million that will be included in its fiscal year 2013 statistics.

Although Caronia’s immediate reach is limited–it is binding only in the Second Circuit, and the holding centered on criminal enforcement of the FDCA–the court’s reasoning may translate into a defense against FCA liability in some off-label cases: if the First Amendment protects a manufacturer’s right to speak truthfully regarding off-label uses of its product, then it is difficult to see how the exercise of that right could cause the submission of legally false claims or why it should be burdened by the potential imposition of treble damages plus penalties under the “most powerful tool” in the government’s arsenal, the FCA.

Caronia also may alter the dynamics of settlement negotiations with the DOJ.  FCA cases involving pharmaceutical and medical device companies often are investigated in parallel with criminal cases under the FDCA, which allows for misdemeanor criminal liability without any required showing of knowledge or intent.[125]  This low bar for establishing liability, along with the significant collateral consequences of conviction (a misdemeanor conviction under the FDCA can trigger permissive exclusion from federal healthcare programs),[126] offers the DOJ tremendous leverage.  If the scope of possible criminal liability diminishes in the wake of Caronia, a result that is far from certain, more companies may be prepared to contest liability aggressively.

None of this is to say that we expect the DOJ to divert its attention from pharmaceutical and medical device manufacturers’ promotional conduct.  Caronia may give manufacturers more leverage in some cases in which there are no allegations that off-label promotion was false or misleading,[127] but we expect to see qui tam relators and the DOJ bring cases in which they do characterize questionable promotion as false or misleading and continue to “blend” theories of liability in FCA cases with theories under other laws or regulations. Finally, we also expect to see a continued increase in cases against pharmaceutical and medical device manufacturers based on non-promotional conduct such as manufacturing and adverse event reporting.

III.       Legislative Activity

A.        Federal Activity

As noted in our 2012 Mid-Year False Claims Act Update, Senators Patrick Leahy (D-VT) and Charles Grassley (R-IA) introduced the Fighting Fraud to Protect Taxpayers Act of 2011, S. 890, in May 2011.  Since that time, the senators have had little success in advancing this legislation.  In the meantime, there has been the following other legislative and regulatory activity.

            1.         Proposed Regulations regarding Medicare or Medicaid Overpayments

As we discussed in our 2010 Year-End False Claims Act Update, the Patient Protection and Affordable Care Act, Pub. L. 111-148, 124 Stat. 119 (“PPACA”), amended the Social Security Act (“SSA”) to require that individuals and entities report and return any Medicare or Medicaid overpayments within sixty days of identifying them or when any corresponding cost report is due.  The PPACA further provided that “[a]ny overpayment retained . . . after the deadline for reporting and returning the overpayment” is subject to recovery under the FCA.[128]

On February 16, 2012, the HHS, Centers for Medicare & Medicaid Services (“CMS”) published a proposed rule to implement this requirement.[129]  The proposed regulations largely track the statutory language, but one significant addition is a “lookback period” that requires reporting and repayment of any overpayment identified within ten years of when the overpayment was received.[130]  CMS also proposed to use its existing voluntary refund process–which would be renamed the “self-reported overpayment refund process”–as the vehicle for reporting and returning overpayments.[131]  The comment period regarding these proposed regulations closed on April 16, 2012, but CMS has not yet issued final regulations.  As we have advised before, the knowing retention of an overpayment continues to create a risk of FCA liability.

            2.         Public Commentary on HHS OIG’s Self-Disclosure Protocol

In our 2012 Mid-Year False Claims Act Update, we noted that HHS OIG had solicited industry comment regarding its Self-Disclosure Protocol, which delineates steps a healthcare provider or company may take to self-report potential fraud to OIG in the hopes of securing leniency.  HHS OIG specifically sought commentary regarding “how best to revise the Protocol to address relevant issues and to provide useful guidance to the health care industry.”[132]  Before the commentary period closed on August 17, 2012, HHS OIG received responses from various interested organizations, including the American Medical Association and the Health Law Section of the American Bar Association.  Perhaps not surprisingly, given OIG’s implicit acknowledgment that the Protocol needed clarification, public comments often focused on the need to consolidate OIG’s guidance and ensure that the Protocol generally results in fair and predictable results.  Among other recommendations, the commenters suggested that OIG should (1) suspend the sixty-day overpayment reporting deadline discussed above for those providers that enter the Self-Disclosure Protocol;[133] (2) consolidate existing guidance on the Protocol by, for example, providing that the revised Protocol expressly supersedes prior guidance;[134] (3) “clarify whether a settlement through the [Protocol] that involved Medicare and Medicaid claims would release the provider from future actions taken by the [DOJ], a relator, or the state regarding the AKS, False Claims Act or Medicaid claims liability resolved through the settlement”;[135] and (4) provide a process through which self-reporting providers may seek review of settlement offers from line attorneys at OIG that are unacceptable.[136]

We question whether this process will produce meaningful improvements to the Protocol.  Although the Protocol, on its face, offers great promise as a tool for promoting and rewarding robust compliance monitoring, its utility is limited in practice by, among other things, that fact that resolving a self-disclosed matter with OIG does not protect a company from an FCA suit by the DOJ.  We will continue to monitor these developments, but no decision to self-disclose should be made without a thorough analysis of the potential risks and benefits.

B.        State Activity

As is well-known, the 2005 Federal Deficit Reduction Act included a financial incentive designed to prompt states to adopt false claims acts “at least as effective as” the federal FCA in combatting false or fraudulent Medicaid claims.[137]  Those states that enact qualifying laws, as adjudged by HHS OIG (in consultation with DOJ), may collect an additional 10% of any recovery of federal Medicaid funds recovered through a state action.  In light of the many revisions to the federal FCA wrought by the Fraud Enforcement and Recovery Act of 2009, the Patient Protection and Affordable Care Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act, OIG provided a two-year grace period during which states with false claims acts that OIG previously approved would continue to receive the 10% incentive.

As the March 31, 2013-end-of-the-grace-period approaches, several states have enacted amendments to their false claims act that reflect the recent changes to the federal FCA.  For example:

• California:  Although OIG extended California’s grace-period until August 31, 2013,[138] Governor Jerry Brown signed into law Assembly Bill 2492 on September 29, 2012.  The law, which takes effect on January 1, 2013, conforms California’s False Claims Act to the federal FCA.[139]  Among other amendments, the law (1) allows relators to proceed with claims based on publicly disclosed allegations if the Attorney General opposes dismissal of the claims, if the whistleblower informed the state of the information underlying the claims before the public disclosure, or if the whistleblower’s knowledge is independent of and “materially adds” to the publicly available information and the whistleblower communicated his or her information to the state before initiating the claims; (2) bolsters protection for whistleblowers, who will be permitted to seek reinstatement, in addition to other damages; and (3) allows relators to recover on claims even if they “planned and initiated” the conduct giving rise to the claims (although the court may reduce the recovery).
• Massachusetts:  Like California, Massachusetts recently amended its False Claims Act to align it with the federal FCA.[140]  Accordingly, many of Massachusetts’s amendments mirror those of the revised California False Claims Act.  For example, the amended law (1) authorizes the state’s Attorney General to override the bar to claims based on public information; (2) expands the definition of “original” information about false claims thereby permitting certain claims to proceed even if based on publicly available information; and (3) allows former and current state employees to bring claims derived from information gathered during their employment.
• Hawaii:  On July 9, 2012, Hawaii’s governor, Neil Abercrombie, signed into law amendments to the Hawaiian false claims laws to ensure that they are at least as strict as the federal FCA.[141]

Various other bills that would either enact or expand a false claims law continue to proceed slowly through the legislative process.  The list of states with pending legislation includes:  Alabama (H.R. 594); Arizona (H.B. 2844); Illinois (H.B. 6202, S.B. 2769); Kentucky (H.B. 401); Rhode Island (S.B. 2769); South Carolina (S.B. 1003, S.B. 1018, S.B. 1233); and Wyoming (H.B. 0081).

In addition to these developments, on June 20, 2012, Mayor Michael Bloomberg signed into law an amended version of the City of New York’s False Claims Act[142] that (1) is permanent (the prior version expired on June 1, 2012) and (2) more closely resembles the New York State False Claims Act.

IV.       Conclusion

In today’s world of increased government spending and expanding breadth of the FCA, it is more important than ever that companies remain mindful of the FCA, have compliance programs in place to prevent violations of the FCA, and appropriately respond and react to allegations of FCA violations that may have occurred despite these precautions.  Defending an FCA investigation, even successfully, can be extremely disruptive and expensive. 

Furthermore, studies show that most whistleblowers first report their concerns internally.[143]  Companies therefore must take employee complaints seriously, establish standard procedures for raising complaints and responding to them, and educate the workforce about the FCA.  Every well-designed response plan also should include a discussion with qualified outside counsel about the potential benefits and risks of self-disclosure to the government.[144]  It is important to be thoughtful and strategic about this decision and whether to avail oneself of the various voluntary self-disclosure regimes that now exist (e.g., HHS OIG).  The factors leading to a determination about self-disclosure are complex and nuanced, and must be handled appropriately.

In conclusion, based on our observations from 2012, the ever-increasing and well-publicized FCA bounties, the staggering figures of fraud and abuse in government programs, and the intense demand for oversight and accountability discussed in this and our prior FCA updates, Gibson Dunn predicts that 2013 will be another dynamic and interesting year for FCA activity.  As you might expect, we will keep you posted.  

© 2013 Gibson, Dunn & Crutcher LLP

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