January 8, 2009
I. Introduction
Today’s headlines are riddled with allegations of fraud and fraudulent schemes–against investors, markets, homeowners, individuals, corporations, and the government. To combat the latter, the government calls upon its primary weapon – the False Claims Act, 31 U.S.C. §§ 3729-33 (“FCA” or the “Act”). The Act, as amended in 1986, provides for treble damages and substantial civil penalties from any person or entity that knowingly submits or causes another to submit a false or fraudulent claim to the United States. Unique “qui tam” provisions of the Act empower private individual whistleblowers, called “Relators,” to file suit in federal court on behalf of the government and to share in anyrecovery. Recently, the Department of Justice (“DOJ”) reported that in fiscal year 2008 alone, it recovered approximately $1.34 billion in FCA settlements and judgments.[1]
While our nation engages in unprecedented amounts of federal spending,[2] legislation with bipartisan support is likely to be reintroduced in the current Congress, which would expand the scope of the Act and relax restrictions on those who may initiate lawsuits. Meanwhile, industries that did not receive federal funding in the past may soon receive, directly or indirectly, a portion of billions of dollars in federal “bailouts” recently announced. Unwary companies, therefore, could find themselves the target of federal or state FCA investigations and lawsuits for allegedly misusing or fraudulently obtaining federal funds. For these and other reasons, Gibson Dunn predicts continued (if not unprecedented) growth in FCA investigation, enforcement, and litigation.
This year-end update provides:
(1) A brief overview of the federal statute, including its unique damages, penalty, and private enforcement provisions.
(2) A review of significant activities in 2008, including substantial recoveries by industry, including healthcare, defense, public works, government contracts, and education.
(3) Information regarding Government intervention and the importance of early involvement of qualified FCA counsel and appropriate cooperation with the government to limit exposure to FCA claims.[3]
(4) A summary of important federal court decisions in 2008 and certain legal trends that the FCA lawyers at Gibson Dunn observed this past year.
(5) An overview of legislation, proposed in late-2007, passed out of Committee in 2008, and which may be re-introduced and enacted in 2009, that would broaden the scope of the Act and reverse many of the judicial limitations that have recently emerged.
(6) An overview of state false claims acts. Because many federal programs, contracts, and grants are jointly funded and/or administered by the states (such as Medicaid), companies are increasingly likely to face simultaneous state and federal enforcement actions.
(7) An overview of new rules for government contractors (effective December 12, 2008) that require internal controls and self-disclosure of suspected FCA violations.
We conclude our review with some predictions for the year ahead.
A. Liability Under The Statute
The FCA provides for recovery of civil penalties and treble damages from any person who knowingly submits or causes the submission of false or fraudulent claims to the United States for money or property.[4] Under the most commonly-enforced provisions of the statute, a person is liable for “knowingly” (1) presenting or causing the presentment of a claim for payment or approval; (2) making a “false record or statement to get a false or fraudulent claim paid or approved by the Government;” or (3) conspiring to defraud the government “by getting a false or fraudulent claim allowed or paid.” The FCA also penalizes so-called “reverse false claims,” in which a person “knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.” The FCA defines “knowingly” as having “actual knowledge” of falsity or acting in “deliberate ignorance” or “reckless disregard” of the truth or falsity of the information. “No proof of specific intent to defraud is required.” 31 U.S.C. §3729(b).
The FCA’s qui tam provisions empower private individuals to file litigation in federal court on behalf of the government and to share in any subsequent recovery. Qui tam complaints are filed under seal for at least 60 days, to allow the government to investigate the allegations and determine whether to intervene. After review, the DOJ, on the government’s behalf, decides whether to: (1) intervene and dismiss the action, (2) intervene and assume primary responsibility for prosecuting the action; or, (3) decline intervention and permit the alleged whistleblower to proceed with the lawsuit on his or her own. Even if the government initially declines to intervene, it may later intervene in a qui tam action at any time upon a showing of good cause. 31 U.S.C. § 3730(c)(3). Moreover, because the alleged whistleblower ostensibly brings the action on behalf of the government, the government always retains the right to approve or reject any settlement, even in those cases where the government initially opted out. See 31 U.S.C. §§ 3730(b)(1) (a qui tam action “may be dismissed only if the court and the Attorney General give written consent to the dismissal”); 31 U.S.C. § 3730(c)(3).
FCA civil damages and penalties are harsh. A defendant may be liable for up to three times actual damages plus penalties between $5,500 and $11,000 per claim.[5] Depending on the manner in which the number of “claims” is calculated, civil penalties may far exceed any actual damages the government sustained. The DOJ and plaintiffs’ bar have recently pursued expansive theories of liability, seeking the maximum possible damages. For example, under a “fraudulent inducement” theory (discussed further below under current trends), plaintiffs contend that if a government contractor makes a misrepresentation to obtain a government contract, then every single claim or invoice submitted to the government pursuant to that contract is “false” (and thus subject to a civil penalty). Under that theory, therefore, all monies paid by the government to the contractor would be recoverable as damages, as the government would have paid nothing had it known of the falsity. This expansive theory of damages persists regardless of whether the government actually received a valuable product, service, or benefit. Some courts, it appears, have been receptive to such arguments. See, e.g., United States v. Rogan, 517 F.3d 449 (7th Cir. 2008).[6]
Voluntary disclosure of an FCA violation and full cooperation with the government may help reduce damage exposure to double, instead of triple, recovery. 31 U.S. C. § 3729(a). Accordingly, companies that do business with the federal government, or receive federal monies, should implement and maintain robust internal compliance programs and take any related employee complaints seriously. In fact, as discussed further below, Federal Acquisition Regulations (“FARs”) now require certain federal government contractors to create business ethics awareness and compliance programs, an internal control system, and to voluntarily disclose suspected FCA violations to the federal government. See FAR Case 2007–006; Contractor Business Ethics Compliance Program and Disclosure Requirements.
The FCA’s qui tam provision provides enormous incentives for qui tam Relators to expose fraud against the government.[7] Successful Relators may receive 15-30% of settlement or judgment proceeds, and may be entitled to reasonable attorney fees’ and costs, which can be substantial. 31 U.S.C. § 3730(d).
In FY 2008 (ending September 30, 2008), Relators received approximately $198 million of the federal government’s recoveries, which is an increase from approximately $180 million in FY 2007.[8] On a dollar for dollar basis, Relators recover significantly more money when the government actually intervenes in their FCA whistleblower actions, despite the fact that Relators receive a greater percentage of any recovery when the government declines to intervene. In FY 2008, for example, Relators recovered only $197,438,998 (approximately 1% of total relator share awards) in cases where the government declined to intervene. Id. The statistics are similar for FY 2007 (approximately 3% of Relator share awards derived from cases in which the government declined to intervene). Id.
Although the FCA authorizes private qui tam enforcement actions, the FCA limits an individual’s ability to file suit to avoid multiple actions against the same defendants and/or about the same conduct. For example, the FCA’s “first-to-file” bar would prohibit any private action “based upon allegations or transactions which are the subject of a civil suit or an administrative civil money penalty proceeding in which the Government is already a party,” 31 U.S. C. § 3730(e)(3), but the provision has created significant debate about how closely related the suits must be to trigger the limitation. Another limitation, and the one most frequently litigated, is the “public disclosure bar,” 31 U.S.C. § 3730(e)(4), which divests a court of jurisdiction over any action “based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media,” unless the action is brought by an “original source” of the information. Id. To qualify as an “original source,” and thereby avoid dismissal based on the “public disclosure,” the Relator must (1) have “direct and independent knowledge” of the information on which the allegations in his or her complaint are based, and (2) must voluntarily provide the information to the Government before bringing suit. Id.
D. Statute Of Limitations
An FCA action must be brought within six years of the date on which a violation was committed, 31 U.S.C. § 3731(b)(1), or within three years of the date on which the government knew or should have known that a violation was committed, and in no event more than 10 years after the date on which the violation was committed. 31 U.S.C. § 3731(b)(2). Courts are divided about whether the limitations period begins to run from the date a false claim is submitted to the government or from the date a false claim is paid by the government. Additionally, courts are split over whether a qui tam Relator is entitled to take advantage of the three-year tolling provision, or whether that provision only applies to the government. Finally, there is also debate as to whether government claims first asserted in a complaint-in-intervention beyond the limitations period may nevertheless survive by “relating back” to the time of filing the original qui tam complaint under seal.
Total federal recoveries under the FCA have exceeded $21.6 billion since 1986.[9] For FY 2008, the federal government obtained more than $1.34 billion in FCA settlements and judgments.[10] While the $1.34 billion recovered in FY 2008 is a staggering number, it is a decline from the last two fiscal years. The government reportedly recovered almost $2 billion in settlements and judgments in FY 2007, and a record $3.2 billion in settlements and judgments in FY 2006.[11] Commentators (largely from the plaintiffs’ bar) generally attribute the recent decline in recoveries to a substantial backlog of whistleblower cases awaiting DOJ action. But Gibson Dunn attributes the decline, at least in part, to significant legal developments in the federal courts that have limited the scope of the Act and made it more difficult for private individuals to sustain claims.
Significantly, virtually all monies recovered by the government under the FCA arose in cases where the government intervened. For example, in FY 2008, of the $1.34 billion recovered, only $5,956,644 (less than ½ of 1%) resulted from actions in which the government elected not to intervene, continuing a consistent trend from previous years (see chart immediately below). Without question, early involvement of qualified FCA defense counsel and effective communication with the government are essential to dissuading the government from intervening and otherwise minimizing exposure to FCA claims.
Settlements or Judgments in Cases Where the Government Declines Intervention as a Percentage of Total Annual FCA Recoveries
A. Federal Recoveries By Industry
The government uses the FCA to combat fraud in connection with any federal contract or program, and has enforced the Act within virtually every federal agency, from the Department of Agriculture to the Department of Veterans Affairs (essentially all but federal tax fraud is included). The overwhelming majority of FY 2008 FCA recoveries (nearly 90% or more than $1.11 billion) came from the health care industry, including pharmaceutical companies and related entities in particular.
The following summarizes some of the significant recoveries in 2008 within certain industries frequently targeted for FCA enforcement and litigation activity.
As the foregoing chart demonstrates, recoveries from the healthcare industry represent the vast majority of FCA recoveries in every year since 2000. Gibson Dunn expects this trend to continue into 2009 in part because Congress has allocated more than $25 million to combat fraud and abuse in the Medicaid Program under the Supplemental Appropriations Act of 2008 and Section 6035 of the Deficit Reduction Act.[12] Already, the fiscal year 2009 Work Plan for the U.S. Department of Health & Human Services (“DHHS”), Office of Inspector General (“OIG”), identifies as its primary area of investigative focus, the Durable Medical Equipment supplier business and targets “potentially illegal practices by suppliers and manufacturers who do not directly bill [federal healthcare] programs,” and “business arrangements that allegedly violate the Federal health care anti-kickback and anti-referral statutes.”[13] Accordingly, Gibson Dunn looks for these enforcement initiatives to spark an increase in FCA litigation in 2009 and beyond.
In 2008, significant healthcare recoveries included the following:
In February 2008, Merck & Company agreed to pay $650 million to resolve allegations that it knowingly failed to pay proper rebates to Medicaid and other government health care programs and paid kickbacks to health care providers to induce them to prescribe the company’s products. The settlement resulted from two qui tam lawsuits. In the first lawsuit, a former Merck employee alleged that the company violated the Medicaid Rebate Statute by providing discounts to hospitals that used its drugs Zocor and Vioxx in place of competitors’ brands, without reporting those discounts and other cost information to reflect its “best price,” as the statute requires. The suit also alleged that Merck paid kickbacks to physicians to induce them to prescribe its drugs. In the second lawsuit, a physician alleged that Merck provided discounts to hospitals to induce them to administer its antacid, Pepcid. Under the two settlement agreements, the federal government received more than $360 million, and forty-nine states and the District of Columbia received over $290 million.
In March 2008, CVS Caremark Corporation agreed to pay $36.7 million ($21.1 million to the federal government and $15.6 million to 23 states) to settle claims that from 2000-2006, the company illegally switched patients from the tablet form of the drug Ranitidine (generic Zantac) to a capsule form in order to increase Medicaid reimbursement. A whistleblower initiated the lawsuit in 2003 and received more than $4.3 million as his share of the settlement.[14] In its press release, the Government announced, “[s]witching medication from tablets to capsules might seem harmless, but when that is done solely to increase profit and in violation of federal and state regulations that are designed to protect patients, pharmacies must know that they are subjecting themselves to the possibility of triple damages, civil penalties and attorney fees. . . . These penalties, coupled with the willingness of insiders to report fraud, should deter such misconduct, but when it doesn’t, the result in this case and others serve notice that we will aggressively pursue all available legal remedies.”[15]
Walgreen Co. settled multiple qui tam actions this year for nearly $45 million. In June 2008, Walgreens agreed to pay $35 million (federal share $18.6 million with remainder to 46 states and Puerto Rico) to settle claims that it switched patients to different prescription drugs in order to increase Medicaid reimbursement. In September 2008, Walgreens agreed to a $9.9 million settlement to resolve allegations that the company over-billed four state Medicaid agencies for prescription drugs provided to beneficiaries covered both by Medicaid and by private third-party insurance. Although pharmacies may bill Medicaid for prescription drug costs not covered by private insurers, which typically amounts to a co-payment alone, DOJ alleged that Walgreens knowingly submitted claims to the Medicaid programs in excess of the co-pay amount.
In September 2008, Cephalon Inc. agreed to pay a total of $425 million to resolve criminal and civil claims arising from allegations that the company marketed three drugs for off-label uses in violation of FDA rules resulting in false claims to Medicaid, Medicare and other programs for unapproved uses of the drugs the programs did not cover. $375 million was paid to resolve the civil FCA allegations, $116 million of which was paid to several states. The settlement resolved four qui tam lawsuits, three of which were brought by former Cephalon sales representatives. The Relators received over $46 million of the federal share of the settlement.
In September 2008, Abbott Laboratories, Inc. agreed to pay a total of $28 million to resolve false claims allegations stemming in part from a qui tam lawsuit alleging that the company falsely reported drug prices to state and federal Medicaid programs, which are used to calculate reimbursement rates, causing the federal and state governments to overpay for prescription medications.
Under certain conditions, Medicaid and Medicare disburse “outlier payments,” in addition to standard reimbursement rates, to compensate providers when the length of stay or cost of treating a beneficiary is exceptionally high relative to the average length of stay or average cost of treating comparable conditions. Following a record-breaking $900 million settlement in July 2006 with Tenet Healthcare Corporation resolving fraudulent outlier payment allegations (among other alleged violations), this type of fraud continued to be a focus in FY 2008.
On December 10, 2007, Warren Hospital agreed to pay $7.5 million to resolve claims from two separate qui tam actions alleging the hospital fraudulently claimed outlier payments. In March 2008, Cathedral Healthcare Systems settled three separate qui tam actions for $5.3 million to resolve allegations that it fraudulently obtained outlier payments. In August 2008, BlueCross BlueShield of Tennessee settled outlier fraud claims for $2.1 million, and in September 2008, Cooper University Hospital (in New Jersey) agreed to pay $3.85 million to resolve allegations that it defrauded Medicare by increasing charges and fraudulently obtaining outlier payments.
c. Illegal Kickbacks and Referrals[16]
In December 2007, HealthSouth Corporation and two physicians agreed to pay $14.9 million to settle allegations that the company submitted false Medicaid and Medicare claims to the government and paid illegal kickbacks to physicians in violation of the Anti-Kickback Statute and the Stark Law. Notably, the settlement resulted from company disclosures to the government following a change in management and an internal investigation.
In April 2008, a Florida radiologist, his imaging center, and related entities agreed to pay $7 million to resolve allegations of fraudulent billing and violations of the Stark law and Anti-Kickback statute. Memorial Health, Inc. also agreed to pay $5.08 million to resolve a qui tam lawsuit alleging Medicare fraud and violations of the Stark Law.
In May 2008, Baptist Health South paid nearly $7.8 million to settle claims that it violated the FCA and Stark laws.
In July 2008, Lester E. Cox Medical Centers agreed to pay $60 million to settle claims that it violated the FCA, the Anti-Kickback Statute, and the Stark Law. The United States alleged that Cox entered into illegal financial relationships with referring physicians at a local physician group and engaged in improper billing practices with respect to Medicare. The settlement also resolved claims that Cox included non-reimbursable costs on its Medicare cost reports and improperly billed for dialysis services.
In November 2008 (FY 2009) Bayer Healthcare LLC agreed to pay $97.5 million to settle FCA allegations that it had paid illegal kickbacks to diabetic suppliers.
d. Fraudulent Healthcare Billing
In November 2007, Stryker Corporation and its former outpatient therapy division, Physiotherapy Associates Inc. agreed to pay $16.6 million to settle allegations that Physiotherapy submitted false claims to Medicare and other federal and state health care programs. Former Physiotherapy employees brought the lawsuit alleging that Physiotherapy falsely billed services as one-on-one services and improperly retained excess or duplicate payments.
In March 2008, HealthEssentials Solutions, Inc. agreed to pay $117 million to resolve claims that it committed health care fraud against Medicare, Medicaid, and other federally subsidized health care programs by “upcoding” claims. The settlement resulted from three different whistleblower lawsuits.
In May 2008, Medtronic Spine, LLC (formerly Kyphon Inc.) agreed to pay $75 million to settle claims that it violated the FCA by knowingly causing the submission of false claims to Medicare in connection with its kyphoplasty spinal procedure (allegedly performed on an inpatient basis rather than the less costly outpatient basis). The settlement resolved a qui tam lawsuit filed by two former Kyphon employees.
In August 2008, Amerigroup Corporation agreed to pay $225 million to settle federal and state FCA charges that the corporation systematically avoided enrolling pregnant women and other high-cost patients in the company’s managed care program in Illinois in violation of Medicaid regulations. In October 2006, a federal district court entered judgment for $334 million. Amerigroup appealed the decision to the Seventh Circuit, but ultimately settled. A former employee filed the lawsuit and received approximately $55 million as his share of the settlement proceeds.
In September 2008, Staten Island University Hospital (SIUH) agreed to pay $74 million to settle two FCA qui tam actions and two other matters for alleged fraudulent Medicare and Medicaid billing. In addition, SIUH agreed to pay the State of New York more than $14.8 million.
In October 2006, the government announced a new National Procurement Fraud Task Force “to promote the early detection, prevention and prosecution of procurement fraud associated with increased contracting activity for national security and other government programs.” The task force includes members from the DOJ Criminal and Civil Divisions, U.S. Attorneys’ Offices, and other federal law enforcement agencies, such as the FBI, the Special Inspector General for Iraq Reconstruction, the Offices of Inspectors General for the Department of Defense, the Central Intelligence Agency, the General Services Administration, and the Department of Homeland Security, among others. One of the Task Force’s primary objectives is to “[i]ncrease and accelerate civil and criminal prosecutions and administrative actions to recover ill-gotten gains resulting from procurement fraud.”[17] In its December 2008 Progress Report, the Task Force reported that in the two years since its formation, it had recovered more than $362 million in civil settlements or judgments arising from procurement fraud claims. Id. The Task Force credits some of the significant recoveries in 2008 set forth below to its coordinated investigation and prosecution efforts.
a. Department of Defense[18]
There were several multimillion dollar settlements in connection with the manufacture and supply of defective Zylon bulletproof vests purchased and paid for by the government. In October 2007, for example, Hexcel Corporation agreed to pay $15 million. In October 2008 (FY 2009), Armor Holdings Products LLC agreed to pay $30 million. On June 5, 2008, the government sued Honeywell International, Inc. under the FCA for allegedly failing to inform Armor Holdings or the government of known defects in the Zylon Shield vests. The National Procurement Fraud Task Force’s 2008 Progress Report also notes that the government has brought FCA causes of action against Second Chance Body Armor and Toyobo Corporation for making similar false claims.
In March 2008, National Air Cargo agreed to pay $28 million in a global settlement to resolve criminal and civil FCA allegations of fraudulently billing the DOD for the shipment of freight by surface rather than air transportation as DOD regulations require. Of the total payment, National Air Cargo paid $11.75 million to settle civil FCA claims brought by a whistleblower.
In May 2008, the Pasha Group agreed to pay $13 million to resolve allegations that the company participated in a conspiracy to rig bids and fix prices for transportation of household goods belonging to U.S. military and DOD personnel, which allegedly caused the government to overpay for transportation claims, in violation of the FCA.
In August 2008, Pratt & Whitney agreed to pay $53 million to resolve allegations that the companies knowingly submitted false claims for defective turbine blades the Air Force purchased. The government pursued the case as part of the National Procurement Fraud Initiative.
Gibson Dunn believes that the wars in Iraq and Afghanistan likely will give rise to a surge in FCA enforcement actions and new claims against government defense contractors in the near future. Indeed, just last month, on December 8, 2008, the DOJ announced that a subsidiary of L-3 Communications Holdings Inc. paid the government $4 million to settle allegations that its employees falsified time cards for services to the Army between March 2004 and August 2005. A former L-3 employee brought the action. Further, the National Procurement Fraud Task Force in 2008 identified contracts related to the wars in Iraq and Afghanistan, and the rebuilding of those countries, as a “major focus of the Civil Division’s procurement fraud efforts.”[19]
In January 2008, Bechtel Infrastructure Corp. and PB Americas Inc. agreed to pay $458 million to settle federal and state claims (which included $23 million to the United States and over $40 million to the Commonwealth of Massachusetts to settle state FCA allegations). The claims arose in connection with a major public transportation infrastructure project in Boston known as the “Big Dig.” The government alleged the firms submitted false claims for federal highway funds by failing to provide adequate management and quality assurance services during construction. The settlement also resolved claims brought in a qui tam action filed in the United States District Court for the District of Massachusetts.
Of note, President-elect Obama recently announced plans for enormous infusions of federal funds to the states for the purpose of infrastructure and public works projects.[20] Accordingly, Gibson Dunn expects to see enhanced federal and state FCA activity in this area.
In May 2008, Computer Sciences Corporation (“CSC”) agreed to pay $1.37 million to settle allegations that it solicited and received improper payments and failed to disclose conflicts of interest in connection with government agency technology contracts. The settlement is significant because the action against CSC is part of a larger investigation of government technology vendors and consultants, which also resulted in FCA actions filed in 2007 against Accenture, LLP, Hewlett-Packard Company, and Sun Microsystems Inc.[21]
In addition to university teaching hospitals, which are frequent targets of FCA actions alleging Medicaid and Medicare fraud, many universities and institutions of higher learning apply for and receive federal student aid and research grants from agencies such as the NIH or CDC. In exchange, they must adhere to federal regulations, such as the Higher Education Act (HEA). Some of the nation’s most prominent universities have settled FCA allegations in the past few years, including Harvard ($31 million in 2005; $2.4 million in 2004), Weill Medical College of Cornell University ($4.4 million in 2005), John Hopkins ($2.6 million in 2004), the Mayo Clinic ($6.5 million in 2005), and Northwestern ($5.5 million in 2003). In July 2007, Oakland City University paid $5.3 million to resolve a qui tam action alleging false certification of compliance with HEA provisions.
This trend continued in 2008. In February 2008, the Puerto Rico Department of Education paid more than $19 million to resolve allegations that it falsely certified its eligibility to receive federal funds under the Migrant Education Program. In July 2008, St. Louis University agreed to pay $1 million to settle a lawsuit filed by a former Dean of the school alleging that it improperly supplemented faculty pay by misusing federal (CDC) grant funds.
On December 23, 2008, the DOJ announced that Yale University had agreed to pay $7.6 million to resolve allegations that it violated the FCA by misusing and mismanaging federally-funded research grants. The government alleged that researchers transferred non-allocable costs to certain grant accounts in order to obtain unspent grant funds near the expiration dates of the grants. In addition, the settlement resolved allegations that certain researchers improperly charged federal grant accounts for time spent on unrelated work, in order to obtain salaries over the summer months. Yale cooperated with the government during its investigation, and DOJ reports that as a result of such cooperation and the settlement, there will be no lawsuit filed against the university regarding more than 6,000 federally-funded grants covered by the agreement. The DOJ stated that the settlement should “send a clear message that the regulations applicable to federally-funded research grants must be strictly adhered to.”[22]
A significant qui tam action remains pending in California federal court against the University of Phoenix, alleging the university defrauded the federal government out of millions of dollars in federal education loans by paying unlawful bonuses and other gifts to recruiters. The government declined to intervene. Although the district court dismissed the action, the Ninth Circuit reversed. The case is in the midst of discovery and is presently scheduled for trial in 2010.
B. Hot Topics, Significant Legal Trends, and Key Cases in 2008
There were several significant legal developments in the FCA arena during 2008. These developments include, among others: (1) the Supreme Court’s ruling in Allison Engine Co. v. United States ex rel. Sanders, 128 S.Ct. 2123 (2008), which significantly curtailed the potential reach of the FCA; (2) further development regarding the nature of the public disclosure bar including a growing trend of dismissing cases on public disclosure grounds; (3) further narrowing of false certification and fraudulent inducement theories of liability which relators and DOJ have used in an attempt to expand potential FCA liability; (4) courts insisting on a greater level of specificity in a Relator’s pleadings to avoid dismissal under Rule 9(b); and, (5) an increased willingness of courts to grant summary judgment for lack of evidence of a “knowing” violation of the FCA. Each of these trends is discussed in further detail below.
1. The U.S. Supreme Court Curtails the Reach of the FCA and Warns Against “transform[ing] the FCA into an all-purpose antifraud statute”
In Allison Engine Co. v. United States ex rel., Sanders, 128 S.Ct. 2123 (2008) the Supreme Court addressed the issues of whether a plaintiff asserting a claim under Section 3729(a)(2) (using a false record or statement to get a false or fraudulent claim paid) and Section 3729(a)(3) (conspiracy) “must show regarding the relationship between the making of a ‘false record or statement’ and the payment or approval of ‘a false or fraudulent claim . . . by the Government.'” The Court unanimously held that a Relator must prove “that the defendant intended that the false record or statement be material to the Government’s decision to pay or approve” a false claim.
The facts: The United States Navy procured missile destroyers from two prime-contractor shipbuilders. The two prime contractors contracted with Petitioner Allison Engine, which subcontracted with Petitioner General Tool Company, which subcontracted with Petitioner Southern Ohio Fabricators, Inc., to manufacture the generator sets (“Gen-Sets”) which supplied the electrical power to the destroyers. Each Gen-Set had to be manufactured according to Navy specifications, and each subcontractor invoice had to be accompanied by a Certificate of Conformance (“COC”). Relators introduced evidence that the Gen-Sets were not manufactured according to Navy specifications and that the Petitioners’ invoices were accompanied by false COCs, but “did not, however, introduce the invoices submitted by the shipyards to the Navy.”
The Supreme Court, for the first time, addressed the requisite proof of an offense under 31 U.S.C. § 3729(a)(2). The Court held, “If a subcontractor or another defendant makes a false statement to a private entity and does not intend the Government to rely on that false statement as a condition of payment, the statement is not made with the purpose of inducing payment of a false claim ‘by the Government.’ In such a situation, the direct link between the false statement and the Government’s decision to pay or approve a false claim is too attenuated to establish liability.”
Allison Engine increases the burden on plaintiffs when bringing an FCA false record and/or conspiracy claim against subcontractors and others who deal only indirectly with the federal government. Specifically, the Supreme Court confirmed that Relators must demonstrate that the subcontractor made a false statement to a private entity intending that the Government would rely upon the statement in order to make payment. To prevail on an FCA conspiracy claim, Allison Engine instructs that “it is not enough for a plaintiff to show that the alleged conspirators agreed upon a fraud scheme that had the effect of causing a private entity to make payments using money obtained from the Government. Instead, it must be shown that the conspirators intended to ‘defraud the Government.’”
The lower courts in 2008 have only just begun considering the ramifications of Allison Engine. However, several decisions suggest that Allison Engine has already curtailed the reach of the Act. For example, following the Allison Engine decision, a district court in Iowa entered summary judgment sua sponte dismissing Section 3729(a)(2) and (3) claims in connection with allegedly false crop insurance claims. See United States v. Hawley, 566 F. Supp. 2d 918 (N.D. Iowa 2008). In Hawley, the government alleged that Mr. Hawley engaged in improper conduct that allowed certain ineligible farmers to obtain and make claims against multi-peril crop insurance policies that were sold by Hawley, issued by North Central Crop Insurance, and reinsured by the Federal Crop Insurance Corporation. The court dismissed the “false statement” and conspiracy claims because the alleged fraud was too attenuated. Id. at 927-28 (“the allegedly false crop insurance claims themselves were never forwarded to or approved by the government, nor was the payment of the crop insurance claims conditioned on review or approval by the government, and there is no showing that the defendant intended that the false records or statements would be material to the government’s decision to pay or approve the false claim.”)
Similarly, in United States ex rel. Sterling v. Health Ins. Plan of Greater N.Y., Inc., 2008 U.S. Dist. LEXIS 76874 (S.D.N.Y. Sept. 30, 2008), the Relator alleged that defendant Health Insurance Plan of Greater New York, Inc. (“HIP”) defrauded the federal government and the City of New York by fraudulently altering statistical data about its treatment procedures in order to obtain accreditation needed to maintain a contract to provide health benefits and health management services to federal employees, recipients of Medicaid, and federal beneficiaries of various programs, including Child Health Insurance Plus. Following Allison Engine, the district court dismissed the complaint because the allegedly false statements to the accreditation agency (the National Committee for Quality Assurance) were too far removed from any actual claims. Id. at *14 (the “Relator’s claim does not show a substantial connection between HIP’s alleged fraud and the Government’s payment to HIP. Relator attempts to draw such a connection by stating that HIP had a contractual requirement to maintain accreditation, that the strep-throat testing statistics would have affected its accreditation, that HIP therefore falsified the results that it gave to NCQA to maintain good ratings, and then, finally, that the Government relied on this fraudulently obtained positive NCQA rating to award HIP continuing contracts. … This line of argument stretches the narrow boundaries that Allison Engine created.”).
By contrast, in United States v. Eghbal, 548 F.3d 1281 (9th Cir. 2008), the court determined that under the standards set forth in Allison Engine, FCA liability could attach to false statements in loan applications for federally-insured loans that have a “”material effect’ on the Government’s eventual decision to pay a claim.” Id. at *6. The defendants in Eghbal purchased HUD-foreclosed homes and resold them for profit to buyers with mortgage secured loans insured by HUD. Defendants sold the loans to buyers who lacked sufficient assets to cover the down payment on the properties, and provided the down payment for the buyers in violation of HUD rules (HUD would not insure a loan for a home for which the down payment was paid by the seller). Defendants signed documents falsely certifying that they provided no funds towards the down payment. Defendants argued that “they sought only to fraudulently induce HUD to insure the mortgage, not to have the buyers default or cause the mortgage holders to make claims on HUD.” Id. at *5. The court rejected their claims and held “liability under the FCA nevertheless attaches, because the false statements were ‘relevant to the government’s decision to confer a benefit,'” and the “plain language of the FCA contemplates liability not only for fraudulently causing the Government to pay a claim, but also for causing the Government to approve a claim.” Id. at *5-6.
Some have speculated that Allison Engine may restrict actions in the Medicaid arena, because claims are presented to state agencies and paid with state funds (which the federal government then reimburses to the state on a percentage basis).[23] It is too soon to make any generalizations about the precise effect of Allison Engine, but litigation of the issue is sure to surface in the year ahead.
2. The Federal Courts Interpret the Public Disclosure Bar
As noted above, a district court does not have jurisdiction over a private individual’s FCA action if the claim is based on publicly disclosed information unless the Relator qualifies as an “original source” of the information upon which his/her action is based. 31 U.S.C. §3730(e)(4). Congress enacted the provision to balance competing desires to encourage private citizens to expose fraud on the government, but also to discourage opportunistic or “parasitic” plaintiffs from capitalizing on publicly disclosed information.
In determining whether a court has jurisdiction over an FCA claim, in the first instance, courts must answer three questions – (1) Was there a public disclosure? If so, (2) Is the qui tam action based upon the public disclosure? If so, (3) Is each Relator an original source of the information underlying each of the allegations of the complaint? Each of those three questions has given rise to considerable litigation and has divided the Federal Circuit Courts. Indeed, plaintiff lawyers (and, consequently, the courts) have subjected every word of the statute to varied interpretation, making the search for clarity and guidance elusive. In 2007 the Supreme Court resolved a circuit split about the third question in Rockwell Int’l Corp. v. United States, 549 U.S. 457 (2007), thereby restricting the interpretation of the “original source” requirement.
a. Do State Reports Qualify as A Source of Public Disclosure? U.S. Supreme Court May Resolve Issue Shortly
With respect to the first question, whether there was a public disclosure of the information, the FCA enumerates several sources of public disclosure, including disclosure in a “Congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation.” A common point of debate, however, is whether a state administrative report constitutes a public disclosure. On June 9, 2008, the Fourth Circuit held “the public disclosure bar applies to federal administrative audits, reports, hearings or investigations, but not to those conducted or issued by a state or local governmental entity.” United States ex rel. Wilson v. Graham County Soil & Water Conservation Dist., 528 F.3d 292, 296 (4th Cir. 2008) (emphasis added).
The defendant in that case has petitioned the U.S. Supreme Court for review, and, in December 2008, the Supreme Court invited the United States Solicitor General to file a brief expressing its views whether administrative reports or audits issued by state or local governments constitute “public disclosures” within the meaning of the FCA. Several states’ Attorney Generals and representatives of the pharmaceutical and biotechnology industries have filed amicus briefs in the case, as those non-parties are vitally concerned that the Supreme Court hear the issue and resolve the Circuit split in favor of a decision that a state audit or report is a “public disclosure” within the meaning of the FCA. States regularly administer programs involving federal funds (such as Medicaid, which is jointly administered and funded), during the course of which they routinely investigate improper or fraudulent claims.
b. A Stricter Interpretation of the Original Source Requirement
With respect to the third question, that is, proof required to demonstrate “original source” status, the FCA defines an original source as an “an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action . . . which is based on the information.” 31 U.S.C. § 3730(e)(4)(A) and (B). In March 2007, the Supreme Court decided Rockwell Int’l Corp. v. United States, 549 U.S. 457 (2007), which resolved a split among the circuits and narrowly construed the “original source” requirement.
First, Rockwell clarified that the “original source” issue is a jurisdictional issue, which cannot be conceded or waived, may be raised, and must be satisfied, at all stages of the litigation, even post-trial.[24] Second, Rockwell held that a Relator must possess “direct and independent knowledge” of the information on which the allegations of his or her complaint are based, as opposed to the information on which the publicly disclosed allegations are based (this particular holding resolved the split in the Circuits). Third, Rockwell prohibits “claim smuggling;” a Relator must qualify as an original source as to all claims raised, and some claims may be severed and dismissed even if the Relator is an original source as to other claims in the same litigation. Fourth, Rockwell held that a qui tam Relator’s “prediction” or suspicion of wrongdoing is not first hand knowledge sufficient to satisfy the “original source” requirement.
Following Rockwell, and throughout late-2007 and 2008, Gibson Dunn identified a trend in which courts appear far more willing to dismiss claims for lack of jurisdiction under the public disclosure bar. See, e.g., United States ex rel. Hockett v. Columbia/HCA Healthcare Corp., 498 F. Supp. 2d 25 (D.D.C. 2007); United States ex rel. Boothe v. Sun Healthcare Group, Inc., 496 F.3d 1169 (10th Cir. 2007); United States ex rel. Fried v. West Independent School Dist., 527 F.3d 439 (5th Cir. 2008) (“The burden was on [Relator] to show that the information and allegations he discovered were qualitatively different information than what had already been discovered and not merely the product and outgrowth of publicly disclosed information.”) (internal quotations omitted); United States ex rel. Duxbury v. Ortho Biotech Products, 551 F. Supp. 2d 100 (D. Mass. 2008).
3. The Rise of False Certification and Fraudulent Inducement Theories of Liability and Federal Courts’ Efforts To Restrict Such Theories
The DOJ and Relators have taken ever expansive views of liability under the FCA. For example, allegations of promissory fraud continue to percolate in the federal courts, with plaintiffs taking the position that if an FCA defendant lied to obtain a contract at the outset, then liability attaches to all claims submitted under that contract because all claims are “tainted” by the alleged fraudulent inducement and all monies paid under the fraudulently obtained contract must be re-paid to the government. Additionally, Relators frequently attempt to bring claims under implied or express “false certification” theories of liability, arguing that a defendant may be liable for falsely certifying compliance with a broad range of federal statutes, regulations, or guidelines at the time of seeking payment on a claim, whether or not the regulations directly relate to the actual claim for government funds. In other words, private individuals who would not otherwise have standing to enforce myriad laws (e.g., healthcare or environmental regulations) because those regulations contain no private enforcement mechanisms like the FCA’s qui tam provisions, seek to use the FCA as a back-door to enforce compliance with those laws and to severely penalize non-compliance, even if the noncompliance itself resulted in little or no monetary loss. Some of the most prevalent FCA actions in 2008 involved allegations that healthcare providers falsely certified compliance with anti-kickback and self-referral legislation, or that government contractors fraudulently obtained contracts in violation of government procurement regulations and/or fraudulently certified compliance with regulations at the time of claim submission.
a. False Certification
The Tenth Circuit this year in United States ex rel. Conner v. Salina Regional Health Center, Inc., 543 F.3d 1211 (10th Cir. 2008) addressed “whether a qui tam plaintiff, proceeding under the FCA, can maintain a cause of action against a Medicare provider based on an allegation that the provider’s certification of compliance with Medicare statutes and regulations, contained in the annual cost report, render[ed] all claims submitted for reimbursement by that provider false within the meaning of the FCA.” In other words, can FCA liability arise if the Medicare provider is not in complete compliance with all Medicare statutes and regulations?
The facts: Dr. Brian E. Conner was an ophthalmologist and eye surgeon who worked as a member of the medical staff for Salina Regional Health Center, Inc. (“SRHC”) at its Salina, Kansas facility. When SRHC provided a Medicare service, it submitted individual Medicare reimbursement requests to an intermediary of the Government, which then calculated and dispensed estimated periodic payments. Final payments were calculated based on actual costs, as set forth in annual cost reports the Medicare provider submits. As part of its annual cost reports, an SHRC representative certified, among other things, that “the services identified in this cost report were provided in compliance with [Medicare] laws and regulations.” Conner asserted that at the time SRHC made this representation, it was not in compliance with all Medicare laws and regulations.
Conner filed a qui tam complaint after SHRC refused to reappoint him to its medical staff and alleged that SHRC had “presented false claims because it was in violation of various regulations and statutes establishing Medicare conditions of participation at all times from 1987 until the present day.” The district court granted SHRC’s Rule 12(b)(6) motion to dismiss, holding that “the government’s payment for services rendered was not conditioned on” compliance with Medicare statutes and regulations, and Conner appealed.
The Tenth Circuit affirmed because although the certification represented “compliance with underlying laws and regulations, it contain[ed] only general sweeping language and d[id] not contain language stating that payment [was] conditioned on perfect compliance with any particular law or regulation.” In reaching its holding the Tenth Circuit distinguished between “[c]onditions of participation, as well as provider’s certification that it has complied with those conditions, [which] are enforced through administrative mechanisms,” from “[c]onditions of payment . . . which, if the government knew they were not being followed, might cause it to actually refuse payment. Conner is representative of the growing trend of cases rejecting false certification claims based on boilerplate certifications of compliance with federal regulations.
By contrast, plaintiffs may prevail where they identify a false certification of compliance with a specific regulation that is a condition of payment. Compare United States ex rel. Roberts v. Aging Care Home Health, Inc., 2008 U.S. Dist. LEXIS 56846, *28-34 & n.13 (W.D. La. July 25, 2008) (holding Medicare conditions payment of a claim upon a certification of compliance with the Stark Laws, but also noting that “[v]iolations of Stark II or any other law, without more, do not create liability under the FCA.”) with Abner v. Jewish Hosp. Health Care Servs., 2008 U.S. Dist. LEXIS 61985, *22-25 & n.3 (S.D. Ind. Aug. 13, 2008) (noting the Circuit split regarding the viability of express or implied false certification theories of liability; dismissing false certification claims for failure to plead with particularity where “relators pointed the court generally to 42 C.F.R. parts 482 and 493 but did not point to any specific regulation requiring certification before dispensation of payment, let alone point to one that defendants allegedly violated;” and warning, “[i]f relators file a second amended complaint that alleges false certification with particularity, they must direct the court to a specific regulation conditioning payment on certification of compliance.”) (emphasis added).
b. Fraudulent Inducement
The Fourth Circuit in United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370 (4th Cir. 2008) addressed the issue of whether a fraudulent inducement theory of FCA liability can arise when a defendant fails to satisfy generic statements of contractual obligations.
The Facts: Kellogg Brown & Root, Inc. (“KBR”) entered into a Logistics Civil Augmentation Program contract with the Department of Defense (“DOD”) to provide operational support to the United States military in wartime situations. Under the general contract, the Army requested specific services pursuant to Task Orders. The Task Orders also contained Statements of Work that further delineated KBR’s responsibilities. Pursuant to Task Order 43, KBR agreed to provide transport services for the army. Task Order 43 required KBR, among other things, to maintain vehicles “in a safe operating condition and good appearance.”
Relators Wilson and Warren, KBR employees who drove supply trucks in Iraq, brought suit under the FCA using a “fraudulent inducement” theory. They argued that KBR fraudulently induced the United States into issuing Task Order 43 by knowingly misrepresenting that KBR would comply with the Task Order’s maintenance requirements. The Relators asserted that KBR had signed a DOD form accepting the task order subject to its terms and conditions, which was required to be signed before payment could be made, knowing that KBR had not fulfilled its maintenance obligations in the past and would not do so in the future. The district court granted KBR’s rule 12(b)(6) motion to dismiss because the DOD form did not constitute a “false statement or fraudulent course of conduct.”
The Fourth Circuit affirmed the district court’s dismissal of the claims, holding that Relators’ assertions that KBR did not fulfill its maintenance obligations were mere “allegations of poor and inefficient management of contractual duties,” insufficient to create a cause of action under the FCA Furthermore the “imprecise nature of the general maintenance provisions at issue” made it difficult to determine what qualified as adequate or inadequate maintenance under Task Order 43. The Fourth Circuit also noted that the DOD form in question had been signed more than five months after KBR began performance under the Task Order so, as a matter of law, even if the DOD form contained a misstatement, such misstatement could not explain how Task Order 43 had been “obtained originally” through fraudulent inducement as the FCA requires.
KBR confirms that Relators pursuing fraudulent inducement theories of recovery under the FCA must identify specific false statements made while negotiating a contract that induced the government to contract with, or pay, the contractor.
4. Requiring Increased Particularity In Pleading Pursuant To Rule 9(b)
FCA actions are subject to the Federal Rules of Civil Procedure, including special pleading requirements applicable to fraud actions. Specifically, Rule 9(b) requires a plaintiff to plead with particularity the who, what, when, where, and how of the alleged fraud. When facing Motions to Dismiss, court often struggle to determine the appropriate level of specificity required in a complaint, particularly where the plaintiff alleges a fraudulent scheme occurring over many years and/or in multiple programs or locations.
Gibson Dunn has identified a trend in which courts appear to demand an increasing level of specificity in complaints to withstand dismissal. For example, plaintiffs frequently allege an underlying “scheme to defraud” the government in detail, but courts nevertheless seem more apt to dismiss such complaints unless at least some representative examples of specific false claims resulting from the alleged fraudulent schemes are identified in, or attached to, the complaint. See, e.g., United States ex rel. Fowler v. Caremark, R.X., LLC, 496 F.3d 730, 740 (7th Cir. 2007), cert. denied, 128 S. Ct. 1246, 170 L. Ed. 2d 66 (2008); United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 379-80 (4th Cir. 2008) (agreeing with district court that the third amended complaint failed to satisfy Rule 9(b) in part because the “complaint lacks any specific facts about several important elements of the alleged scheme”); United States ex rel. Marlar v. BWXT Y-12, L.L.C., 525 F.3d 439 (6th Cir. 2008) (affirming dismissal of substantive FCA claims for failing to comply with Rule 9(b)); Barys v. Vitas Healthcare Corp., 2008 U.S. App. LEXIS 22619 (11th Cir. 2008) (district court did not err in refusing to relax pleading requirements nor in dismissing amended complaint for failure to satisfy the requirements of Rule 9(b)); United States ex rel. Hebert v. Dizney, 2008 U.S. App. LEXIS 21413, *13-14 (5th Cir. Oct. 10, 2008) (“While we agree that Rule 9(b) does not require a qui tam plaintiff alleging a long-running scheme involving many false claims to list every false claim, its dates, [and] the individuals responsible, . . . the allegedly great extent and complexity of a fraudulent scheme does not excuse a failure to plead at least one false claim with the requisite specificity.”) (internal quotations omitted); United States ex rel. Serrano v. Oaks Diagnostics, Inc., 568 F. Supp. 2d 1136, 1143 (C.D. Cal. 2008) (“The general allegations that all claims submitted during an almost four year period were fraudulently submitted is insufficient particularity to satisfy the 9(b) pleading standard. While the Court is not suggesting that Rule 9(b) requires precise details pertaining to each of the allegedly 1393 claims submitted, the Ninth Circuit requires some specifics, such as the time, place, nature of the false statement, as well as the identities of the parties to the misrepresentation be present to comply with Rule 9(b) pleading standards. . . . [B]ecause not a single allegedly false claim is stated with those particularities, the FCA claims must be [dismissed].”).[25]
Defendants served with FCA complaints should carefully consider challenging the complaint on the basis of Rule 9(b) at the outset. Even if dismissal is granted with leave to file an amended complaint, defendants are far better prepared to defend against detailed and specific allegations and may even be successful in narrowing the scope of discovery, which can be expensive, intrusive, and time consuming.
5. Granting Summary Judgment For Lack Of Evidence Of a “Knowing” Violation
The FCA penalizes only “knowing” violations, defined as actual knowledge, or a deliberate ignorance of, or reckless disregard for, the truth or falsity of information. 31 U.S.C. §3729(b). Repeatedly, courts have held that negligent or innocent billing mistakes are not actionable under the statute. See, e.g., United States ex rel. Farmer v. City of Houston, 523 F.3d 333, 338-39 (5th Cir. 2008) (“Though the FCA is plain that “proof of specific intent to defraud” is not necessary, . . . that mens rea requirement is not met by mere negligence or even gross negligence. . . . Given [the FCA’s] definition of ‘knowingly,’ courts have found that the mismanagement-alone-of programs that receive federal dollars is not enough to create FCA liability.”)
Predictably, plaintiffs almost invariably argue that “scienter” or state-of-mind element is a factual issue, inappropriate for summary disposition prior to trial. Recently, however, federal courts appear far more willing to dispose of FCA cases on summary judgment where plaintiffs fail to submit evidence to support a reasonable inference of knowledge or reckless disregard, particularly in areas where there is evidence that governing regulations or contract terms are ambiguous and the defendant’s interpretation was reasonable.[26]
IV. Significant Proposed Legislation – The False Claims Correction Act of 2007
For more than 100 years, since President Lincoln signed the FCA into law in 1863 to combat fraud perpetrated against the Union Army, the FCA remained virtually untouched by legislators. In 1986, however, Representative Howard Berman (D-Cal) and Senator Chuck Grassley (R-Iowa) reinvigorated the century-old law by adding provisions that allow citizens to act as “private attorneys general” and sue for government fraud. Then, in late 2007, these lawmakers introduced bills in the U.S. House of Representatives and Senate to amend the False Claims Act. Both bills are entitled the False Claims Correction Act of 2007.
Specifically, on September 12, 2007, Senator Grassley introduced the Senate’s amended bill, S. 2041, 110th Cong., which was intended to “modernize and strengthen” the False Claims Act, expanding the government’s ability to protect treasury assets and fight fraud. Senator Grassley has long been a champion of the False Claims Act, and the bill’s other sponsors show that it has enjoyed bi-partisan support. On December 19, 2007, Representative Berman introduced a companion bill in the House, H.R. 4854, 110th Cong., which includes substantially the same provisions. The House bill also has bipartisan support. Both bills were debated and passed out of Committee in 2008, but were not voted on by either chamber or signed into law.[27]
With the end of the 110th Congress on January 3, 2009, the bills will not automatically carry over to the 111th Congress. However, Gibson Dunn anticipates that Senator Grassley and Representative Berman will submit materially identical versions of these bills for consideration by the 111th Congress.
B. Important Proposed Changes To The Current Act
The congressional bills seek to affect crucial changes on the structure and operation of the False Claims Act. Most notably, the bills expand the availability of lawsuits under the Act.
Possibly the most significant change to the FCA under the proposed amendments seeks to confer on private individuals the right to bring FCA claims without exposing any fraud. The amendments circumscribe the public disclosure bar by defining “public information” narrowly to encompass only information “on the public record” or “broadly disseminated to the general public.” Thus, the amendments would allow individuals to bring qui tam actions even if the government already knew about an alleged fraud but failed to disclose that fraud through the public channels previously articulated in the statute. The amendments further constrict the public disclosure bar by limiting the bar to situations where “all essential elements” of the plaintiff’s claim are publicly available. This would effectively eliminate the public disclosure bar in all but the most egregious of cases because plaintiffs would need only show one non-public source of information to escape the bar–a substantially lower standard than currently required: “direct and independent” knowledge of the fraud. And finally, and perhaps most significantly, only the U.S. Attorney General–not the court–would have the power to dismiss a qui tam Relator’s claims for violating the public disclosure bar.
2. Expanded Definition of “Claim”
The proposed legislation also expands the definition of a “claim.” Indeed, the amendments would broaden the availability of FCA suits by allowing suits against any person who knowingly presents a false or fraudulent claim for government money or property. The amendments effectively repeal any “presentment” requirement by tying FCA claims directly to federal money and property, regardless of to whom the claim is presented. Similarly, the amendments would expand the definition of “government property” to encompass third-party property that is merely administered by the government. If passed, this amendment would permit FCA suits arising out of a purely private transaction and would greatly expand the reach of the Act. It remains to be seen whether the verbiage of any proposed amendment in this regard will change following the Supreme Court’s decision in Allison Engine providing that the link between a false statement and the federal government’s decision to pay or approve a false claim must not be “too attenuated” (discussed above).
3. Qui Tam Actions by Government Employees
One of the amendments’ most controversial provisions would allow government employees to bring qui tam actions themselves after exhausting internal procedures and administrative remedies. Historically, courts have restricted government employees from bringing FCA claims as a matter of strong public policy. See United States ex rel. Fine v. Chevron U.S.A., Inc., 72 F.3d 740 (9th Cir. 1996). The proposed amendments would create increased incentives for exposing fraud, but also may create conflicts of interest among public employees and encourage opportunistic behavior.
For example, federal employees may owe a duty of loyalty and candor to the government to report fraud, and many (such as auditors, investigators and attorneys) are specifically employed in part to identify fraud. Opportunity for personal financial gain may create at least the appearance of investigative and/or enforcement decisions motivated by such personal gain rather than the public interest. Further, if the government has determined not to act upon information disclosed by a government employee, then that employee should not be able to file a private action based on such information. Indeed, the amendments create incentives for government employees to withhold critical information from the government. In addition, if an active government employee files a qui tam action, his or her financial incentive may give rise to a conflict of interest which impairs his or her (and possibly other government employees’) ability to work on the matter or to serve as a witness in any trial.[28]
The amendments also seek to drastically alter the procedural requirements of the Act. Indeed, in a significant departure from current law, the amendments would permit the Attorney General to delegate his broad investigatory powers under the FCA to third parties, including private entities. Presently, only the Attorney General may issue civil investigative demands (CIDs), before commencing a civil proceeding, which may require the target to produce documents and answer oral or written questions regarding such documents. 31 U.S.C. § 3733(a). The “Attorney General may not delegate [that] authority.” Id. By expanding the power to issue CIDs to private parties, the congressional amendments would eliminate what has been a powerful check on investigative fishing expeditions.
The bills also affect procedural changes by requiring the government, if it elects to intervene and proceed with an action, to file its own complaint, or to amend the complaint of a person who brought a civil action. Further, the amendments seek to lengthen the statute of limitations from six years under the current statute (31 U.S.C. § 3731(b)) to ten years. Of note, the House committee shortened this time to eight years.
Finally, the amendments strengthen the Act’s prohibition against retaliatory actions taken by employers against whistleblowers by prohibiting employers from taking actions that materially hinder a whistleblower in obtaining new employment or other business opportunities. Similarly, the Senate bill authorizes relief for government employees and contractors from retaliatory actions taken against them because of lawful acts done in furtherance of efforts to stop violations of the Act.
The amendments’ supporters argue that the legislation is needed because recent judicial decisions have weakened the FCA. Indeed, on February 20, 2008, Senator Grassley criticized the courts for doing “their best to undo the most effective tool of the federal government in rooting out fraud and abuse.”[29] Senator Grassley observed that “[o]ur bill works to make sure recent court decisions won’t weaken the government’s ability to recover taxpayer dollars lost to fraud, whether it’s in health care, defense, or another area of spending.” Id.
Plaintiffs’ attorneys and members of the “Relators’ bar” have argued that recent Supreme Court cases such as Rockwell were wrongly decided, and that the public disclosure bar has routinely, and incorrectly, been utilized to avoid liability. They argue that the amendments are necessary to effectuate the original purposes of the legislation.
D. Opposition To The Amendments
Opponents argue that the amendments greatly expand liability under the Act and will make it more difficult for companies to defend themselves against costly litigation. Indeed, although the House and Senate bills both enjoy bipartisan support, some skepticism has emerged. Not surprisingly, some of the most vehement criticism has been lodged against the bills’ amendments to the public disclosure bar.
The business community has given both bills a cold reception. The U.S. Chamber of Commerce opposes the legislation on the ground that it is unnecessary and that it could harm small businesses that do not have the resources to defend themselves in court.[30] The bills have also been criticized for benefiting plaintiffs’ attorneys and not the federal government.
The DOJ has also expressed “significant concerns” with the bills as written, particularly with respect to provisions that would allow government employees to act as Relators and virtually eliminate the public disclosure bar.[31] The DOJ has echoed others’ complaints, arguing that these provisions would spawn frivolous, costly litigation and hinder the DOJ’s efforts to combat fraud.
More than 20 states and the District of Columbia (and even some cities) have now enacted their own civil False Claims Acts modeled after the federal statute, and more are sure to follow. In fact, the federal government provides an incentive to states that enact such legislation: Section 6031 of the Deficit Reduction Act of 2005 provides that if a state has qualifying false claims act in effect, then the state will get ten percent more of any amount recovered in any false claims action brought under the state’s act. See Section 1909(b) of the Social Security Act, 42 U.S.C. § 1396h(b).
In a recently, highly-publicized case, thought to be the largest recovery ever against a utility for overcharging customers, a California Superior Court ruled in June 2007 that the Los Angeles Department of Water & Power deliberately overcharged Los Angeles County, the school district and other plaintiffs in the case for nearly 10 years and ordered the agency to pay a total of $223.8 million. In October 2008, DWP announced that it had decided not to appeal the verdict and instead settled for a total of $160 million. The lawsuit was initiated by an energy consultant under the California False Claims Act whistleblower provisions.
Similarly, in September 2008, Boehringer Ingelheim Roxane, Inc., a drug manufacturer, paid the Commonwealth of Massachusetts $1.8 million to settle an FCA lawsuit alleging that it falsely inflated the prices of certain drugs that it reported to the national pharmaceutical price reporting services, which states (including Massachusetts) use to determine the reimbursement amounts for drugs dispensed to Medicaid recipients. The state sued 13 drug manufacturers and had already settled similar claims against four other drug companies for nearly $6 million.
Those doing business with the government should be aware that many programs are jointly funded by the federal and state governments (such as Medicaid),[32] and many government contracts are similarly funded by the federal and state governments (such as infrastructure improvement). Accordingly, companies may face concurrent allegations of liability under federal and state versions of the FCA. And qui tam plaintiffs may be able to convince state regulators to intervene and pursue state claims, even if the federal government declines intervention.
VI. Increased FCA Activity in the Future?
The federal government’s recent and expanding bailout places substantial federal funds into the hands of a stunning variety of entities. And with the growing demand for oversight, it is possible that a new form of FCA claims will emerge–claims alleging that the entity receiving federal funds defrauded the government based on misrepresentations to receive the federal monies in the first instance, or false statements made to continue to receive the monies. FCA claims could also be brought by whistleblowers claiming that the federal funds that have been received were not appropriately applied to their intended uses.
B. New Rules For Government Contractors
A final rule issued on November 12, 2008, and effective on December 12, 2008, amends the Federal Acquisition Regulation (“FAR”) to require the disclosure of violations of the FCA and “significant” overpayments on a contract, and a knowing failure by a federal government contractor to timely disclose “credible evidence” of these violations or overpayments may result in suspension or debarment, in addition to FCA damages and penalties. The new rule also mandates that certain federal government contractors create a business ethics awareness and compliance program, as well as an internal control system. For more information on the FAR, please see Gibson Dunn client alert, “New Federal Regulation Requires Mandatory Disclosure and Amplified Compliance Programs for Government Contractors,” November 13, 2008.
Although the full effect of the new rule remains to be seen, it clearly signals an attempt to significantly change the relationship between contractors and the federal government regarding the disclosure of certain criminal and ethical violations, including violations of the FCA, as well as instances of significant overpayment. Key terms such as “significant overpayments” are not clearly defined in the rule, so questions remain as to how broadly the new disclosure requirements will be interpreted and applied. Additionally, the requirements regarding compliance and control programs are complex and are likely to present significant business and legal challenges to contractors in the near future.[33]
C. Proposed Legislative Changes
Passage of the proposed legislative changes would certainly lead to expanded FCA activity. As previously described, the proposed changes would undermine the “public disclosure” bar likely resulting in an increase of the number of private individuals that could bring FCA suits even if they have only indirectly witnessed alleged fraud. A broader definition of a “claim,” opening the FCA to government employees, extending the statute of limitations, and enhancing whistleblower protections are all steps that will likely increase the number of FCA suits brought by the public. Indeed the legislative changes likely would undo many of the judicial trends previously noted in this update that point towards a narrower interpretation of the FCA.
Based on recent events, Gibson Dunn predicts that 2009 will be an active and interesting time for False Claims Act activity. In Rockwell and Allison Engine, the U.S. Supreme Court restricted the class of persons able to bring FCA actions, narrowed the application of the Act, and expressly warned against “transform[ing] the FCA into an all-purpose antifraud statute.” And lower federal courts have applied these requirements, which make it more difficult to pursue FCA claims. But legislation with bipartisan support is likely to be reintroduced and enacted in the current Congress that would essentially reverse those decisions, expand the scope of the Act, and increase penalties. Government agencies (such as DHHS OIG) have increased budgets and issued marching orders to strengthen oversight and enforcement activities to prevent fraud and abuse. Task forces among various government agencies (notably, in the healthcare and procurement areas) have recently been formed with specific goals of combining and leveraging their investigative and prosecutorial resources to more efficiently and effectively recoup federal funds obtained by fraud. And all of this at a time when the federal government has infused, and has announced plans to further infuse, unprecedented amounts of money into many sectors of the economy. The year ahead is sure to present a robust level of enforcement activity.
[1] See DOJ Press Releases available at
http://www.usdoj.gov/criminal/npftf/pr/press_releases/2008/nov/11-10-08_frd-fls-clam-fy08.pdf and http://www.usdoj.gov/opa/pr/2008/November/fraud-statistics1986-2008.htm.
[2] According to the U.S. Census Bureau’s September 2008 Consolidated Federal Funds Report for Fiscal Year 2007, the federal government allocated $2.56 trillion in domestic spending for FY 2007, which was up 4.4% from the prior year, and nearly half of all spending (over $1.3 trillion) went to Social Security, Medicare, and Medicaid. Defense spending accounted for approximately 16% ($430.5 billion). See http://www.census.gov/prod/2008pubs/cffr-07.pdf; http://www.census.gov/Press-Release/www/releases/archives/governments/012743.html. FY 2008 figures are not yet final and available.
[3] Companies that do business with the federal government or receive federal funds should implement and maintain robust internal compliance programs and take employee complaints seriously. Because FCA lawsuits are most frequently initiated by present or former employees, and because the employee’s investigation and participation in an FCA action constitutes protected activity under the Act, companies should also engage qualified FCA counsel before making any employment decisions regarding an individual who has complained of potentially fraudulent activity.
[4] 18 U.S.C. § 287 makes it a crime to knowingly present a “false, fictitious, or fraudulent” claim to the government punishable by up to five years imprisonment and/or a fine. Id. This year-end summary focuses on the civil False Claims Act, but the government can, and often will, pursue both criminal and civil remedies.
[5] The Act defines “claim” as “any request or demand, whether under a contract, or otherwise, for money or property which is made to a contractor, grantee, or other recipient if the United Sates Government provides any portion of the money or property which is requested or demanded, or if the Government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.” 31 U.S.C. § 3729(c).
[6] In Rogan, an individual was liable under the FCA for conspiring to defraud the government by concealing illegal referrals and kickbacks and for otherwise inflating Medicaid and Medicare claims. Following a bench trial, the court awarded damages equal to three times the entire amount that the medical facility (Edgewater) received from the government plus penalties. The court refused to discount damages based on any actual services or treatment provided at the medical facility. Id. at 451-52 (court did not “think it important that most of the patients for which claims were submitted received some medical care–perhaps all the care reflected in the claim forms. … Edgewater did not furnish any medical service to the United States. The government offers a subsidy (from the patients’ perspective, a form of insurance), with conditions. When the conditions are not satisfied, nothing is due. . . . Now it may be that, if the patients had gone elsewhere, the United States would have paid for their care. Or perhaps the patients, or a private insurer, would have paid for care at Edgewater had it refrained from billing the United States. But neither possibility allows Rogan to keep money obtained from the Treasury by false pretenses, or avoid the penalty for deceit.”)
[7] The FCA protects whistleblowers from retaliation by their employers as a result of the whistleblower’s investigative activities. 31 U.S.C. §3730(h).
[10] DOJ statistics confirm that the government depends heavily on whistleblowers to expose fraud. Of the 542 new FCA matters opened in FY 2008 (including referrals, investigations and qui tam actions), 375 (70%) of those were qui tam actions. This represents a slight decline in the percentage of actions initiated by private individuals (in FY 2007, of the 472 new FCA investigations, 364 (77%) were qui tam actions; similarly, in FY 2006, of the 455 new investigations, 384 (84%) were qui tam actions). Of the total amount of recoveries in 2008, 78% (approximately $1.04 billion) resulted from investigations or actions originally initiated by whistleblowers.
[13] The OIG also intends to focus on Medicare Part D drug benefits,” as well as “enrollment and marketing schemes,” “prescription shorting,” quality-of-care and substandard care issues and will “expand [its] focus on these issues to additional institutions and community-based settings.” Further, the OIG intends “to conduct investigations related to false claims submitted to Medicaid for services not rendered, claims that manipulate payment codes in an effort to inflate reimbursement amounts, claims for substandard care provided to nursing home residents, and claims submitted to obtain program funds.” Id.
[14] Notably, the relator in the CVS action (a pharmacist) initiated similar claims (switching from tablets to more expensive capsule versions of certain prescription drugs) against Omnicare, Inc, which resulted in a $49.5 million settlement in FY 2007. The whistleblower received over $6.4 million of that award, bringing his total qui tam share recovery to more than $10 million.
[16] The Anti-Kickback Statute, 42 U.S.C.S. § 1320a-7b, imposes liability on anyone who knowingly and willfully offers or pays any remuneration directly or indirectly, to any person to induce that person to refer an individual for the provision of any item or service for which payment may be made under a Federal health care program. The Stark Law, 42 U.S.C.S. § 1395nn, generally prohibits physicians having a financial relationship with an entity from making a referral to the entity for the provision of health services. Some courts have held that violations of the Anti-Kickback Statute and the Stark Law are actionable under the FCA if the government conditioned payment upon compliance therewith.
[18] The U.S. Census Bureau reports that federal government procurement contracts accounted for $440 billion (17 percent) of total federal spending in FY 2007. Of that spending, defense contracts compromised 67% percent. FY 2008 figures are not yet available.
[19] The National Procurement Fraud Task Force 2008 Progress Report noted that in 2007, the FBI launched a project “to scan approximately seven million DOD payment vouchers totaling over $10 billion dollars in expenditures/payments . . . to aid in retention, retrieval, and proactive review for fraud indicators and red flags. . . . . Several cases have been referred to [federal] agencies as a result of red flags and anomalies discovered during the review of these vouchers.”
http://www.usdoj.gov/criminal/npftf/resource/Dec08progress_report.pdf. Litigation is sure to follow.
[20] See, e.g., Scott Horsley, Can Infrastructure Spending Rev Up The Economy?, Nat’l Pub. Radio, Dec. 8, 2008 (available at http://www.npr.org/templates/story/story.php?storyId=97973470), reporting that President-elect Obama voiced his intention to “lead the biggest government infrastructure investment since the interstate highway system was launched in the 1950s.”
[21] In August 2007, IBM Corporation and PricewaterhouseCoopers agreed to pay more than $5.2 million to settle allegations stemming from that investigation. In FY 2007, Oracle Corporation paid the government $98.5 million to resolve allegations that PeopleSoft, Inc. (acquired by Oracle in 2005) engaged in defective pricing of its software and services under the company’s multiple award schedule with GSA.
[23] See, e.g., CRS Report for Congress, “The False Claims Act, the Allison Engine Decision, and Possible Effects on Health Care Fraud Enforcement,” Nov. 6, 2008, available at http://assets.opencrs.com/rpts/RS22982_20081106.pdf.
[24] This holding should greatly interest companies that are presently defendants in FCA actions. As a jurisdictional inquiry, even if the case has progressed beyond motions to dismiss or for summary judgment, the “public disclosure” bar may be a viable defense to claims, regardless of whether it was raised at an earlier stage of the litigation.
[25] District court cases dismissing FCA complaints for failure to satisfy Rule 9(b) pleading requirements have been published on a weekly, if not daily basis, over the past few months. See, e.g., United States ex rel. Kennedy v. Aventis Pharmaceuticals, Inc., 2008 U.S. Dist. LEXIS 100444 (N.D. Ill. Dec. 10, 2008); United States ex rel. Radcliffe v. Purdue Pharma L.P., 2008 U.S. Dist. LEXIS 81688 (W.D. Va. Oct. 14, 2008); Unterschuetz v. In Home Pers. Care, Inc., 2008 U.S. Dist. LEXIS 81914 (D. Minn. Oct. 14, 2008); United States ex rel. Sterling v. Health Ins. Plan of Greater N.Y., Inc., 2008 U.S. Dist. LEXIS 76874 (S.D.N.Y. Sept. 30, 2008); United States ex rel. Lacy v. New Horizons, Inc., 2008 U.S. Dist. LEXIS 73814 (W.D. Okla. Sept. 25, 2008).
[26] Some of the Circuit Court decisions in 2008 that affirmed summary judgment for lack of evidence of scienter include: United States ex rel. K & R Ltd. P’ship v. Mass. Hous. Fin. Agency, 530 F.3d 980, 981 (D. C. Cir. 2008); United States ex rel. Hefner v. Hackensack Univ. Medical Ctr., 495 F.3d 103, 110 (3d Cir. 2007); United States ex rel. Farmer v. City of Houston, 523 F.3d 333, 339 (5th Cir. 2008); United States ex rel. Taylor-Vick v. Smith, 513 F.3d 228, 232 (5th Cir. 2008); United States ex rel. Gudur v. Deloitte & Touche, 2008 U.S. App. LEXIS 17038, *4-5 (5th Cir. Aug. 7, 2008); United States ex rel. Bustamante v. Orenduff, 2008 U.S. App. LEXIS 24303, *49 (10th Cir. Nov. 28, 2008).
[27] S. 2041 was referred to the Committee on the Judiciary, which held hearings on the measure on February, 27, 2008. After debating the bill, the committee passed the bill in early April 2008 without a single dissenting vote. H.R. 4854 bill was referred to the House Committee on the Judiciary, which held hearings in June 2008. The bill was also referred to the Subcommittee on Commercial and Administrative Law and the Subcommittee on Courts, the Internet, and Intellectual Property. On July 16, 2008, the Committee voted to report the bill to the full chamber.
[28] For these and other policy reasons, the DOJ “strongly opposes the proposed amendment” in this regard and “believes there should be a complete ban on any qui tam suit that utilizes information acquired during the course of Government employment.” See http://www.usdoj.gov/ola/views-letters/110-2/07-15-08-hr4854-false-claims-act-correction-act.pdf.
[29] Geof Koss, Senate Judiciary to Weigh Changes to Key Whistleblower Law, CongressNow (Feb. 21, 2008).
[30] Brendan Brown, Chamber of Commerce Argues Against Update of False Claims Act, CongressNow (June 19, 2008).
[31] See http://www.usdoj.gov/ola/views-letters/110-2/07-15-08-hr4854-false-claims-act-correction-act.pdf and http://www.usdoj.gov/ola/views-letters/110-2/02-21-08-s2041-false-claims-correction-act.pdf.
[32] On October 28, 2008, the Department of Health & Human Services Centers For Medicare & Medicaid Services (CMS) issued a letter to the states setting forth CMS policy on refunding the federal share of Medicaid overpayments recovered under state false claims act statutes. See SHO #08-004 (“this letter explains what amounts must be returned to the Federal Government on any recovery, the proper accounting of the relator’s share and litigation”).
[33] Many critics of the proposed rule argued that FCA violations are difficult to define, and contractors are likely to have an honest disagreement about whether a violation of the FCA has occurred sufficient to warrant self-disclosure. In enacting the Rule, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council stated, “the disclosure requirement applies only where the contractor has ‘credible evidence’ that a violation of the civil FCA has occurred. . . . Genuine disputes over the proper application of the civil FCA may be considered in evaluating whether the contractor knowingly failed to disclose a violation of the civil FCA.” Further, “the mere filing of a qui tam action under the civil FCA is not sufficient to establish a violation under the statute, nor does it represent, standing alone, credible evidence of a violation. Similarly, the decision by the Government to decline intervention in a qui tam action is not dispositive of whether the civil FCA has been violated, nor conclusive of whether the contractor has credible evidence of a violation of the civil FCA.”
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Gibson Dunn successfully argued the Allison Engine case in the Supreme Court, which resulted in a unanimous decision by the Court. Our attorneys have handled more than 100 FCA investigations and have a long track record of litigation success. The firm has more than 30 attorneys with substantive FCA expertise and 20 former Assistant U.S. Attorneys and DOJ attorneys. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
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