Click for PDF Industries worldwide are confronting unprecedented challenges and uncertainties sparked by the novel coronavirus (COVID-19) public health crisis, which has shuttered businesses, disrupted travel, supply chains, and the financial markets, and threatened global economic stability.  In response to the pandemic, the United States government has responded with a $2.2 trillion economic stimulus package—the largest in history.  This massive new program comes on the heels of other local, state, and federal emergency measures, including significant spending on critical supplies and the federal government’s invocation (albeit on a limited basis) of a wartime statute to direct U.S. industry to manufacture needed medical supplies and equipment. In the midst of this crisis, companies that do business with the government, including entities in the health care industry and a range of government contractors, have prioritized the public and raced to meet government needs.  The fast-paced corporate decisions and actions that this effort has required may not be scrutinized in detail today, in the heat of the moment.  But if history is any indicator, today’s responses to the COVID-19 crisis will be scrutinized in the years to come, and could lead to future legal action under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq.  In the aftermath of past crises, the U.S. Department of Justice (“DOJ”) and qui tam relators have vigorously pursued FCA claims targeting entities that benefited from government spending—efforts contributing heftily to the nearly $40 billion that the federal government has recovered under the FCA in the last decade alone. There is no reason to believe that the COVID-19 crisis will be any different.  DOJ already announced it will “prioritize the investigation and prosecution of Coronavirus-related fraud schemes” and established a national hotline for whistleblowers to report suspected fraud.  Accordingly, any company receiving government funds would do well to take steps today to protect against the risk of potential future FCA liability.  Below, we summarize these developments, identify potential areas of likely COVID-19-related FCA enforcement, and offer tips for managing risks and other mitigation efforts.

I.          Background

The FCA has served as the principal tool for combatting fraud in government programs for more than 150 years.  FCA enforcement has been particularly robust when emergency government spending ramps up, giving opportunists the chance to exploit the public fisc, even when lives are at stake.  The FCA itself is the product of such a national crisis:  Congress enacted the statute during the Civil War in 1863 in response to unscrupulous suppliers defrauding the Union Army,[1] providing defective goods such as “spavined beasts and dying donkeys” in place of healthy horses, sand instead of sugar, and “experimental failures of sanguine inventors” instead of working firearms.[2] Flurries of FCA activity also have followed more recent crises, particularly those that involve significant emergency government spending.  This includes, for example, the wars in Iraq and Afghanistan, natural disasters such as Hurricane Katrina, the 2008 financial crisis and Troubled Asset Relief Program (“TARP”), and the ongoing national opioid epidemic.  In addition to DOJ’s enforcement activities, private plaintiffs’ attorneys representing qui tam relators have, in the wake of past crises, enthusiastically pursued FCA actions against all types of government contractors and industries receiving government funds. In connection with the 2008 financial crisis, for example, a DOJ task force charged with rooting out fraud in federally insured mortgage and lending programs was the vanguard of aggressive FCA enforcement.  The task force’s efforts, focused primarily on lenders participating in government programs and other institutions receiving government funds, led to record-setting annual FCA recoveries upwards of $6 billion in the years that followed, and their effects still linger more than a decade later.  And even just the most recent of these crises proves the point.  In the last few years, DOJ has boldly pursued FCA claims against manufacturers, prescribers, health systems, and others involved in the opioid distribution chain, recovering more than $1.5 billion last year alone. The COVID-19 crisis has prompted federal action that may well dwarf expenditures on prior crises.  Just days ago, for example, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) became law.  The CARES Act, the largest emergency stimulus package in history, will devote $2.2 trillion worth of government funds to mitigate the effects of COVID-19.[3]  As we reported in detail earlier this week, several key provisions in the Act provide relief for businesses, industries, individuals, employers, and states, including as follows:

• Establishment of a Small Business Administration (“SBA”) loan program offering up to $350 billion in loans forgivable under certain conditions, with relaxed eligibility requirements relative to existing law;
• Provisions for direct rebates and other tax relief for individuals and employers;
• Provisions for hundreds of billions of dollars in funding and other resources for the health care industry, education sector, defense contractors, and lending institutions; and
• Establishment of a $500 billion economic stabilization program to provide loans and loan guarantees for eligible businesses, states, and municipalities.

In addition to passage of the CARES Act, the government’s efforts have included the following steps, on which we reported last week:[4]

• Enacting legislation appropriating more than $8 billion dollars in government spending for supplies, vaccines, tests, isolation and quarantine costs, sanitization of public areas and more;
• Declaring a state of emergency authorizing the release of up to $50 billion in spending in government efforts to combat the virus;
• Invoking the wartime-era Defense Production Act to direct U.S. industries to manufacture critical medical supplies, including respirator masks and ventilators; and
• Announcing intended partnerships with the private sector to expand COVID-19 testing.

These steps, and others that are sure to follow as the crisis develops, will set the stage for potential COVID-19-related FCA enforcement activity in years to come.

II.        DOJ Prioritizes COVID-19 Fraud Cases and Whistleblower Attorneys Gear Up

DOJ has already confirmed that it will focus resources on COVID-19-related fraud.  In a March 16 memorandum to all U.S. Attorneys and a March 20 press release, Attorney General William Barr announced that DOJ will prioritize the investigation and prosecution of coronavirus-related fraud schemes.[5]  In addition, Attorney General Barr directed U.S. Attorneys to appoint a “Coronavirus Fraud Coordinator” in each district—responsible for coordinating enforcement and conducting public outreach and awareness—and also established a national system for whistleblowers to report suspected fraud.[6]  DOJ further affirmed in a March 17 public statement that it is “committed to pursuing” violations of the FCA “especially during this critical time as our nation responds to the outbreak of COVID-19.”[7]  Although still in their infancy, DOJ’s efforts harken to similar government actions in past times of crisis. DOJ’s efforts will be complemented by the CARES Act’s creation of a new oversight committee called the Pandemic Response Accountability Committee (“PRAC”) to promote transparency and oversight of CARES Act appropriated funds.[8] The Act’s emergency appropriations included $80 million for the PRAC, which will be comprised of various agency Inspectors General to “(1) prevent and detect fraud, waste, abuse, and mismanagement; and (2) mitigate major risks that cut across program and agency boundaries.”[9] In addition to potentially drawing scrutiny from DOJ and agency Inspectors General, companies contracting with or receiving government funds are likely to see a slew of future qui tam whistleblower complaints in connection with the COVID-19 crisis and economic downturn.  The plaintiffs’ bar has already signaled its willingness to begin this effort, including a widely publicized request by a whistleblower attorney and national whistleblower advocacy group for DOJ to form a task force “to monitor and investigate” COVID-19-related FCA cases,[10] and numerous firms issuing calls for would-be relators to come forward and pursue qui tam actions relating to COVID-19.[11]

III.       Potential FCA Pitfalls in Responding to the COVID-19 Crisis

Entities in the following industries are most exposed to the risk of future COVID-19-related FCA enforcement actions.

A.         Life Sciences and Health Care Industries

Given the nature of the COVID-19 crisis, companies in the life sciences and health care industries—including drug and device manufacturers and suppliers, diagnostic companies, health care providers, and insurers—are perhaps the most likely to have their decisions and conduct scrutinized through the lens of the FCA in the future. In its recent announcement prioritizing COVID-19-related enforcement actions, DOJ specifically targeted fraud in treatment by providers, such as “obtaining patient information for COVID-19 testing and then using that information to fraudulently bill for other tests and procedures.”[12]  This echoed DOJ officials’ comments from February, which focused on the practice of Medicare Advantage insurers indiscriminately billing the government for “every possible patient diagnosis,” including “unsupported diagnosis codes” ineligible for reimbursement.  Entities billing federal programs (as well as state programs) for treatment of those affected by COVID-19 should exercise particular care in selecting diagnostic codes when seeking reimbursement. Other activities that fall within the types of buckets that resulted in FCA actions in the past (whether successful or not)—and could serve as the basis of COVID-19 related FCA actions—could potentially include:

• “upcoding” for testing or treatments of different types or amounts than those actually provided;[13]
• billing for treatment or testing that is not medically necessary, especially treatment whose safety or efficacy is unsupported and may even cause harm;
• billing for treatment, testing, or medical supplies that do not comply with regulatory requirements;
• billing for treatment that is grossly and materially substandard; and
• making false or misleading statements in connection with marketing drugs or devices.

The bar for pursuing frontline health care providers under the FCA is likely to be higher when it comes to the COVID-19 crisis, given the critical need to provide treatments to patients during this crisis.  Notably, the CARES Act provides immunity to many treatment providers for claims under federal or state laws relating to emergency health care services provided with respect to COVID-19.[14]  Further, the CARES Act recognizes liability immunity for certain respiratory protective devices that HHS has deemed a priority for use during this public health emergency.  Nevertheless, frontline providers may still face situations where the government or qui tam whistleblowers allege after the fact that the emergency care provided was not undertaken in good faith and instead was to profit off of the crisis.

B.        Other Industries Receiving COVID-19 Relief Funding

FCA liability is a potential risk even for entities that do not directly conduct business with the government, but nevertheless accept government funding in some manner, including in the form of loans, grants, or other programs. 1. Loan Programs. The CARES Act injects nearly a trillion dollars’ worth of loan and loan guarantee programs into the economy.  This aid is partially specific to certain industries, such as the passenger airline and air cargo sectors, but the bulk is more widely available to a range of domestic-based businesses.  Further, the Act makes SBA loans available to any business that qualifies as a “small business” under eligibility requirements more inclusive than existing law.[15]  Any participant in these programs, or similar government relief programs, will be subject to certain required conditions of participation and/or payment, which can be complex and may create a potential minefield from an FCA perspective. With respect to the $500 billion CARES Act loan program, some portions of funding are restricted to passenger air carriers ($25 billion), cargo air carriers ($4 billion), and any “businesses critical to maintaining national security” ($17 billion).  As to the eligibility requirements for the remainder of the fund,[16] while the CARES Act does specify some requirements—such as that a business be domiciled and have significant operations and a majority of its employees in the United States—the complete terms and conditions for eligibility remain to be determined, as the legislation directs the Secretary of the Treasury to promulgate the full requirements no later than 10 days after enactment, i.e., the first week of April.[17] Although the CARES Act does provide clearer standards of eligibility for the SBA loan program (i.e., any company with no more than 500 employees may be eligible), the Act also contains numerous exceptions that expand its reach. For example, the CARES Act’s limited waiver of existing SBA affiliation rules—affecting whether or how the head count for certain affiliates are included in calculating the number of employees when determining eligibility for the program—will allow certain businesses in the accommodation and food services industries to still qualify for loans depending on their classification and the number of employees per physical location.[18]  But outside the Act’s enumerated exceptions, businesses must still abide by the requirement to aggregate their employee headcounts or revenues with those of their affiliates to determine whether they are eligible for the SBA loan program.  Although the CARES Act provides an expanded avenue for relief to some businesses seeking financial assistance, companies (including those with private equity ownership) should familiarize themselves with both the SBA affiliation rules and the CARES Act’s limited exceptions before seeking to obtain SBA loans. 2. Grants. The CARES Act includes emergency appropriations providing funding to the CDC, NIH, and other agencies for research, health surveillance programs, and other resources to respond to the COVID-19 crisis, as well as prepare for future public health emergencies.[19]  In addition, as relief efforts continue, the government may provide future funding for charitable or research grant programs, or similar types of funding—all of which implicate the FCA. In recent years, a variety of entities, including private companies, universities, and even municipalities, have faced FCA claims alleging violations in connection with obtaining or performing federal grants, ranging from a failure to comply with regulations and grant conditions, to falsifying grant applications or fabricating study data.  In one case, a private university paid more than $100 million to settle qui tam claims that it violated the FCA by submitting applications and progress reports that contained falsified research data.[20]  In another case, a national energy company paid nearly $30 million to resolve allegations it received inflated payments by misrepresenting its eligibility for federal grant funds.[21] And while it might be natural to think that the government would be more forgiving when charitable or good causes are involved, such as this, history counsels otherwise.  For example, a children’s hospital paid nearly $13 million to resolve FCA claims alleging that the hospital misreported its available bed count when seeking grant funding from HHS for pediatric resident training.[22]  And certain courts have upheld, in FCA cases, the award of treble damages on the entire amount of the research grants at issue, including in cases based on alleged false statements made in grant renewal applications.[23]  Companies receiving federal funds in the future, whether charitable relief, or in connection with COVID-19 research grants, should be mindful of these pitfalls. 3. Other Government Programs. As we covered in our report, the CARES Act also impacts rules and requirements relating to numerous government programs and revenue streams, including appropriations for national defense, debt restructuring, lending by financial institutions, and federally-backed mortgages.[24]  The Act therefore has implications for a wide range of industries, including defense contracting, the education sector, and banks and other lending institutions, among others, that receive government funding or relief and are all potential targets for FCA relators and their attorneys.

IV.       Guidance for Minimizing FCA Risks in Government Procurement and Relief Programs

As the government expands spending to address the COVID-19 crisis, any entity receiving government funding or taking advantage of government-backed or guaranteed loans should consider the practices outlined below to mitigate the risk of future FCA legal action:

• Stay informed:
  • Ensure that you understand government contracting regulations detailing what you are required to do and when.
    • Know when you are contractually required to notify the government of your right to an equitable adjustment of a contract price, delivery schedule, or both. For example, FAR 52.243-1 requires notification to the Contracting Officer within 30 days.
    • Track and understand the complex requirements imposed by regulations specific to your industry, e.g., Medicare and Medicaid requirements.
  • Monitor announcements by the government and agencies appropriately to ensure that you remain informed of waivers, modifications, and other developments in regulatory requirements, or guidance for industry, which may change as the crisis unfolds.
    • CMS and HHS-OIG, for example, have begun providing blanket waivers and made broadly applicable modifications to provider requirements aimed at permitting hospitals to operate with fewer restrictions and maximize the treatment of COVID-19 patients.[25]
  • Remember that even unintentional or implied misrepresentations of regulatory compliance can lead to FCA enforcement actions, if material to payment and done with “reckless disregard.”
• Adopt best practices for ensuring compliance with government requirements:
  • Continue to implement effective risk management and auditing procedures during the COVID-19 crisis to minimize the risk of such liability.
    • Keep in mind that while some risks of FCA liability are readily apparent even in a time of crisis—such as in the case of providing substandard or defective equipment or services to the government—it can be easier to lose sight of other, less obvious pitfalls during an emergency, such as billing the government for goods or services that do not strictly comply with all regulatory requirements. This could include, for example, billing for work performed by unqualified personnel, or for work done by personnel other than those represented to the government as having performed the work.
  • Implement effective procedures and controls around any required certifications regarding what the government is paying for.
    • Account for any requirements imposed by statute, regulation, rules, or contract, whether generally applicable, or that apply to your industry and/or the specific goods or services provided—which, for example, could include ADA requirements, the Buy American Act, or the Trade Agreements Act.
    • Document your compliance with any such requirements and/or the bases of any required certifications.
  • Avoid unilaterally deciding to forego or not complete any government requirements (e.g., skipping mandated procedures, tests, certifications, and so forth) even if intended to fast track production given the urgency involved, unless there is explicit and clear (and written) government authorization to do so, as outlined further below.
    • Remember that efforts that involve cutting corners might appear entirely reasonable to anyone in the midst of a crisis, but may well appear hasty, ill-advised, or even wasteful when viewed in hindsight months or years later.
    • Claims for payment that involve misrepresentations of compliance with government requirements have resulted in significant FCA liability—even when those claims were made during times of past crises. For example, a telecommunications company that designed and built Iraq’s national 911 emergency communications system during the height of the Iraq War settled FCA claims based on allegations the company had certified completion of certain testing and validation that it had not actually performed.[26]  Similarly, a company constructing urgently needed housing for first responders following Hurricane Katrina settled FCA claims alleging that it failed to abide by the specific requirements in its contract.[27]
    • Be aware that FCA liability requires more than a “bare assertion that defendants delivered goods that did not conform to contractual specifications.”[28] And even in cases where the government pays for what it later discovers to be defective, for example, “ineffective vaccines,” courts have dismissed FCA claims for lack of scienter.[29]
  • Exercise care when participating in any COVID-19 loan, grant, or other relief program to ensure that any government requirements are met, and that any representations made to the government as part of the funding process are accurate.
  • Be aware of the risks posed to those directors and officers responsible (directly or through private equity ownership) for a company availing itself of government funding, such as through the CARES Act’s SBA loan program, particularly those who certify compliance with government requirements. If the individual is found to have caused the submission of a false claim, they may face arguments that their conduct satisfies the falsity element of FCA liability.
    • If the director or officer is found to have proceeded in good faith, however, it would be difficult for a plaintiff to satisfy the scienter element. It is thus important to document the rationale and bases underlying the good faith belief (including, for instance, communications with the government, or others in the industry, or counsel, etc.).  Advice of counsel, in particular, can constitute very strong evidence on scienter for the officer or director (but, of course, likely would result in waiver of privilege as to the relevant subject matter).  To the extent that you believe that an insurance policy could be applicable, consult your insurance counsel about potential coverage issues.
• Document any governmental modification or waiver of requirements:
  • Ensure that any such waivers or modifications are authorized by a government official or agency with sufficient authority to act (i.e., by the Contracting Officer, or by an authorized government agency), and are thoroughly and adequately documented in writing.
    • Be aware that in past FCA cases, defendants have faced arguments that government officials who modified requirements lacked the “unilateral authority” to amend requirements, and that therefore defendants should still be subject to liability.[30]
  • Seek confirmation regarding changes in government requirements, even if you already believe them to be clear.
    • Keep in mind that the fluid nature of the COVID-19 situation has reportedly created confusion and apparent inconsistencies in guidance from federal agencies.[31]
  • Compile in real time written evidence or documentation of the modifications or waivers and their purpose to meet government or public needs.
    • Understand that memories are likely to be treated as less reliable than documentation, and what may seem obvious today may not be in the future when the crisis has abated. Adequately-documented decisions by authorized officials are likely to provide a strong defense on scienter and materiality elements.
    • Evidence of this “government knowledge” will be a key issue with respect to materiality and scienter, as courts have acknowledged that such evidence can “negate both of these elements,”[32] although in some instances, have held that scienter is negated only if the government communicates its knowledge and approval back to the contractor.[33]
    • Do not assume that you are in the clear simply because the government is aware of your actions. Rather, it is critical to document a communication from the government expressing approval, under the line of cases requiring the government’s knowledge and approval be communicated back to the contractor to negate scienter.
  • Consider publicly announcing any government approved waivers or modifications to existing requirements, as well as your reliance on such actions.
    • For example, as noted above, CMS and HHS-OIG have waived or modified certain requirements with respect to hospitals to maximize the availability of COVID-19 treatment. Similarly, FDA has modified or waived certain regulatory requirements with respect to respirator masks for use by health care personnel to encourage manufacturers to make additional masks available.[34]
    • Making public your reliance on the government’s actions serves not only to highlight a lack of scienter, but may also bolster future arguments that FCA claims are subject to the statute’s “public disclosure” bar. If the key elements of the alleged fraud are published in the news media, this can support dismissal unless the whistleblower is an “original source” that materially adds to the information in the public domain.
• Ensure that you have effective reporting systems in place to discover potential compliance issues and then take them seriously:
  • Know that many whistleblowers are current and former employees. With the increased furloughs and layoffs brought on by the COVID-19 crisis, there may be a significant rise in whistleblowing activity.  In addition to compliance and reporting systems, you should ensure that you pay close attention to any allegations or issues raised as part of exit interviews.
  • Statistics show the overwhelming majority of whistleblowers first report their allegations internally and are willing to wait for the internal investigation process.[35] If you become aware of any claims of misconduct or fraud in connection with requests for or receipt of government funding involving your company, ensure that your response is handled by appropriate compliance or legal personnel and treat allegations seriously, including by conducting a thorough, well-documented investigation.
  • By taking these steps, you may be able to satisfactorily resolve the concerns raised internally, and avoid escalation to outside agencies or counsel. Studies have shown that a company’s internal whistleblower report volume is associated with fewer and lower amounts of government fines and material lawsuits.[36]
• Steer clear of anti-competitive conduct:
  • Be mindful of DOJ’s recently announced focus on enforcement of antitrust laws—violations of which may form the basis of related FCA claims—in connection with COVID-19.
    • As we have reported recently, on March 9, DOJ warned that it will be on “high alert” for collusive practices, including fixing prices or rigging bids for personal health equipment such as face masks, respirators, and diagnostic equipment, especially by companies selling to federal, state, and local agencies.[37]
    • DOJ has in the past brought enforcement actions under the FCA against companies—for instance, generic drug manufacturers—on the grounds that claims for government program reimbursement of drugs allegedly tainted by price-fixing conspiracies were false or fraudulent.[38]

If you have any doubts about the propriety of any action when it comes to government contracts, funding, or government loans, stop and seek guidance of counsel.  We are all working through this crisis together, and Gibson Dunn's lawyers are available to assist with any questions you may have regarding FCA and government contracting developments related to the COVID-19 outbreak.

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[1]              Office of Pub. Affairs, U.S. Dep’t of Justice, The False Claims Act: A Primer (2011), https://www.justice.gov/sites/default/files/civil/legacy/2011/04/22/C-FRAUDS_FCA_Primer.pdf. [2]              U.S. ex rel. Newsham v. Lockheed Missiles & Space Co., 722 F. Supp. 607, 609 (N.D. Cal. 1989) (citing Tomes, Fortunes of War, 29 Harper’s Monthly Mag. 228 (1864)). [3]              See Gibson, Dunn & Crutcher LLP, Senate Advances the CARES Act, the Largest Stimulus Package in History, to Stabilize the Economic Sector During the Coronavirus Pandemic (Mar. 26, 2020) (“CARES Alert”), https://www.gibsondunn.com/senate-advances-the-cares-act-to-stabilize-economic-sector-during-coronavirus-pandemic/. [4]              See Gibson, Dunn, & Crutcher LLP, Emergency Federal Measures to Combat Coronavirus (Mar. 18, 2020), https://www.gibsondunn.com/emergency-federal-measures-to-combat-coronavirus/. [5]              U.S. Dep’t of Justice, Memorandum from Attorney General William P. Barr (Mar. 16, 2020), https://www.justice.gov/ag/page/file/1258676/download; Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Attorney General William P. Barr Urges American Public to Report COVID-19 Fraud (Mar. 20, 2020), https://www.justice.gov/opa/pr/attorney-general-william-p-barr-urges-american-public-report-covid-19-fraud. [6]              U.S. Dep’t of Justice, Memorandum from Attorney General William P. Barr (Mar. 16, 2020), https://www.justice.gov/ag/page/file/1258676/download; Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Attorney General William P. Barr Urges American Public to Report COVID-19 Fraud (Mar. 20, 2020), https://www.justice.gov/opa/pr/attorney-general-william-p-barr-urges-american-public-report-covid-19-fraud. [7]              Lydia Wheeler, Bloomberg News, Coronavirus False Claims Task Force Urged at Justice Department (Mar. 17, 2020), https://news.bloomberglaw.com/health-law-and-business/coronavirus-false-claims-task-force-urged-at-justice-department. [8]              Gibson, Dunn & Crutcher LLP, CARES Alert, Section IV. [9]              Id. [10]            Lydia Wheeler, Bloomberg News, Coronavirus False Claims Task Force Urged at Justice Department (Mar. 17, 2020), https://news.bloomberglaw.com/health-law-and-business/coronavirus-false-claims-task-force-urged-at-justice-department. [11]             See, e.g., https://www.kkc.com/news/what-laws-protect-coronavirus-whistleblowers-whistleblower-attorneys-publish-faqs-for-coronavirus-whistleblowers-and-qui-tam-relators/, https://www.fcacounsel.com/false-claims-act-whistleblower-blog, https://www.beasleyallen.com/news/whistleblower-advocate-urges-formation-of-coronavirus-task-force/, https://www.whistleblowerllc.com/coronavirus_fraud/. [12]             U.S. Dep’t of Justice, Memorandum from Attorney General William P. Barr (Mar. 16, 2020), https://www.justice.gov/ag/page/file/1258676/download; Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Attorney General William P. Barr Urges American Public to Report COVID-19 Fraud (Mar. 20, 2020), https://www.justice.gov/opa/pr/attorney-general-william-p-barr-urges-american-public-report-covid-19-fraud. [13]             See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Healthcare Service Provider to Pay $60 Million to Settle Medicare and Medicaid False Claims Act Allegations (Feb. 6, 2017), https://www.justice.gov/opa/pr/healthcare-service-provider-pay-60-million-settle-medicare-and-medicaid-false-claims-act. [14]             Gibson, Dunn & Crutcher LLP, CARES Alert, Section III. [15]            Id., Section I and IV. [16]            Id., Section IV. [17]            Id. [18]            Id., Section I and IV. [19]            Id. [20]             See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Duke University Agrees to Pay U.S. $112.5 Million to Settle False Claims Act Allegations Related to Scientific Research Misconduct (Mar. 25, 2019), https://www.justice.gov/opa/pr/duke-university-agrees-pay-us-1125-million-settle-false-claims-act-allegations-related. [21]             See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, SolarCity Agrees to Resolve Alleged False Claims Act Violations Arising From Renewable Energy Grant Claims to Treasury (Sep., 22, 2017), https://www.justice.gov/opa/pr/solarcity-agrees-resolve-alleged-false-claims-act-violations-arising-renewable-energy-grant. [22]             See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Children’s Hospital to Pay $12.9 Million to Settle False Claims Act Allegations (Jun. 15, 2015), https://www.justice.gov/opa/pr/childrens-hospital-pay-129-million-settle-false-claims-act-allegations. [23]             See U.S. ex rel. Feldman v. van Gorp, 697 F.3d 78, 81 (2d Cir. 2012). [24]             See Gibson, Dunn & Crutcher LLP, CARES Alert, Section IV. [25]             See Rich Daly, Health Care Legal, Hospitals seek legal cover amid their coronavirus responses (Mar. 24, 2020), https://www.hfma.org/topics/news/2020/03/hospitals-seek-legal-cover-amid-their-coronavirus-responses.html. [26]             See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Alcatel-lucent Subsidiary Agrees to Pay U.S. $4.2 Million to Settle False Claims Act Allegations (Sep. 21, 2012), https://www.justice.gov/opa/pr/alcatel-lucent-subsidiary-agrees-pay-us-42-million-settle-false-claims-act-allegations. [27]             See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Hurricane Katrina Contractor Accepts $4 Million Judgment Under the False Claims Act (Apr. 24, 2009), https://www.justice.gov/opa/pr/hurricane-katrina-contractor-accepts-4-million-judgment-under-false-claims-act. [28]            U.S. ex rel. Hutchins v. DynCorp Int’l, Inc., 342 F. Supp. 3d 32, 52 (D.D.C. 2018). [29]            Id. at 52. [30]             Id. at 55. [31]             Dorothy Atkins, Law360, Top DOJ Atty Spotlights Main FCA Target Areas For 2020 (Mar. 24, 2020), https://www.law360.com/articles/1255991/coronavirus-fallout-leaves-gov-t-contractors-scrambling. [32]             See U.S. ex rel. Hunt v. Cochise Consultancy, Inc., 887 F.3d 1081, 1092 n.10 (11th Cir. 2018); see also Kelly v. Serco, Inc., 846 F.3d 325, 334 (9th Cir. 2017) (finding that relator “failed to establish a genuine issue of material fact regarding materiality” on FCA claim where the government continued to make payment after learning of alleged noncompliance). [33]             See U.S. ex rel. Becker v. Westinghouse Savannah River Co., 305 F.3d 284, 289 (4th Cir. 2002). [34]             See U.S. Food and Drug Admin., Coronavirus (COVID-19) Update: FDA and CDC take action to increase access to respirators, including N95s, for health care personnel (Mar. 2, 2020), https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-and-cdc-take-action-increase-access-respirators-including-n95s. [35]             See Dana Gold, et. al., Government Accountability Project, Why Whistleblowers Wait, https://www.whistleblower.org/wp-content/uploads/2018/12/GAP_Report_Why_Whistleblowers_Wait.pdf. [36]             Stephen Stubben, et. al., University of Utah, Evidence on the Use and Efficacy of Internal Whistleblowing Systems (Mar. 3, 2020), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3273589. [37]             Gibson, Dunn & Crutcher LLP, Antitrust Implications of COVID-19 Response (Mar. 12, 2020), https://www.gibsondunn.com/coronavirus-antitrust-implications-of-covid-19-response/. [38]             See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pharmaceutical Company Admits to Price Fixing in Violation of Antitrust Law, Resolves Related False Claims Act Violations (May 31, 2019), https://www.justice.gov/opa/pr/pharmaceutical-company-admits-price-fixing-violation-antitrust-law-resolves-related-false; Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Second Pharmaceutical Company Admits to Price Fixing, Resolves Related False Claims Act Violations (Dec. 3, 2019), https://www.justice.gov/opa/pr/second-pharmaceutical-company-admits-price-fixing-resolves-related-false-claims-act.

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Gibson Dunn attorneys regularly counsel clients on issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please also feel free to contact the Gibson Dunn attorney with whom you usually work, any member of the False Claims Act Group, or the authors: Authors:  John D.W. Partridge, Jonathan M. Phillips, James L. Zelenay Jr. and Sean S. Twomey © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Click for PDF The books are now closed on another decade of False Claims Act (FCA) enforcement, and what a decade it was. During the last ten years, the government recovered nearly $38 billion dollars under the FCA from companies that do business with the federal government. This ten-year total is more than double the amount recovered in the prior decade (2000 to 2009), and there are no signs of relief in sight. This past year, as in preceding years, the government continued to rely on the FCA to combat alleged fraud and corruption by companies doing business with the government, and the Department of Justice (DOJ) obtained more than $3 billion in recoveries. This figure marks a slight uptick from 2018 and remains relatively consistent with recent recovery trends. The pipeline of new cases—which will drive recoveries in future years—also remains full. More than 780 new FCA matters were initiated in 2019, marking the tenth year in a row in which over 700 new FCA cases were filed. In other news, while this year has seen no major legislative developments at the federal level, states continue to enact or amend false claims statutes that will enable states to receive a higher percentage share of any recoveries under such laws. Meanwhile, the courts continued to develop a body of law beneath the statutory text. During the last year, there were a number of noteworthy circuit court decisions that concern the scope of the statute’s reach in relation to government programs, materiality, causation, and even DOJ’s authority to seek dismissal of qui tam suits pursued by whistleblowers, among other important topics. We address these and other developments in greater depth below. We first focus on enforcement activity during the fiscal year ending on September 30, 2019 and recent, noteworthy FCA settlements. Next, we turn to legislative and policy updates at the federal and state levels. Finally, we analyze significant case law developments. As always, Gibson Dunn’s recent publications on the FCA may be found on our website, including industry-specific articles, webcasts, presentations, and practical guidance to help companies avoid or limit liability under the FCA. And, of course, we would be happy to discuss these developments—and their implications for your business—with you.

I.  FCA ENFORCEMENT ACTIVITY

A.  Total Recovery Amounts: 2019 Recoveries Exceed $3 Billion

The federal government recovered more than $3 billion during fiscal year 2019.[1] This amount is a slight increase from last year ($2.9 billion), and marks the eleventh straight year that total FCA recoveries have been $2.45 billion or more.[2] With the exception of 2012, 2014, and 2016, when DOJ hit high-water marks of $5 to $6 billion (driven in part by mortgage-related settlements resulting from the 2008 financial crisis), the modern era of FCA enforcement appears to have settled into a remarkable rhythm: every year, the federal government recovers somewhere in the neighborhood of $3 billion dollars using the FCA. There are no signs of these staggering recovery amounts abating, and this trend has held regardless of the administration. Although the Trump Administration had overseen a slight downtick in the annual recoveries during each of the prior two years, this year’s recoveries reversed the trend with an increase from last year. These recoveries, while very high in their own right, do not even include all of the recoveries attributable to false claims activity, because the DOJ figures represent only federal recoveries, not state recoveries. Yet, in FCA cases there is very often a state component to any settlement or judgment, especially in health care cases where there is a nexus with state Medicaid programs. Indeed, DOJ touted in its press release announcing these figures that “in many of these cases the department was instrumental in recovering additional millions of dollars for state Medicaid programs.”[3]

B.  Qui Tam Activity

The total number of FCA cases filed each year remains remarkably high, too. This year, there were 782 new FCA cases. Of those, 146 (or 19%) were initiated by the government, while the other 636 (or 81%) were initiated by qui tam whistleblowers.[4] This is consistent with past years, as demonstrated in the chart below. Number of FCA New Matters, Including Qui Tam Actions Source: DOJ “Fraud Statistics – Overview” (Jan. 9, 2020) Qui tam suits (particularly those in which the government decides to intervene) also continue to drive the bulk of the recovery amounts. This year, more than $2.2 billion of the total $3 billion in settlements and judgments resulted from lawsuits originally filed under the FCA’s qui tam provisions.[5] Notably, the federal government recovered $1.9 billion (63% of the total amount of recoveries) in qui tam cases where the government intervened, and $844 million (28% of total recoveries) in non-qui tam cases (i.e., cases initiated by the government, not a whistleblower). This also means the government recovered $293 million (10% of the total) in cases where DOJ declined to intervene in a qui tam, the third highest total in declined cases during the last 20 years. This is also a significant increase from last year, when recoveries in declined cases were $135 million, and signifies the ongoing threat of FCA cases even if a company can convince the government to stand down in the first instance.[6] Settlements or Judgments in Cases Where the Government Declined Intervention as a Percentage of Total FCA Recoveries Source: DOJ “Fraud Statistics – Overview” (Jan. 9, 2020)

C.  Industry Breakdown

Once again, the vast majority of the federal government’s FCA recoveries came from the health care industry. This year, $2.6 billion (more than 85%) of the $3 billion in recoveries came from the health care sector, including providers, pharmaceutical companies, and medical device manufacturers. Recoveries from the defense industry accounted for another approximately $250 million.[7] FCA Recoveries by Industry Source: DOJ “Fraud Statistics – Overview” (Jan. 9, 2020) Enforcement efforts in the health care industry are notable for both their breadth and depth, targeting a wide variety of companies under a wide variety of theories. As in past years, however, a large number of the FCA settlements with health care companies were premised on alleged kickbacks, including violations of the Anti-Kickback Statute (AKS) and Stark Law. This year, in particular, DOJ also continued its strong focus on companies involved with the opioid crisis, including both opioid manufacturers and companies that provided services to opioid manufacturers.[8] Stemming from these theories and enforcement priorities, settlements with health care companies included both relatively small settlements with small businesses (e.g., a health clinic) as well as blockbuster settlements with large companies. But this latter category—big settlements with big companies—once again drove the high dollar volumes. As summarized below (and in our 2019 Mid-Year False Claims Act Update), some of the biggest settlements of 2019 included settlements of $500 million and $195 million from opioid manufacturers; and settlements of $124 million and $122 million by pharmaceutical companies in connection with charitable foundations. There were also 505 new health care FCA cases initiated in the last year,[9] making it all but certain that health care will remain the leading source of FCA recoveries in years to come. Outside of the health care space, the theories of liability and types of companies that DOJ targeted were more disparate. Among the most notable and novel theories this year included $162 million in settlements premised on a hybrid antitrust-FCA theory (a theory we discussed in our recent webcast on antitrust enforcement in the government procurement space). In that case, in particular, South Korean companies allegedly drove up fuel prices charged to the United State military through concerted anticompetitive conduct, as we covered in our 2019 Mid-Year False Claims Act Update.[10] In another novel case, DOJ and a coalition of state attorneys general secured the first-ever FCA settlement premised on cybersecurity vulnerabilities, after a technology company failed to report or remedy flaws in the security surveillance system it sold to multiple states and the federal government. There was also an array of more traditional procurement and government contracting settlements, as discussed below.

II.  NOTEWORTHY DOJ ENFORCEMENT ACTIVITY DURING THE SECOND HALF OF 2019

We summarize below some of the notable FCA settlements announced since July 2019 (we covered notable settlements and judgments from the first half of 2019 in our 2019 Mid-Year False Claims Act Update). These summaries reveal details of some of the most notable settlements and provide insight into the theories of liability and industries that have been a focus of government (and relator) enforcement efforts during the last year.

A.  Health Care and Life Science Industries

• On July 11, an international consumer goods conglomerate agreed to pay the federal government $1.4 billion to resolve potential criminal and civil liability related to the marketing of an opioid addiction treatment drug. The resolution is the largest recovery by the United States related to opioid drugs, and includes forfeiture of proceeds totaling $647 million, civil settlements with the federal government and the states totaling $700 million, and an administrative resolution with the FTC for $50 million. DOJ alleged that the consumer goods conglomerate directly, or through its subsidiary pharmaceutical company, knowingly (1) promoted the sale and use of the drug to physicians who were writing prescriptions for unsafe and medically unnecessary uses; (2) promoted the sale or use of the drug to physicians and state Medicaid agencies with false claims that the drug was less susceptible to diversion, abuse, and accidental pediatric exposure than alternative drugs; and (3) took measures to delay the entry of generic competitor drugs in an attempt to control pricing of the drug.[11]
• On July 24, a Pennsylvania-based addiction treatment hospital agreed to pay almost $2.9 million to settle allegations that it violated the FCA by submitting bills to Medicare, Medicaid, and the Federal Employees Health Benefits Program for detoxification treatment services on behalf of patients who did not meet the qualifying medical criteria or lacked documentation to support their claims. The hospital also entered into a Corporate Integrity Agreement. The whistleblower will receive over $500,000 for his share of the recovery.[12]
• On August 8, a California-based medical group and one of its physicians agreed to pay more than $5 million to resolve allegations that they reported invalid diagnoses to Medicare Advantage plans and in doing so caused the plans to receive inflated payments from Medicare and increased their own share of payments received from the Medicare Advantage Organizations. The whistleblower, a former employee of the medical group, will receive approximately $850,000 as his share of the federal recovery.[13]
• On August 29, a provider of overseas health care services for the federal government agreed to pay $940,000 to resolve allegations that it overcharged TRICARE, the federal health care program for military members and their families, for aeromedical evacuation services. DOJ alleged that the company concealed discounts it received from air ambulance providers that it was required to pass along to TRICARE, resulting in inflated invoices. The whistleblower will receive $165,000 as his share of the recovery.[14]
• On September 4, a pharmaceutical company agreed to pay $15.4 million to settle allegations that it paid illegal kickbacks under the FCA and AKS by providing meals and entertainment to health care providers allegedly to induce them to prescribe the company’s drug. The whistleblowers will receive approximately $2.9 million as their share of the settlement. The government is continuing to pursue other FCA claims against the pharmaceutical company related to allegations that the company paid illegal kickbacks in the form of co-pay subsidies.[15]
• On September 18, a compounding pharmacy, two of its executives, and a private equity firm agreed to a $21.4 million settlement in total to resolve allegations that they violated the FCA through their involvement in an alleged kickback scheme to induce referrals of prescriptions that were reimbursed by TRICARE. DOJ alleged that the compounding pharmacy (1) paid kickbacks to outside “marketers” that paid telemedicine doctors to prescribe military members and their families compounded creams and vitamins that were formulated to ensure the highest reimbursement from TRICARE; (2) regularly paid patient copayments without verifying patients’ financial needs and disguised the source of the payments as a sham charitable organization; and (3) continued to seek reimbursement for prescriptions despite receiving complaints from patients that prescriptions were being written without patient consent or a valid relationship between the patient and prescriber. DOJ alleged that the private equity firm that managed the pharmacy agreed to and financed the plan to pay kickbacks to outside marketers to help generate prescriptions.[16]
• On September 25, a national provider of mobile health diagnostic services agreed to pay $8.5 million to settle allegations that it engaged in a kickback scheme with skilled nursing facilities. DOJ alleged that the diagnostic services company provided x-rays to nursing facilities at prices below fair market value in an effort to induce the facilities to refer federal health care business to the company. The settlement was announced months after the company filed for bankruptcy earlier this year. The two whistleblowers will receive a total of more than $2 million as their share of the federal recovery.[17]
• On September 26, a California-based pharmaceutical company was charged for allegedly paying kickbacks to a health care provider to prescribe the company’s drug to beneficiaries of federal health care programs. The company agreed to pay more than $108 million in criminal penalties, forfeiture, and civil damages. Of the total settlement, the pharmaceutical company agreed to pay over $95 million to resolve FCA allegations. DOJ alleged that the pharmaceutical company paid kickbacks in the form of money, honoraria, travel, and meals to health care providers of elderly patients at long-term care facilities to induce them to prescribe the company’s drug for behaviors associated with dementia patients, which is not an approved use of the drug. Three whistleblowers will share more than $17.7 million from the civil settlement. Additionally, the pharmaceutical company will pay approximately $7 million to resolve state Medicaid claims and has agreed to cooperate with indictments against four individuals alleged to be involved in the alleged kickback scheme. The company also entered into a Corporate Integrity Agreement.[18]
• On October 4, a California-based medical group, its former CEO, and several physicians paid the United States and California nearly $6.7 million to settle allegations that they billed for medically unnecessary eye exams, improperly waived Medicare co-payments, and violated other regulations. The settlement resolves claims that personnel improperly billed Medicare and Medicaid/Medi-Cal by misclassifying simpler exams as being more complex, and also waived Medicare co-payments and deductibles without proper documentation of patients’ financial hardship in an effort to receive referrals.[19]
• On October 9, a genetic testing company and its three principals agreed to pay $42.6 million in total to settle claims that they violated the FCA by paying kickbacks to physicians in exchange for laboratory referrals and for providing and billing medically unnecessary tests. The company and its principals allegedly paid the kickbacks to induce orders of pharmacogenetic tests, in return for the physicians’ participation in a clinical trial. The federal government also alleged that the company and its principals furnished tests that were not medically necessary and billed Medicare. The company also agreed to a 25-year exclusion period from participation in federal health care programs.[20]
• On October 9, an operator of kidney dialysis clinics agreed to pay $5.2 million to settle claims that the company tested dialysis patients for Hepatitis B more than medically necessary and then billed Medicare for those tests. The government alleged that the company conducted, and billed Medicare for, tests of patients it knew to be immune to Hepatitis B infection. The whistleblower will receive 27.5% of the federal government’s recovery.[21]
• On October 18, seven clinics and their owners agreed to pay the federal government more than $7.1 million to settle allegations that they violated the FCA by submitting false claims to Medicare for medically unnecessary viscosupplementation injections and knee braces. The settling clinics and related parties also entered into a Corporate Integrity Agreement with the Department of Health and Human Services Office of Inspector General that requires implementation of compliance controls and annual claims review. The whistleblower will receive $857,550 of the settlement amount.[22]
• On November 7, the U.S. Attorney for the Southern District of New York announced a civil settlement in which a medical device company and two executives agreed to pay nearly $6 million in total to settle the federal government’s FCA claims that they violated the AKS by paying surgeons to use and promote their products, resulting in false claims for payment from Medicare and Medicaid. The settlement resolves allegations that the company and the executives recruited doctors and paid them millions in consulting fees, royalties, and intellectual property purchase fees to induce them to use the company’s products. The government had intervened in a private qui tam lawsuit.[23]
• On October 28, several South Dakota-based hospital entities agreed to pay $20.25 million to settle FCA allegations that they submitted false claims to federal health care programs resulting from violations of the AKS and medically unnecessary spinal surgeries. The settlement resolves allegations that the hospital entities received repeated warnings that one of its top neurosurgeons was improperly receiving kickbacks from his use of implantable devices distributed by his physician-owned distributorship and was performing medically unnecessary procedures. The United States alleged that, despite these warnings, the companies continued to employ the physician, allowed him to profit from use of his device, and continued to submit claims for medically unnecessary procedures. The whistleblowers will receive $3.4 million from the federal government.[24]
• On November 7, a pharmaceutical company agreed to pay $20.5 million to settle allegations concerning the establishment of false and inflated Average Wholesale Prices (AWPs) for active pharmaceutical ingredients used in compound prescriptions. The settlement resolves claims that the company knowingly inflated the AWPs for its ingredients to increase the reimbursement that its pharmacy customers received from federal health care programs for using the company’s ingredients to prepare and fill specially-made compound prescriptions. The company allegedly promoted its high AWPs and profit potential as an inducement to pharmacies to purchase its ingredients. The settlement also resolved other allegations against other related entities. The whistleblowers will receive $3.7 million from the federal government.[25]
• On November 8, a hospital company and its affiliate agreed to pay $12.3 million to settle claims that it violated the FCA by submitting false claims to Medicare for procedures only partially performed or supervised by attending surgeons. The settlement resolves allegations that the hospital billed for endoscopic and robotic procedures that were insufficiently supervised by medical residents instead of the attending physician, and that it administered unnecessary and improperly documented treatments. The alleged scheme centered on the practice of the former chairman of the urology department conducting a high-revenue robotic operation in one operating room while unsupervised residents were performing surgeries on patients in the other room.[26]
• On November 15, several hospitals agreed to pay the federal government $46 million to resolve allegations arising from claims they submitted to Medicare. The settlement resolves allegations that one hospital violated the Stark Law by billing Medicare for services referred by an affiliated physician group, to whom it allegedly paid amounts under a series of compensation agreements that exceeded the fair market value for the services provided. The United States also alleged that the physician group submitted duplicative bills to Medicare for services performed by physicians’ assistants it was leasing to the hospital. The hospital also agreed to settle claims related to other self-disclosed conduct. The whistleblower will receive $5.9 million as her share of the federal government’s recovery.[27]
• On November 20, a hospital pharmacy agreed to pay $10 million to the federal government to settle claims that it violated the FCA by submitting false claims to Medicare for prescription drugs that did not meet Medicare coverage requirements. The settlement also resolves allegations that the company submitted claims to Medicare that resulted from improper remuneration provided to Medicare beneficiaries in the form of free blood glucose testing supplies and waiver of co-payments and deductibles for insulin, in violation of the AKS. The whistleblower will receive $1.9 million from the United States.[28]
• On November 26, a Massachusetts-based laboratory company agreed to pay $26.7 million to settle allegations that it violated the AKS and the Stark Law, as well as allegations that it improperly billed claims to the federal government for laboratory testing. The settlement resolves claims that the laboratory agreed to provide laboratory testing for small Texas hospitals in exchange for per-test payments. To generate more referrals for the hospitals and more money for itself, the company allegedly conspired with the hospitals’ independent marketers to make payments to referring physicians that were disguised as investment returns, but were actually based on, and offered in exchange for, the physicians’ referrals. These physicians allegedly referred patients to the Texas hospitals for laboratory testing performed by the company, which were then billed to Medicare, Medicaid, and TRICARE. The whistleblowers will receive approximately $4.4 million of the settlement.[29]

B.  Government Contracting

• On July 16, a producer of electrical connectors agreed to pay $11 million to settle allegations that it violated the FCA by supplying connectors to the U.S. military that did not comply with testing protocols. DOJ alleged that the company did not conduct required periodic testing on six models of electrical connectors from 2008 to 2017. The whistleblower will receive $2.1 million from the federal government.[30]
• On July 31, a manufacturer of security camera software agreed to pay $8.6 million to settle multistate litigation alleging that the company violated the FCA and state whistleblower acts because it allegedly knowingly failed to report or remedy flaws in the security surveillance system it sold to multiple states and the federal government that made the system vulnerable to hackers. The settlement provided refunds to the federal government and sixteen states that had purchased the allegedly defective software.[31]
• On August 5, a New York-based construction company admitted to underpaying its workers on two federally funded construction projects and submitting payroll records to the federal government that falsely described the nature of the employees’ work. The construction company agreed to pay $435,000 to resolve lawsuits alleging civil fraud and FCA violations.[32]
• On August 8, a company that provides medical supplies to the Departments of Defense and Veterans Affairs agreed to pay $3.3 million to settle FCA allegations that it manufactured products in China and Malaysia, knowing that these countries did not comply with the Trade Agreements Act’s requirement that all products sold to government agencies come from countries with which the United States has a trade agreement.[33]
• On August 19, a Georgia-based producer of prefabricated modular structures agreed to pay $2.4 million to settle allegations that it violated the FCA by allegedly selling products to the Army, Department of Veterans Affairs, and General Services Administration that did not comply with electrical and structural standards. As part of the settlement agreement, the company also agreed to repair all allegedly deficient products previously supplied to the federal government.[34]
• On August 20, the majority owner and former CEO of a Virginia-based defense contractor agreed to pay $20 million to resolve allegations that it violated the FCA by fraudulently procuring federal contracts reserved for small businesses. DOJ alleged that, based on misrepresentations made by the former CEO, the company was awarded multiple small business set-aside contracts for which it was ineligible. DOJ previously resolved claims against the defense contractor and its former general counsel related to the alleged scheme, resulting in combined settlements totaling more than $36 million, making it the largest FCA recovery related to allegations of small business contracting fraud.[35]
• On August 20, an international airline headquartered in Texas agreed to pay approximately $22.1 million to resolve allegations under the FCA that the airline falsely reported the times at which it delivered United States mail to foreign postal administrations or other intended mail recipients allegedly to conceal its noncompliance with contractual obligations to the United States Postal Service.[36]
• On November 13, a development corporation agreed to pay $2.8 million and give up $16 million in potential administrative claims to settle allegations that the company fraudulently induced the Army to award the company a contract for renovation of a shipyard by falsely representing that it would perform the contract when, in fact, its Israeli parent company intended to do so, and for presenting false claims to the United States certifying that it was performing the work as the prime contractor when in fact the work was being performed by its parent company.[37]

III.  LEGISLATIVE AND POLICY DEVELOPMENTS

A.  Federal Developments

The second half of the year remained quiet on the legislative front, and 2019 passed without any major federal legislative developments pertaining to the FCA. But we did identify some noteworthy developments on topics that we detailed in our 2019 Mid-Year False Claims Act Update.

1.  Attention on Application of the Granston Memo

Section 3730(c)(2)(A) of the FCA provides the government with authority to seek to dismiss declined qui tam cases, stating that “the Government may dismiss the action notwithstanding the objections of the person initiating the action if [1] the person has been notified by the Government of the filing of the motion and [2] the court has provided the person with an opportunity for a hearing on the motion.” DOJ continued its more active exercise of discretion to seek dismissals pursuant to Section 3730(c)(2)(A) in 2019, guided by the Granston Memo DOJ released in January 2018, which is codified in DOJ’s Justice Manual,[38] and which we discussed most recently in this year’s Mid-Year Update. As we have explained, the Granston Memo set forth a non-exhaustive list of factors for DOJ to consider when determining whether to move to dismiss a qui tam relator’s case under Section 3730(c)(2)(A), including whether dismissal would serve the government’s interests.[39] In the wake of the Granston Memo, lower courts have faced an increasing number of government requests to dismiss qui tam cases pursuant to the government’s authority under Section 3730(c)(2)(A). Courts have been split on the proper legal standard to apply to such requests, a question that the FCA’s text does not directly address. Some lower courts have followed the Ninth Circuit’s Sequoia test, also adopted by the Tenth Circuit, under which the government may only dismiss if: (1) it identifies a valid government purpose; (2) a rational relation exits between the dismissal and accomplishment of that purpose; and (3) dismissal is not fraudulent, arbitrary and capricious, or illegal. United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998). Other courts have followed the D.C. Circuit’s more government-friendly test under which the government has “an unfettered” right to dismiss such that dismissals are “unreviewable” (with a possible exception for “fraud on the court”). Swift v. United States, 318 F.3d 250, 252-53 (D.C. Cir. 2003). In a decision exploring this issue, the Third Circuit held last year that “the dismissal provisions in the FCA . . . do not guarantee an automatic in-person hearing in every instance,” notwithstanding the requirement that a court provide the “opportunity for a hearing.” United States ex rel. Chang v. Children’s Advocacy Ctr. of Del., 938 F.3d 384, 387-88 (3d Cir. 2019). There, the district court granted the government’s request to dismiss after the government asserted that it had declined the case because the relator’s allegations were “factually incorrect and legally insufficient.” Id. at 386. Although the relator opposed the request, he did not specifically request a hearing and was not provided one. On appeal, the Third Circuit concluded that “an in-person hearing is unnecessary unless the relator expressly requests a hearing or makes a colorable threshold showing of arbitrary government action.” Id. at 388. The court also affirmed the dismissal, but—despite requests from the parties—declined to “take a side in this circuit split” regarding the proper standard to apply to the government’s dismissal requests under Section 3730(c)(2)(A). Instead, the Third Circuit concluded that the government’s request passed muster under “even the more restrictive standard” requiring a “rational relation” between dismissal and accomplishment of a valid purpose. Id. at 387. The Third Circuit’s decision reaffirms that the government’s dismissal power under Section 3730(c)(2)(A) remains a forceful tool in its arsenal, and it highlights the challenges that relators face in opposing such requests for dismissal. Other courts also continued to grapple with the implications of the Granston Memo during the second half of 2019. On November 5, 2019, the U.S. District Court for the Northern District of California granted the government’s motion to dismiss the qui tam relators’ FCA claims in United States ex rel. Campie v. Gilead Sciences, Inc., No. 11-cv-00941-EMC, 2019 WL 5722618 (N.D. Cal. Nov. 5, 2019). FCA defendants and practitioners have watched this case closely in hopes of discerning more about the impact of the Granston Memo. (We have covered Campie in past updates, including here and here.) The government previewed late last year in an amicus brief before the U.S. Supreme Court that if Campie were remanded to the district court, the government would move to dismiss the case under Section 3730(c)(2)(A).[40] The government stayed true to its word. In its motion after remand, the government asserted that dismissal of the relators’ FCA claim would serve the government’s interests by (1) preventing the relators “from undermining the considered decisions of [the U.S. Food and Drug Administration (FDA)] and [Centers for Medicare and Medicaid Services (CMS)] about how to address the conduct at issue here,” and (2) avoiding “the additional expenditure of government resources on a case that it fully investigated and decided not to pursue,” especially given that FDA already had taken regulatory actions it deemed appropriate. United States ex rel. Campie, 2019 WL 5722618 at *5. The district court granted the government’s motion, applying the test for dismissal set forth in Sequoia, under which the court examines whether the government has set forth a valid reason for dismissal, as discussed above. The court observed that the government investigated the relators’ claims for more than two years after the suit was filed, and that FDA was involved with oversight of Gilead even before the relators filed the suit, so the decision to move for dismissal was not “cursory.” Id. at *5-7. The court also rejected relators’ assertion that the government lacked sufficient basis to argue for dismissal based on the cost of continued litigation; according to the district court, the ultimate question is whether the government engaged in a meaningful consideration of cost and benefit such that its decision to seek dismissal is supported by a rational basis. Id. at *7. It is clear that the Granston Memo and the scope of DOJ’s dismissal authority will remain important topics in the coming year. Indeed, just before the district court handed down its decision in Campie, Senator Charles E. Grassley of Iowa, Chairman of the Senate Committee on Finance, wrote to Attorney General William Barr expressing concerns with DOJ’s implementation of the Granston Memo and “efforts to dismiss greater numbers of qui tam cases for reasons that appear primarily unrelated to the merits of individual cases”—this, according to Senator Grassley, “could undermine the purpose of the False Claims Act.”[41] Senator Grassley highlighted three cases in which DOJ moved to dismiss relators’ claims and cited the cost of litigation, including Campie, United States ex rel. Polansky v. Executive Health Res., Inc., No. 12-CV-4239-MMB, 2019 WL 5790061 (E.D. Pa. Aug. 20, 2019), and United States ex rel. Cimznhca, LLC v. UCB, Inc., No. 17-CV-765-SMY-MAB, 2019 WL 1598109 (S.D. Ill. April 15, 2019), the latter of which we discussed in our 2019 Mid-Year Update. The Senator also asked DOJ to answer a number of questions about DOJ’s utilization of dismissal authority, including what role the Granston Memo played in DOJ’s decision to dismiss in Campie, whether DOJ would have moved to dismiss the case absent the Memo, and what resources have been devoted to dismissing qui tam claims since the Memo.[42] DOJ responded to Senator Grassley’s letter on December 19, stating that it shares the Senator’s view on the importance of the FCA and its qui tam provisions and that, since January 1, 2018, DOJ has moved to dismiss only 45 cases under Section 3730(c)(2)(A) out of 1,170 qui tam cases filed, or less than 4%.[43] DOJ provided some additional detail regarding the cases it sought to dismiss, including the fact that ten were filed by the same for-profit private investment group advancing the same allegations, which DOJ determined lacked merit.[44] Further, DOJ stated that it has recovered more than $60 billion under the FCA since 1986, “more than 70% of which was recovered in connection with lawsuits filed pursuant to the statute’s qui tam provisions.”[45] We will be watching carefully to see how this saga unfolds.

2.  Action on Opioids

As discussed above, the government has indicated that it will make fighting the opioid crisis a priority. In the press release announcing the government’s $1.4 billion settlement with an international consumer goods conglomerate, for example, the government stated that the settlement demonstrated that it “will work tirelessly to address all facets of the opioid epidemic.”[46] In December 2019, DOJ announced that it would award more than $333 million to help communities affected by the opioid crisis, adding that DOJ has made fighting opioid addiction “a national priority.”[47] This announcement came on the heels of DOJ’s statement in July that ten districts with some of the highest drug overdose death rates in the country would focus on prosecuting every “readily available” case involving synthetic opioids,[48] and HHS’s statement in September that it had released more than $1.8 billion in funding to states to combat the opioid crisis.[49] We will continue to closely watch DOJ’s approach to opioids in the coming year.

3.  Additional Developments

A few other recent government announcements bear mentioning as examples of how the current administration is thinking about the scope of FCA enforcement activity. As we described in an alert earlier this year, DOJ announced on October 28, 2019, that it signed a memorandum of understanding with Housing and Urban Development (“HUD”) that establishes guidance for the use of the FCA in actions against Federal Housing Administration (“FHA”) lenders.[50] The memorandum makes clear that FHA requirements will be enforced primarily through HUD’s administrative proceedings, absent extenuating circumstances, and it follows a series of settlements with significant recoveries related to the FHA loan program.[51] On October 31, 2019, HHS’s Office of the General Counsel, including Deputy General Counsel and CMS Chief Legal Officer Kelly Cleary, issued a memorandum (the “Cleary Memo”) assessing the impact of the Supreme Court’s recent opinion in Azar v. Allina Health Services, 139 S. Ct. 1804 (2019) on Medicare payment rules that form the basis of compliance actions.[52] As the Cleary Memo sets forth, the Court held that “any Medicare issuance that establishes or changes a ‘substantive legal standard’ . . . must go through notice-and-comment rulemaking.”[53] HHS cautioned in the Memo that guidance that should have been promulgated through notice-and-comment rulemaking under Allina (but was not) cannot validly be used to bring an enforcement action.[54] That is, an enforcement action cannot be predicated on a guidance document unless it was issued through notice-and-comment rulemaking.[55] HHS also acknowledged, however, that under long-standing legal principles recently articulated in the Brand Memo, which we discussed in our 2018 Mid-Year and Year-End False Claims Act Updates, even guidance documents consistent with Allina may not be used as the sole basis for an enforcement action, although they may be relevant for questions of scienter and materiality.[56] Turning briefly to address Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), HHS stated that “the touchstone of materiality is whether the government would have paid the claims at issue had it known of a defendant’s alleged noncompliance with a law or regulation,” and that cases where a violation “may be material even if the government continued to pay with full knowledge of that violation” are “exceedingly rare” after Escobar.[57] Addressing specifically “healthcare qui tam suits” in which HHS would be the government payor in question, HHS explained that “the critical question is whether the alleged violation would have influenced our decision to pay.”[58] The Cleary Memo offers interesting insight from HHS on important FCA issues relating to materiality and the substantive standards underlying potential FCA theories. Finally, on January 27, 2020, Deputy Associate Attorney General Stephen Cox gave a speech at the 2020 Advanced Forum on False Claims and Qui Tam Enforcement where he reviewed DOJ’s recent enforcement priorities and took a look ahead at the next year.[59] Many of the topics he addressed are covered above or in our 2019 Mid-Year Update—including opioid enforcement, the Granston Memo, reliance on subregulatory guidance, and cooperation credit. In addition to these topics, Cox also addressed the emerging issue of third-party litigation financing in qui tam actions. In class actions and other private cases, third-party financing for litigation is a common, albeit often secretive, feature of modern litigation. In his comments, Cox noted various reform efforts that are underway to address this issue, and acknowledged that third-party financing for litigation is very likely behind some qui tam suits as well. Notably, however, Cox indicated that the government often has “little insight into the extent to which they are backing the qui tam cases we are investigating, litigating, or monitoring.”[60] Given that qui tam cases are ostensibly undertaken in the government interest, this is remarkable: even the government does not know who is financing (and perhaps influencing) the direction of FCA lawsuits. Cox pledged that DOJ is “considering what, if any, interests the United States has with respect to third-party litigation financing in qui tam litigation and whether it is worth seeking some disclosure, at least to the department, of such arrangements.”[61]

B.  State Developments

We detailed the HHS’s Office of Inspector General’s (HHS OIG) review and approval of state false claims statutes and other developments in state laws in our 2019 Mid-Year Update. Since then, HHS OIG also has reviewed and approved Hawaii’s false claims statute, bringing the total number of states with approved statutes to twenty-one.[62] As we explained mid-year, to receive approval, state statutes must contain provisions that are at least as effective in “rewarding and facilitating qui tam actions” as those in the federal FCA and contain civil penalties of at least an equivalent amount, among other requirements. As an incentive for implementing such requirements, states with qualifying laws can receive a 10% greater share of any damages recovered under those laws.[63] HHS OIG has yet to approve false claims statutes it has reviewed in eight states—Florida, Louisiana, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, and Wisconsin.[64] We also reported in our 2019 Mid-Year Update on a bill passed by the California Assembly, Assembly Bill No. 1270, which would broaden the state’s false claim act considerably, including by amending the act to include consideration of “the potential effect” of an alleged false record or statement “when it is made,” and extending the act to tax-related cases where the damages pleaded exceed $200,000 and a defendant’s state-taxable income or sales exceed $500,000. The California Senate has amended the bill slightly to clarify that it would not apply retroactively to tax-related cases where the alleged false statement or record occurred before January 1, 2020, and the bill currently remains pending in the state senate.[65] The South Carolina bill that we also discussed in our mid-year update, which would enact the state’s first false claims act, likewise remains stalled in the state senate’s judiciary committee, where it has been sitting since January of 2019.[66] We will continue to watch state legislation in these states and others for signs of further movement or revisions.

IV.  NOTABLE CASE LAW DEVELOPMENTS

The second half of 2019 was active on the case law front, featuring a number of notable circuit court decisions touching on various aspects of the FCA, including the statute’s materiality and causation requirements, and the statute’s reach in relation to government programs.

A.  Second Circuit Holds that the FCA Applies to Federal Reserve Banks

Although broad in many respects, the FCA is cabined by its purpose of protecting the government fisc, and thus the statute expressly does not apply to efforts to defraud private entities who are not administering or using government funds. Under 31 U.S.C. § 3729(b)(2)(A), fraudulent “claims” are thus actionable when they are presented either (1) to an “officer, employee, or agent” of the United States, or (2) to a private “contractor, grantee, or other recipient” so long as a portion of the money is (a) “provided” or “reimburse[d]” by the United States and (b) used to advance its “interest[s].” In United States v. Wells Fargo & Co., the Second Circuit grappled with this dividing line between public and private, holding that the FCA reaches allegedly fraudulent claims relating to emergency loans made by the twelve Federal Reserve Banks (FRBs). 943 F.3d 588 (2d Cir. 2019). There, relators pursued FCA claims based on allegations that certain banks had misrepresented their financial condition to the FRBs to qualify for emergency loans at favorable interest rates for which they were not, in fact, qualified. The district court concluded that the allegedly fraudulent loan requests were not “claims” within the meaning of the FCA because FRBs were not government “agents” and because the United States did not provide the money involved in the FRB emergency loan program. Id. at 594. The Second Circuit reversed, holding that the FCA reaches claims to FRBs because they are “governmental instrumentalities operating under direct supervision of a government agency where the disbursement itself is part of a government program and where the money is created ex nihilo pursuant to congressional authority.” Id. at 605. The court held that FRBs act as “agents” of the United States in the context of emergency loans at issue because they “extend emergency loans pursuant to a statutory delegation from Congress” and are supervised by a government agency, the Federal Reserve Board, which “exercises substantial control over FRB emergency lending activities.” Id. at 599-600. The court reached its conclusion even though FRBs are not part of any executive department or agency, but instead are corporations with private banks as nominal shareholders, and even though that FRB loans are delivered in the form of credit to the borrowing bank, not lent out of treasury funds. As the Second Circuit explained, the “United States is the source of the purchasing power conferred on the banks when they borrow from the Fed’s emergency lending facilities.” Id. at 603. Although the Second Circuit emphasized that its holding that the FCA applied was limited to “the narrow context” of claims involving FRBs with respect to “the Fed’s emergency lending facilities,” the decision may nevertheless encourage future arguments in other contexts that a broader swath of entities are “governmental instrumentalities” that fall within the statute’s scope. Id. at 605-06.

B.  Eleventh Circuit Rejects FCA Liability Based on Reasonable Differences in Opinion

In United States v. AseraCare, Inc., the Eleventh Circuit held that claims cannot be “deemed false” under the FCA based solely on “a reasonable difference of opinion among physicians” as to a medical provider’s clinical judgment. 938 F.3d 1278, 1281 (11th Cir. 2019). There, the government relied on a false certification theory that claims for treatment for hospice patients were based on the provider’s representation of the patients as “terminally ill” when, according to expert physician witness testimony as to a sample subset of patients, they were, in fact, not. Id. at 1284-85. The district court vacated a jury finding in the government’s favor and entered summary judgment against it, concluding that the mere difference of opinion between physicians (the government’s expert and the provider) could not establish “falsity” as a matter of law. Id. at 1285-86. On appeal, the Eleventh Circuit agreed, holding that when a certification to the government—including that a patient is terminally ill—is based on a physician’s clinical judgment, it cannot be “false,” and therefore is not actionable, unless the underlying clinical judgment reflects an “objective falsehood.” Id. at 1296-97. Concluding that a “mere difference of reasonable opinion” among medical providers alone does not constitute an “objective falsehood,” the court explained that plaintiffs instead “must identify facts and circumstances surrounding the patient’s certification that are inconsistent with the proper exercise of a physician’s clinical judgment. Where no such facts or circumstances are shown, the FCA claim fails as a matter of law.” Id. at 1297. Although the Eleventh Circuit’s ruling reversed a grant of summary judgment for defendants, the opinion nonetheless articulated a standard for proving the specific alleged false claims at trial: “crucially, on remand the Government must be able to link this evidence of improper certification practices to the specific . . . claims at issue in its case. Such linkage is necessary to demonstrate both falsehood and knowledge.” Id. at 1305. In reaching its conclusion regarding falsity, the AseraCare court considered but declined to follow decisions by both the Tenth and Sixth Circuits. Id. at 1300 n.15 (citing United States ex rel. Polukoff v. St. Mark’s Hospital, 895 F.3d 730 (10th Cir. 2018); and United States v. Paulus, 894 F.3d 267 (6th Cir. 2018)). The government had argued, unsuccessfully, that these cases established that a mere difference of medical opinion can be sufficient to show that a statement is false for FCA liability. Id. Whether AseraCare creates a circuit split of sorts on this issue will become clearer as other circuits consider it, as the AseraCare court sought expressly to distinguish Paulus and Palukoff on the grounds that the clinical standards at issue in the former case were capable of objective factual evaluation and the opinions at issue in the latter may not have been reasonable or even genuinely-held. Although nominally a win for the government, the Eleventh Circuit’s AseraCare decision undoubtedly will reverberate in health care fraud cases of many types, given that the treating physician’s clinical judgment is the linchpin for reimbursement in many different federal health program settings. Under AseraCare, the government will have to show more than mere differences in medical opinions to prove falsity; and, the case likely will require more rigor in the use of statistical sampling to support evidence of false claims, insofar as the government will be required to establish a specific link between the government’s evidence and the particular false claims at issue.

C.  Courts Continue to Interpret the FCA’s Materiality Requirement Post-Escobar

In 2019, as in past years, lower courts continued to develop the growing body of jurisprudence regarding materiality and government knowledge under the FCA in the wake of the Supreme Court’s decision in Escobar, 136 S. Ct. 1989, the landmark decision on the implied certification theory of liability. Consistent with the Supreme Court’s directive in Escobar, circuit courts continued to examine whether FCA plaintiffs have adequately alleged facts to satisfy the rigorous and demanding materiality standard at the pleadings stage, with mixed outcomes. In Godecke v. Kinetic Concepts, Inc., the Ninth Circuit addressed materiality allegations in an FCA claim predicated on the theory that the defendants allegedly submitted claims for Medicare payment without disclosing that no written order had been received before delivery, in violation of regulatory requirements. 937 F.3d 1201 (9th Cir. 2019). As to materiality, the complaint alleged that Medicare would not have paid for the claims had it been aware of the lack of prior written orders, because that requirement was part of relevant government reimbursement rules (i.e., an express “condition of payment”). Further, according to the complaint, the requirement was not just some “paperwork issue” but instead was the result of “extensive negotiations” between the defendant and Medicare “in order to prevent fraud and abuse.” Id. at 1213. The Ninth Circuit held that these allegations indicated that noncompliance with the requirement was not “minor or insubstantial” and thus were sufficient to establish materiality (even though the allegations did not address how Medicare “has treated similar violations”). Id. at 1213-14. In contrast, in United States ex rel. Patel v. Catholic Health Initiatives, the Fifth Circuit, in a per curiam opinion, affirmed dismissal of an FCA complaint because the alleged false claim—failure to report a change in ownership of a hospital—was not “material.” No. 18-20395, 2019 WL 6208665, at *4 (5th Cir. Nov. 20, 2019). The case involved an ownership dispute over a hospital that had originally been structured with individual doctors as partners. The hospital system then purchased or terminated their shares and then allegedly received reimbursements through an entity designated as the owner even after a court determined that, due to the partnership dispute, that entity was not really the owner. Invoking Escobar, the court held that the relator failed to adequately allege materiality. Despite the allegations as to misrepresentation of the ownership of the hospital, there was no evidence that the government “consistently refuses to pay claims” with incorrect statements regarding ownership, and the fact that the government had paid the claims at issue suggested that the government did not care who the rightful owner of the hospital was. Id. (citation omitted). Although FCA defendants have had some success in recent years disputing materiality, cases like Patel reaffirm that challenges to allegations of materiality remain a strong potential basis for dismissal at the pleading stage.

D.  Courts Continue to Analyze Rule 9(b)’s Particularity Requirement in FCA Claims

Rule 9(b) heightens the standard for pleading fraud claims, requiring that a party alleging fraud “must state with particularity the circumstances constituting fraud or mistake.” As we have noted in past updates, circuit courts have struggled with how to apply Rule 9(b)’s particularity requirement in FCA cases. This year was no exception, as is clear from two recent cases arising in the context of the Stark Act and AKS. In United States ex rel. Bookwalter v. UPMC, the Third Circuit reversed a lower court’s decision dismissing an FCA case that involved claims predicated on productivity-based physician compensation structures. No. 18-1693, 946 F.3d 162, 166-67, 178 (3d Cir. 2019). The relator alleged that the compensation structures between physician practices and neurosurgeons resulted in improper bill-padding. The Third Circuit concluded that the relators had plausibly alleged the conduct at issue violated the Stark Law and, therefore, the claims were “false” for purposes of the FCA. Id. at 169-70. The court also explored the limits of Rule 9(b)’s heightened pleading standard, holding that the relators did not have to allege “the date, time, place, or content of every single allegedly false Medicare claim” involved in the allegedly unlawful compensation scheme. Id. at 176. Rather, the court determined that since the alleged “falsity” came not from a particular misrepresentation, but from a set of circumstances of alleged bill-padding that made a whole set of claims allegedly false, it was enough to allege the circumstances of that scheme with particularity. Id. The court focused on “[t]he sum total of the[] allegations,” which it concluded told a “detailed story about how the defendants designed a system to reward surgeons for creating and submitting false claims.” Id. at 177. This, the court reasoned, was “particular enough” to achieve Rule 9(b)’s goals of precision, substantiation of the fraud allegation, and notice to the defendant of the misconduct with which it is charged. Id. at 176-77. In Bingham v. HCA, Inc., the Eleventh Circuit similarly explored the intersection between Rule 9(b) and FCA cases predicated on violations of the AKS and the Stark Law, but reached the opposite conclusion. 783 F. App’x 868, 870 (11th Cir. 2019). There, the relator’s FCA theory relied on his allegations the defendants allegedly provided “sweetheart deals to certain physicians who leased space in [its] medical office buildings . . . in exchange for patient referrals,” which constituted unlawful remuneration in violation of the AKS and Stark Law. Id. at 870-71. The court held, however, that the complaint was properly dismissed by the district court because it did not satisfy the heightened pleading requirements of Rule 9(b). Id. at 877. Specifically, the critical elements of the alleged kickback scheme relied entirely on “conclusory” allegations that were “based on information and belief,” and were “devoid of facts regarding the substance of [the] alleged misconduct,” including “when it occurred, and who engaged in it.” Id.

E.  Fifth Circuit Clarifies Causation Standard for Mortgage Fraud Claims Under the FCA

Until recently, federal circuit courts were divided as to the standard for demonstrating proximate causation in FCA cases predicated on claims involving mortgage fraud. While the Fifth Circuit had articulated a rigorous causation standard widely viewed as difficult to meet, other circuits, including the Ninth and D.C. Circuits, employed a much more relaxed standard under which a false statement was deemed a proximate cause of the loss if the statement concerned factors that affected the likelihood of repayment, such as a borrower’s creditworthiness. In United States v. Hodge, however, the Fifth Circuit clarified its standard, electing to step back from the “restrictive” causation standard that its prior precedent had been read to articulate, and expressly brought its standard into alignment with the more relaxed requirements imposed by other circuits. 933 F.3d 468, 474-75 (5th Cir. 2019), as revised (Aug. 9, 2019). In Hodge, the Fifth Circuit affirmed a nearly $300 million treble damages judgment against two mortgage companies and their owner for allegedly fraudulently obtaining FHA insurance for loans that later defaulted. Id. at 472. After a five-week trial, a jury found that the defendants had misrepresented compliance with FHA underwriting guidelines and had concealed the use of unregistered branches to originate loans. Id. On appeal, the Fifth Circuit rejected a challenge to the sufficiency of the evidence, holding that the government had shown scienter, materiality, and causation. Id. at 473-75. Specifically, evidence the defendants had continued to originate loans from unregistered branches after being notified by HUD that it was unlawful demonstrated scienter. Id. at 473. As to materiality, the court relied on the fact that HUD demanded indemnification from defendants after discovering a handful of loans were originated from unregistered branches, and later barred them from the FHA program entirely. Id. at 474. As to causation, the court held that the government’s evidence—which relied on sampling of loan files and extrapolation showing that loans from unregistered branches had higher default rates—was sufficient to show causation between the alleged misconduct and ultimate defaults (leading to alleged damages) even though it did not connect the alleged misconduct to specific loans. Id. at 475. The court concluded that “[e]ven if the defendants did not know which specific loans would eventually default, it was foreseeable that a higher percentage of them would,” which sufficiently demonstrated causation under the FCA. Id. The decision, which allows the government to show causation at a higher level of generality using sampling, may encourage DOJ and relators to pursue similar theories in FCA claims with large numbers of alleged misstatements.

F.  Several Circuits Address Causation and Other Issues in FCA Retaliation Claims

In the second half of 2019, several courts of appeals also addressed issues under the FCA’s anti-retaliation provision, which protects would-be whistleblowers from retaliation based on certain protected activity undertaken in furtherance of a potential FCA claim. We briefly summarize these decisions below. In a matter of first impression for FCA retaliation claims before the Tenth Circuit, the court joined several other circuits in holding that when there is no direct evidence of retaliation, the McDonnell Douglas framework applies to FCA retaliation claims. Miller v. Inst. for Def. Analyses, No. 19-1110, 2019 WL 6997900, at *4 (10th Cir. Dec. 20, 2019) (citing McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973)). Under this three-step framework, “a plaintiff first must set forth a prima facie case of retaliation,” second, “the burden then shifts to the defendant to articulate a legitimate, nonretaliatory reason for the adverse employment action,” and then third, “if the employer produces evidence of a legitimate nonretaliatory reason, the plaintiff must assume the further burden of showing that the proffered reason is a pretext calculated to mask retaliation.” Id. at *4-5 (citations omitted). The Tenth Circuit affirmed a grant of summary judgment in the defendant’s favor, holding that although, at the first step, a short “temporal proximity between [a plaintiff’s] protected conduct and the adverse action” alone can be “relied on to prove causation,” the nearly five-month gap the plaintiff identified was insufficient. Id. at *5-6. The Fifth Circuit, in a pair of decisions, likewise addressed the proper standard for analyzing causation in FCA retaliation claims under the McDonnell Douglas framework. In Garcia v. Professional Contract Services, the Fifth Circuit similarly ruled that in the first step of McDonnell Douglas, “a plaintiff can meet his burden of causation simply by showing close enough timing between his protected activity and his adverse employment action,” but that at the third step (the pretext stage), a “heightened but-for causation requirement applies.” 938 F.3d 236, 243 (5th Cir. 2019). Applying this framework to a retaliation claim brought by an employee with some responsibilities for ensuring “the company was complying with its contracts with the government,” the court reversed a grant of summary judgment in the defendants’ favor at the third step, holding that the plaintiff had pointed to enough evidence of pretext—including the temporal proximity between the alleged protected activity and termination of less than three months, as well as other factors, such as disparate treatment of a similarly situated employee—to survive summary judgment. Id. at 238, 244. In Musser v. Paul Quinn College, however, the Fifth Circuit affirmed a grant of summary judgment for the defendant at the third step in a claim brought by an independent contractor “tasked with providing financial and accounting services” as an interim controller to defendant, where the plaintiff’s alleged evidence of retaliation did not include “other significant evidence of pretext” apart from temporal proximity, and thus fell “short of the . . . evidence described in Garcia.” 944 F.3d 557, 559-64 (5th Cir. 2019). Finally, a split of the D.C. Circuit held that the plaintiff-veterinarian’s termination, allegedly in retaliation for complaints about the defendant’s violations of conditions of federal funding in animal research, could support an FCA retaliation claim even where the plaintiff’s warnings “did not accuse the [defendant] of fraud in terms.” Singletary v. Howard Univ., 939 F.3d 287, 297-98 (D.C. Cir. 2019). The majority held that despite the lack of direct accusations of fraud, the plaintiff had alleged a reasonable belief of an FCA violation because she alleged that the university was required to make annual certifications of compliance, and that her complaints “coincided” with the annual reporting period. Id. According to the dissent, however, because the defendant was never warned “about possible fraud,” the university had no reason to think the plaintiff was reporting in an effort to stop fraud. Id. at 307. The dissent further held that the claim was not viable because mere violations of contract or regulation do not equate to fraud unless they are material to a false claim for money, under Escobar—a topic the majority declined to address. Id.

V.  CONCLUSION

As always, Gibson Dunn will continue to monitor these developments and others in the FCA space and stands ready to answer any questions you may have. We will report back to you on the latest news mid-year, in early July. ______________________ [1] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Justice Department Recovers over $3 Billion from False Claims Act Cases in Fiscal Year 2019 (Jan. 9, 2020), https://www.justice.gov/opa/pr/justice-department-recovers-over-3-billion-false-claims-act-cases-fiscal-year-2019 [hereinafter DOJ FY 2019 Recoveries Press Release]. [2] See U.S. Dep’t of Justice, Fraud Statistics Overview (Jan. 9, 2020), https://www.justice.gov/opa/press-release/file/1233201/download [hereinafter DOJ FY 2019 Stats]. [3] DOJ FY 2019 Recoveries Press Release. [4] See DOJ FY 2019 Stats. [5] Id. [6] Id. [7] Id. [8] DOJ FY 2019 Recoveries Press Release. [9] See DOJ FY 2019 Stats. [10] DOJ FY 2019 Recoveries Press Release. [11] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Justice Department Obtains $1.4 Billion from Reckitt Benckiser Group in Largest Recovery in a Case Concerning an Opioid Drug in United States History (Jul. 11, 2019), https://www.justice.gov/opa/pr/justice-department-obtains-14-billion-reckitt-benckiser-group-largest-recovery-case. [12] See Press Release, U.S. Atty’s Office for the E. Dist. of Pa., Eagleville Hospital Pays $2.85 Million to Resolve Allegations of Improper Billing for Detox Treatment (Jul. 24, 2019), https://www.justice.gov/usao-edpa/pr/eagleville-hospital-pays-285-million-resolve-allegations-improper-billing-detox. [13] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Medicare Advantage Provider and Physician to Pay $5 Million to Settle False Claims Act Allegations (Aug. 8, 2019), https://www.justice.gov/opa/pr/medicare-advantage-provider-and-physician-pay-5-million-settle-false-claims-act-allegations. [14] See Press Release, U.S. Atty’s Office for the E. Dist. of Pa., Defense Contractor to Pay $940,000 to Resolve Allegations of Withholding Discounts from TRICARE (Aug. 29, 2019), https://www.justice.gov/usao-edpa/pr/defense-contractor-pay-940000-resolve-allegations-withholding-discounts-tricare. [15] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Drug Maker Mallinckrodt Agrees to Pay Over $15 Million to Resolve Alleged False Claims Act Liability for “Wining and Dining” Doctors (Sept. 4, 2019), https://www.justice.gov/opa/pr/drug-maker-mallinckrodt-agrees-pay-over-15-million-resolve-alleged-false-claims-act-liability. [16] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Compounding Pharmacy, Two of Its Executives, and Private Equity Firm Agree to Pay $21.36 Million to Resolve False Claims Act Allegations (Sept. 18, 2019), https://www.justice.gov/opa/pr/compounding-pharmacy-two-its-executives-and-private-equity-firm-agree-pay-2136-million. [17] See Press Release, U.S. Atty’s Office for the E. Dist. of Pa., Trident USA Health Services LLC to Pay $8.5 Million to Resolve False Claims Act Liability for Alleged Kickback Scheme (Sept. 25, 2019), https://www.justice.gov/usao-edpa/pr/trident-usa-health-services-llc-pay-85-million-resolve-false-claims-act-liability. [18] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pharmaceutical Company Targeting Elderly Victims Admits to Paying Kickbacks, Resolves Related False Claims Act Violations (Sept. 26, 2019), https://www.justice.gov/opa/pr/pharmaceutical-company-targeting-elderly-victims-admits-paying-kickbacks-resolves-related. [19] See Press Release,  U.S. Atty’s Office for the C. Dist. of Cal., Eye Doctor Group, Physicians Pay $6.65 Million to Settle Allegations They Submitted Fraudulent Bills to Medicare and Medicaid (Oct. 4, 2019), https://www.justice.gov/usao-cdca/pr/eye-doctor-group-physicians-pay-665-million-settle-allegations-they-submitted. [20] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Genetic Testing Company and Three Principals Agree to Pay $42.6 Million to Resolve Kickback and Medical Necessity Claims (Oct. 9, 2019), https://www.justice.gov/opa/pr/genetic-testing-company-and-three-principals-agree-pay-426-million-resolve-kickback-and. [21] See Press Release,  U.S. Atty’s Office for the Dist. of Mass., Fresenius Agrees to Pay $5.2 Million to Resolve Allegations that it Overbilled Medicare for Hepatitis B Tests (Oct. 9, 2019), https://www.justice.gov/usao-ma/pr/fresenius-agrees-pay-52-million-resolve-allegations-it-overbilled-medicare-hepatitis-b. [22] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Former Osteo Relief Institutes and Their Owners to Pay Over $7.1 Million to Resolve Allegations of Unnecessary Knee Injections and Braces (Oct. 18, 2019), https://www.justice.gov/opa/pr/former-osteo-relief-institutes-and-their-owners-pay-over-71-million-resolve-allegations. [23] See Press Release, U.S. Atty’s Office for the S. Dist. of N.Y., Manhattan U.S. Attorney Announces Settlement Of Lawsuit Against Spinal Implant Company, Its CEO, And Another Executive For Paying Millions Of Dollars In Kickbacks To Surgeons (Nov. 7, 2019), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-settlement-lawsuit-against-spinal-implant-company-its. [24] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Sanford Health Entities to Pay $20.25 Million to Settle False Claims Act Allegations Regarding Kickbacks and Unnecessary Spinal Surgeries (Oct. 28, 2019), https://www.justice.gov/opa/pr/sanford-health-entities-pay-2025-million-settle-false-claims-act-allegations-regarding. [25] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Compound Ingredient Supplier Fagron Holding USA LLC to Pay $22.05 Million to Resolve Allegations of False and Inflated Average Wholesale Prices for Ingredients Used in Compound Prescriptions (Nov. 7, 2019), https://www.justice.gov/opa/pr/compound-ingredient-supplier-fagron-holding-usa-llc-pay-2205-million-resolve-allegations. [26] See Stipulation and Order of Settlement, U.S. ex rel. Markelson v. Lenox Hill Hospital et al., No. 1:17-cv-07986 (S.D.N.Y. Nov. 8, 2019) [27] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, California Health System and Surgical Group Agree to Settle Claims Arising from Improper Compensation Agreements (Nov. 15, 2019), https://www.justice.gov/opa/pr/california-health-system-and-surgical-group-agree-settle-claims-arising-improper-compensation. [28] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Kentucky Hospital to Pay over $10 Million to Resolve False Claims Act Allegations (Nov. 20, 2019), https://www.justice.gov/opa/pr/kentucky-hospital-pay-over-10-million-resolve-false-claims-act-allegations. [29] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Laboratory to Pay $26.67 Million to Settle False Claim Act Allegations of Illegal Inducements to Referring Physicians (Nov. 26, 2019), https://www.justice.gov/opa/pr/laboratory-pay-2667-million-settle-false-claims-act-allegations-illegal-inducements-referring. [30] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, ITT Cannon to Pay $11 Million to Settle False Claims Allegations for Untested Electrical Connectors (Jul. 16, 2019), https://www.justice.gov/opa/pr/itt-cannon-pay-11-million-settle-false-claims-allegations-untested-electrical-connectors. [31] See Press Release, NY State Office of the Attorney General, Attorney General James Secures $6 Million From Cisco Systems In Multistate Settlement (Aug. 1, 2019), https://ag.ny.gov/press-release/2019/attorney-general-james-secures-6-million-cisco-systems-multistate-settlement; Mark Chandler, Executive Platform: A Changed Environment Requires a Changed Approach, Cisco Blogs (Jul. 31, 2019), https://blogs.cisco.com/news/a-changed-environment-requires-a-changed-approach. [32] See Press Release, U.S. Atty’s Office for the S. Dist. of NY, Manhattan U.S. Attorney Announces Settlement With Construction Company For Underpaying Workers And Submitting False Payroll Reports On Two Federally Funded Projects (Aug. 5, 2019), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-settlement-construction-company-underpaying-workers-and. [33] See Press Release, U.S. Atty’s Office for the E. Dist. of PA, Defense Contractor to Pay $3.3M to Resolve False Claims Act Allegations (Aug. 8, 2019), https://www.justice.gov/usao-edpa/pr/defense-contractor-pay-33m-resolve-false-claims-act-allegations. [34] See Press Release, U.S. Atty’s Office for the S. Dist. of GA, Government Settles Alleged False Claims Act Violations with Sesolinc Group (Aug. 19, 2019), https://www.justice.gov/usao-sdga/pr/government-settles-alleged-false-claims-act-violations-sesolinc-group. [35] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Former CEO of Virginia-Based Defense Contractor Agrees to Pay $20 Million to Settle False Claims Act Allegations Related to Fraudulent Procurement of Small Business Contracts (Aug. 20, 2019), https://www.justice.gov/opa/pr/former-ceo-virginia-based-defense-contractor-agrees-pay-20-million-settle-false-claims-act. [36] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, American Airlines Inc. Agrees To Pay $22 Million to Settle False Claims Act Allegations for Falsely Reporting Delivery Times of U.S. Mail Transported Internationally (Aug. 20, 2019), https://www.justice.gov/opa/pr/american-airlines-inc-agrees-pay-22-million-settle-false-claims-act-allegations-falsely. [37] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, ABS Development Corporation Agrees to Pay $2.8 Million to Settle False Claims Act Allegations and to Waive Administrative Claims (Nov. 13, 2019), https://www.justice.gov/opa/pr/abs-development-corporation-agrees-pay-28-million-settle-false-claims-act-allegations-and. [38] U.S. Dep’t of Justice, Justice Manual, Section 4-4.111. [39] See Memorandum, U.S. Dep’t of Justice, Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A) (Jan. 10, 2018), https://assets.documentcloud.org/documents/4358602/Memo-for- Evaluating-Dismissal-Pursuant-to-31-U-S.pdf. [40] Brief for the United States as Amicus Curiae at 15, Gilead Sciences, Inc. v. United States ex rel. Campie, 139 S. Ct. 783 (2019). [41] Letter from Sen. Charles E. Grassley to Att’y Gen. William Barr at 1 (Sept. 4, 2019), https://www.grassley.senate.gov/sites/default/files/documents/2019-09-04%20CEG%20to%20DOJ%20%28FCA%20dismissals%29.pdf. [42] Id. at 5-6. [43] Letter from Assistant Att’y Gen. Stephen E. Boyd, Office of Legis. Affairs, U.S. Dep’t of Justice, to Sen. Charles E. Grassley at 1 (Dec. 19, 2019), https://www.grassley.senate.gov/sites/default/files/2019-12-19%20DOJ%20to%20CEG%20%28FCA%20dismissals%29.pdf. [44] Id. at 2. [45] Id. at 1. [46] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Justice Department Obtains $1.4 Billion from Reckitt Benckiser Group in Largest Recovery in a Case Concerning an Opioid Drug in United States History (Jul. 11, 2019), https://www.justice.gov/opa/pr/justice-department-obtains-14-billion-reckitt-benckiser-group-largest-recovery-case. [47] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Justice Department Awards More than $333 Million to Fight Opioid Crisis (Dec. 13, 2019), https://www.justice.gov/opa/pr/justice-department-awards-more-333-million-fight-opioid-crisis. [48] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Justice Department Announces Results in Fight Against the Opioid Crisis At One Year Mark of Operation S.O.S. (July 16, 2019), https://www.justice.gov/opa/pr/justice-department-announces-results-fight-against-opioid-crisis-one-year-mark-operation-sos. [49] See Press Release, U.S. Dep’t of Health & Human Servs., Trump Administration Announces $1.8 Billion in Funding to States to Continue Combating Opioid Crisis (Sept. 4, 2019), https://www.hhs.gov/about/news/2019/09/04/trump-administration-announces-1-8-billion-funding-states-combating-opioid.html. [50] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Departments of Justice and Housing and Urban Development Sign Interagency Memorandum on the Application of the False Claims Act (Oct. 28, 2019), https://www.justice.gov/opa/pr/departments-justice-and-housing-and-urban-development-sign-interagency-memorandum-application. [51] See, e.g., U.S. Dep’t of Justice, Recent Accomplishments of the Housing and Civil Enforcement Section (January 7, 2020), https://www.justice.gov/crt/recent-accomplishments-housing-and-civil-enforcement-section. [52] See Memorandum, Dep’t of Health & Human Servs., Dep. Gen. Counsel & CMS Chief Legal Officer Kelly M. Cleary & Dep. Gen. Counsel Brenna E. Jenny, Impact of Allina on Medicare Payment Rules (Oct. 31, 2019). [53] Id. [54] Id. [55] Id. [56] Id. [57] Id. [58] Id. [59] See Press Release, Office of Pub. Affairs, Deputy Associate Attorney General Stephen Cox Provides Keynote Remarks at the 2020 Advanced Forum on False Claims and Qui Tam Enforcement (Jan. 27, 2020), https://www.justice.gov/opa/speech/deputy-associate-attorney-general-stephen-cox-provides-keynote-remarks-2020-advanced. [60] Id. [61] Id. [62] Dep’t of Health & Human Servs., Office of Inspector Gen., State False Claims Act Reviews, https://oig.hhs.gov/fraud/state-false-claims-act-reviews/index.asp. [63] Id. [64] Id. [65] AB-1270 False Claims Act, California Legislative Information (Aug. 13, 2019), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB1270, https://leginfo.legislature.ca.gov/faces/billStatusClient.xhtml?bill_id=201920200AB1270. [66] See S. 40, A Bill to Amend Title 15 of the 1976 Code, by Adding Chapter 85, to Enact the “South Carolina False Claims Act” (123d Session), https://www.scstatehouse.gov/sess123_2019-2020/bills/40.htm.

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The following Gibson Dunn lawyers assisted in preparing this client update: Stuart Delery, Jim Zelenay, John Partridge, Jon Phillips, Joseph Warin, Joseph West, Robert Blume, Ryan Bergsieker, Karen Manos, Charles Stevens, Winston Chan, Andrew Tulumello, Benjamin Wagner, Alexander Southwell, Reed Brodsky, Robert Walters, Monica Loseman, Geoffrey Sigler, Sean Twomey, Reid Rector, Alli Chapin, Jeremy Ochsenbein, Meghan Dunn, Jennifer Bracht, and Julie Hamilton.

Gibson Dunn's lawyers have handled hundreds of FCA investigations and have a long track record of litigation success.  From U.S. Supreme Court victories, to appellate court wins, to complete success in district courts around the United States, Gibson Dunn believes it is the premier firm in FCA defense.  Among other notable recent victories, Gibson Dunn successfully overturned one of the largest FCA judgments in history in United States ex rel. Harman v. Trinity Indus. Inc., 872 F.3d 645 (5th Cir. 2017), and the Daily Journal recognized Gibson Dunn’s work in U.S. ex rel. Winter v. Gardens Regional Hospital and Medical Center Inc. as a Top Defense Verdict in its annual feature on the top verdicts for 2017.  Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases.  The firm has dozens of attorneys with substantive FCA experience, including nearly 30 Assistant U.S. Attorneys and DOJ attorneys.  For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the following attorneys. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Geoffrey M. Sigler (+1 202-887-3752, gsigler@gibsondunn.com) New York Zainab N. Ahmad (+1 212-351-2609, zahmad@gibsondunn.com) Matthew L. Biben (+1 212-351-6300, mbiben@gibsondunn.com) Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) James L. Zelenay Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Deborah L. Stein (+1 213-229-7164, dstein@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)
Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

DOJ’s newly-announced Procurement Collusion Strike Force portends increased federal antitrust and False Claims Act enforcement in government procurement. Join Gibson Dunn partners as they discuss DOJ’s enforcement techniques, strategies for mitigating legal risks in the procurement process, and response plans for in-house counsel when alerted to a potential government investigation. Topics to be covered include:

• How antitrust and False Claims Act enforcement are being deployed in government procurement cases
• Risk factors and red flags in competitive bids that may attract DOJ prosecutors
• Best practices to minimize antitrust risks in government procurement processes

To read more about the Procurement Collusion Strike Force, visit our Client Alert regarding its announcement, "DOJ Announces a New Strike Force to Combat Antitrust Misconduct in Government Procurement." View Slides (PDF)

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[embed]https://player.vimeo.com/video/377674429[/embed]

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PANELISTS: Kristen Limarzi is a partner in the Washington, D.C. office. Before joining Gibson Dunn, Ms. Limarzi was the Chief of the Appellate Section of DOJ’s Antitrust Division, and she was involved in every civil non-merger matter and all of the most complex criminal cases the Division litigated in the last decade. Her practice focuses on investigations, litigation, and counseling on antitrust merger and conduct matters, as well as appellate and civil litigation. Scott Hammond is a partner in the Washington, D.C. office and Co-Chair of the Antitrust and Competition Practice Group. Previously, Mr. Hammond served as a DOJ prosecutor for 25 years, including 8 years as the Antitrust Division’s Deputy Assistant Attorney General for Criminal Enforcement – the highest ranking career lawyer in the Antitrust Division. He assists clients in antitrust and white-collar crime compliance, crisis management and government investigations across all industry sectors. Jeremy Robison is a partner in the Washington, D.C. office. His practice focuses on defending companies and individuals involved in antitrust investigations by U.S. and international enforcement authorities, conducting internal investigations, and advising companies on antitrust compliance programs and policies. Mr. Robison has represented clients from a range of industries in antitrust investigations, including in the financial services, pharmaceutical, defense, healthcare, and technology sectors. Jonathan Phillips is a partner in the Washington, D.C. office where he focuses on white collar enforcement matters and related litigation. Before joining the firm, Mr. Phillips served as a Trial Attorney in DOJ’s Civil Division, Fraud Section, where he investigated and prosecuted allegations of fraud against the United States under the False Claims Act and related statutes, including cases involving bid rigging and other allegations of fraud by government contractors. Joseph West is a partner in the Washington, D.C. office and former Co-Chair of the firm’s Government Contracts Practice. For 40 years, Mr. West has concentrated his practice on contract counseling, compliance/enforcement, and dispute resolution. He has represented both contractors (and their subcontractors, vendors and suppliers) and government agencies, and has been involved in cases before numerous federal courts and agencies. Lindsay Paulin is a litigation associate in the Washington, D.C. office. Her practice focuses on a wide range of government contracts issues, including internal investigations, claims preparation and litigation, bid protests, and government investigations under the False Claims Act. Ms. Paulin’s clients include contractors and their subcontractors, vendors, and suppliers across a range of industries including aerospace and defense, information technology, professional services, private equity, and insurance.

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MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

Click for PDF In a move designed to encourage greater participation by banks and other lending institutions in Federal Housing Administration (“FHA”) programs, on October 28, 2019, the U.S. Department of Justice (“DOJ”) and the U.S. Department of Housing and Urban Development (“HUD”) signed a Memorandum of Understanding (“MOU”) setting forth guidance on the appropriate use of the False Claims Act (“FCA”) to enforce violations of FHA regulatory requirements.[1] The guidance—Inter-Agency Coordination Of Civil Actions Under The False Claims Act Against Participants In FHA Single Family Mortgage Insurance Programs—is voluntary and creates no legal rights or obligations. Nevertheless, the MOU describes the interagency process for and considerations involved in determining whether certain conduct should be addressed through HUD’s administrative proceedings or similar civil action, or referred to DOJ to pursue action under the FCA. In public remarks proclaiming the MOU’s goal of encouraging banks to participate in FHA lending, HUD Secretary Ben Carson expressed that “the False Claims Act became a monster” that drove banks away in the decade following the financial crisis, “[b]ut now, the monster has been slayed.”[2] Secretary Carson added his “suspicion” that “relatively few things” will warrant referral to DOJ under the MOU, stating that “an obvious case of fraud [is] one thing,” but that “we’re not going to make a big deal of” conduct that “is not a pattern” and is a “mistake that’s correctable.”[3] This alert briefly describes the background and key takeaways from the MOU. Gibson Dunn is available to answer any questions you may have about how this guidance applies to your organization, as well as any other topics related to the FCA. Background The FHA provides important access to government-backed mortgage loans, particularly for lower income and first time home buyers. Over the past decade, however, banks and other lending institutions have dramatically reduced participation in FHA programs—originating less than 14 percent of FHA-insured mortgages this year, down from nearly 45 percent in 2010. HUD officials have attributed this decline to aggressive FCA enforcement against large FHA lenders following the financial crisis.[4] DOJ has recovered approximately $7 billion in FCA actions against mortgage lenders in the last 10 years. Against this backdrop, the MOU is specifically “intended to address [the] concerns [regarding] uncertain and unanticipated FCA liability for regulatory defects [that] led many well-capitalized lenders, including many banks and credit unions … to largely withdraw from FHA lending.”[5] The MOU, which pledges to dial back the use of the FCA in enforcing regulatory noncompliance in FHA programs, also marks the latest development in what has become a broader trend of reining in FCA enforcement under the Trump Administration. In recent years, DOJ policy changes have included issuance of the Brand Memo,[6] which prohibits DOJ attorneys from pursuing enforcement actions predicated on violations of non-binding agency guidance; issuance of the Granston Memo,[7] which instructed prosecutors to more regularly consider moving to dismiss qui tam actions in which DOJ declines to intervene; and revisions to the Yates Memo to provide more opportunities for corporate cooperation credit and inclusion of individuals in corporate settlements, among others.[8] These policy changes have been incorporated into the Justice Manual, the main internal policy manual for DOJ.[9] The MOU As the MOU makes clear, going forward, HUD will handle enforcement of violations of FHA program requirements “primarily through HUD’s administrative proceedings,” including through the agency’s mortgage review board. For more serious regulatory violations, the MOU sets forth a framework for the two agencies to follow in “deciding when to pursue False Claims Act cases to remedy material and knowing FHA violations.”[10] Specifically, the MOU identifies the standards for when HUD may refer a matter to DOJ for pursuit of FCA claims (the “FCA Evaluation Standards”), providing for referral where the following two conditions are met:

• (1) the most serious violations (so-called “Tier 1” violations under HUD regulations) exist either: (i) in at least 15 loans or (ii) in loans with an unpaid principal balance of at least $2 million; AND
• (2) there are aggravating factors such as evidence that the violations are systemic or widespread.[11]

Beyond this referral framework, the MOU acknowledges that DOJ will solicit HUD’s views during the investigative, litigation, and settlement phases of any FCA matters predicated in whole or in part on alleged violations of FHA requirements. This includes HUD’s view as to whether the alleged violations “are material or not material to the agency” so that DOJ “can determine whether [the materiality element and other] elements of FCA [liability] can be established.” It has always been the case that DOJ attorneys would solicit HUD’s views of the allegations under investigation and, as a matter of policy, HUD would have to approve any DOJ action. It is therefore remarkable that the agencies not only highlight this procedure in the guidance but specifically mention materiality—an element which allows an administration to tailor its enforcement agenda by taking the position that an alleged FHA regulatory violation was not important, or at least would not have resulted in non-payment had the government known about it (i.e., was not material). The MOU also specifically addresses qui tam litigation initiated by private relators. Although noting that ultimate dismissal authority remains with DOJ, the MOU nevertheless provides for HUD to recommend dismissal of qui tam suits where HUD determines that:

• the alleged conduct would not have warranted referral to DOJ under the FCA Evaluation Standards;
• the alleged conduct does not represent a material violation of FHA requirements; or
• the litigation threatens to interfere with HUD’s policies or the administration of its FHA lending program and dismissal would avoid these effects.

Finally, the MOU makes clear that even in cases where HUD declines to refer to DOJ or recommends dismissal, it retains discretion to pursue civil monetary penalties for violations of FHA regulations under other applicable laws, including the Program Fraud Civil Remedies Act. Conclusion Citing fears of draconian FCA liability for even minor noncompliance with FHA regulations facing prospective lenders, banks and other lending institutions have shied away from participation in the program in recent years. But particularly if comments from HUD officials are any indication, the new MOU provides a sign that the government has shifted its enforcement priorities in an effort to mitigate these concerns. Organizations that follow the guidance may decrease the likelihood that they will face the prospect of FCA enforcement actions in connection with FHA programs. And particularly noteworthy is that under the MOU DOJ will seek the guidance from HUD as to whether violations alleged by qui tam whistleblowers are material or not, such that DOJ may seek to dismiss such claims outright under its recently-flexed authority to dismiss qui tam cases even over a whistleblower’s objections. As noted above, the MOU is the latest action taken by the Trump Administration in a broader effort to temper FCA enforcement, promote more practical uses of government resources, and reduce the burden on regulated businesses of defending against cases of low or no merit. This effort has begun to generate real change—for example, since the Granston Memo, DOJ has, in fact, begun moving to dismiss qui tam actions at a greater rate than it did in the past. Whether the same can be said of the MOU as to FCA enforcement in connection with FHA lending remains to be seen, but at a minimum, it appears defendants in FCA actions based on alleged FHA program violations will have additional means to pursue declination and dismissal by the government. Gibson Dunn will monitor how this MOU actually works in practice, and will provide updates as they develop. _____________________    [1]   U.S. Dep’t of Justice and U.S. Dep’t of Housing and Urban Development, Inter-Agency Coordination Of Civil Actions Under The False Claims Act Against Participants In FHA Single Family Mortgage Insurance Programs (Oct. 28, 2019), https://www.hud.gov/sites/dfiles/SFH/documents/sfh_HUD_DOJ_MOU_10_28_19.pdf    [2]   Ben Lane, HousingWire, Exclusive: HUD’s Carson on False Claims Act – “The monster has been slayed” (Oct. 28, 2019), https://www.housingwire.com/articles/exclusive-huds-carson-on-false-claims-act-the-monster-has-been-slayed/    [3]   Id.    [4]   Jessica Guerin, HousingWire, FHA clarifies rules to attract more participants to its mortgage lending program (May 9, 2019), https://www.housingwire.com/articles/49011-fha-clarifies-rules-to-attract-more-participants-to-its-mortgage-lending-program/; MarketWatch, Trump administration says it will penalize fewer banks who violate FHA regulations (Oct. 29, 2019), https://www.marketwatch.com/story/trump-administration-says-it-will-penalize-fewer-banks-who-violate-mortgage-regulations-2019-10-29    [5]   Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Departments of Justice and Housing and Urban Development Sign Interagency Memorandum on the Application of the False Claims Act (Oct. 28, 2019), https://www.justice.gov/opa/pr/departments-justice-and-housing-and-urban-development-sign-interagency-memorandum-application    [6]   U.S. Dep’t of Justice, Memorandum from Rachel Brand, Associate Attorney General (Nov. 16, 2017), https://www.justice.gov/opa/press-release/file/1012271/download    [7]   U.S. Dep’t of Justice, Memorandum from Michael D. Granston, Director, Commercial Litigation Branch, Fraud Section (Jan. 10, 2018), https://drive.google.com/file/d/1PjNaQyopCs_KDWy8RL0QPAEIPTnv31ph/view    [8]   See Rod J. Rosenstein, Deputy Attorney General, U.S. Dep’t of Justice, Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0 [announcing changes]; see also U.S. Dep’t of Justice, Memorandum from Sally Yates, Deputy Attorney General (Sep. 9, 2015), https://www.justice.gov/archives/dag/file/769036/download    [9]   U.S. Dep’t of Justice, Justice Manual §§ Section 4-4.111 (Granston), 4-4.112 (Yates), Title 1-20.000 et seq. (Brand)    [10]   Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Departments of Justice and Housing and Urban Development Sign Interagency Memorandum on the Application of the False Claims Act (Oct. 28, 2019), https://www.justice.gov/opa/pr/departments-justice-and-housing-and-urban-development-sign-interagency-memorandum-application    [11]   U.S. Dep’t of Housing and Urban Development, Office of Lender Activities & Program Compliance, Loan Review System (LRS): Implementation and Process Changes (Jan. 26, 2017), https://www.hud.gov/sites/documents/LRS_LENDER_PROCESS.PDF, at 24 (Tier 1: Fraud/Misrepresentation; Violations of statutory requirements; Significant eligibility or insurability issues; Inability to determine/support loan approval).

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The following Gibson Dunn lawyers assisted in preparing this client update: Stuart Delery, Jonathan Phillips, James Zelenay, and Sean Twomey. Gibson Dunn’s lawyers have handled hundreds of FCA investigations and have a long track record of litigation success. Our lawyers are available to assist in addressing any questions you may have regarding the above developments. For more information, please feel free to contact the Gibson Dunn lawyer with whom you work, the authors, or any of the following members of the False Claims Act group.

Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Geoffrey M. Sigler (+1 202-887-3752, gsigler@gibsondunn.com)

New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) James L. Zelenay Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Deborah L. Stein (+1 213-229-7164, dstein@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)
Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

The False Claims Act (FCA) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. The U.S. Department of Justice has recently issued statements and guidance indicating some new thinking about its approach to FCA cases that may signal a meaningful shift in its enforcement efforts. But at the same time, newly filed FCA cases remain at historical peak levels and the DOJ has enjoyed eight straight years of nearly $3 billion or more in annual FCA recoveries. As much as ever, any company that deals in government funds—especially in the health care and life sciences sector—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves. Please join us to discuss developments in the FCA, including:

• The latest trends in FCA enforcement actions and associated litigation affecting drug and device companies;
• Updates on the Trump Administration’s approach to FCA enforcement, including developments with the Yates Memo, guidance on cooperation credit in FCA cases, and DOJ’s use of its statutory dismissal authority;
• Notable legislative and administrative developments affecting the FCA’s statutory framework and application; and
• The latest developments in FCA case law, including recent Supreme Court jurisprudence and the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision.

View Slides (PDF)

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PANELISTS: Stuart F. Delery is a partner in the Washington, D.C. office. He represents corporations and individuals in high-stakes litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement. Previously, as the Acting Associate Attorney General of the United States (the third-ranking position at the Department of Justice) and as Assistant Attorney General for the Civil Division, he supervised the DOJ's enforcement efforts under the FCA, FIRREA and the Food, Drug and Cosmetic Act. Marian J. Lee is a partner in the Washington, D.C. office where she provides FDA regulatory and compliance counseling to life science and health care companies. She has significant experience advising clients on FDA regulatory strategy, risk management, and enforcement actions. John D. W. Partridge is a partner in the Denver office where he focuses on white collar defense, internal investigations, regulatory inquiries, corporate compliance programs, and complex commercial litigation. He has particular experience with the False Claims Act and the Foreign Corrupt Practices Act ("FCPA"), including advising major corporations regarding their compliance programs. Jonathan M. Phillips is a partner in the Washington, D.C. office, where his practice focuses on FDA and health care compliance, enforcement, and litigation, as well as other government enforcement matters and related litigation. He has substantial experience representing pharmaceutical and medical device clients in investigations by the DOJ, FDA, and HHS OIG. Previously, he served as a Trial Attorney in DOJ's Civil Division, Fraud Section, where he investigated and prosecuted allegations of fraud under the FCA and related statutes.

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MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

The False Claims Act (FCA) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. The U.S. Department of Justice has recently issued statements and guidance indicating some new thinking about its approach to FCA cases that may signal a meaningful shift in its enforcement efforts. But at the same time, newly filed FCA cases remain at historical peak levels and the DOJ has enjoyed eight straight years of nearly $3 billion or more in annual FCA recoveries. As much as ever, any company that deals in government funds—especially in the government contracting sector—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves.

Please join us to discuss developments in the FCA, including:

• The latest trends in FCA enforcement actions and associated litigation affecting government contractors;
• Updates on the Trump Administration’s approach to FCA enforcement, including developments with the Yates Memo, guidance on cooperation credit in FCA cases, and DOJ’s use of its statutory dismissal authority;
• Notable legislative and administrative developments affecting the FCA’s statutory framework and application; and
• The latest developments in FCA case law, including recent Supreme Court jurisprudence and the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision.

View Slides (PDF)

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PANELISTS: John W.F. Chesley is a partner in the Washington, D.C. office. He represents corporations, audit committees, and executives in internal investigations and before government agencies in matters involving the FCPA, procurement fraud, environmental crimes, securities violations, antitrust violations, and whistleblower claims. He also litigates government contracts disputes in federal courts and administrative tribunals. Jonathan M. Phillips is a partner in the Washington, D.C. office where he focuses on compliance, enforcement, and litigation involving government contractors, as well as other white collar enforcement matters and related litigation. A former Trial Attorney in DOJ’s Civil Fraud section, he has particular experience representing clients in enforcement actions by the DOJ and Department of Defense brought under the False Claims Act and related statutes. Erin N. Rankin is an associate in the Washington, D.C. office and a member of the firm’s Litigation Department. She represents clients on government contracts matters relating to contract claims, bid protests, suspension and debarment proceedings, voluntary disclosures and government investigations, and she is well-versed in conducting internal investigations and defending against civil False Claims Act allegations brought by qui tam relators. She has substantial litigation experience representing clients before the U.S. Court of Federal Claims, the Armed Services Board of Contract Appeals, and the U.S. Government Accountability Office. James Zelenay is a partner in the Los Angeles office where he practices in the firm's Litigation Department. He is experienced in defending clients involved in white collar investigations, assisting clients in responding to government subpoenas, and in government civil fraud litigation. He also has substantial experience with the federal and state False Claims Acts and whistleblower litigation, in which he has represented a breadth of industries and clients, and has written extensively on the False Claims Act.

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MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

The False Claims Act (FCA) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. The U.S. Department of Justice has recently issued statements and guidance indicating some new thinking about its approach to FCA cases that may signal a meaningful shift in its enforcement efforts. But at the same time, newly filed FCA cases remain at historical peak levels and the DOJ has enjoyed eight straight years of nearly $3 billion or more in annual FCA recoveries. As much as ever, any company that deals in government funds—especially in the financial services sector—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves.

Please join us to discuss developments in the FCA, including:

• The latest trends in FCA enforcement actions and associated litigation affecting the financial services sector;
• Updates on the Trump Administration’s approach to FCA enforcement, including developments with the Yates Memo, guidance on cooperation credit in FCA cases, and DOJ’s use of its statutory dismissal authority;
• Notable legislative and administrative developments affecting the FCA’s statutory framework and application; and
• The latest developments in FCA case law, including recent Supreme Court jurisprudence and the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision.

View Slides (PDF)

---

---

PANELISTS: Stuart F. Delery is a partner in the Washington, D.C. office. He represents corporations and individuals in high-stakes litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement. Previously, as the Acting Associate Attorney General of the United States (the third-ranking position at the Department of Justice) and as Assistant Attorney General for the Civil Division, he supervised the DOJ's enforcement efforts under the FCA, FIRREA and the Food, Drug and Cosmetic Act. Sean S. Twomey is a senior litigation associate in the Los Angeles office with experience in complex commercial cases at both the trial and appellate level, with an emphasis in sports law and health care compliance, enforcement, and litigation. He is experienced in handling white collar investigations, internal audits, and enforcement actions, and also has significant experience in False Claims Act qui tam litigation and related civil and criminal investigations in which he has represented clients in a variety of industries. F. Joseph Warin is a partner in the Washington, D.C. office, chair of the office’s Litigation Department, and co-chair of the firm's White Collar Defense and Investigations practice group. His practice focuses on complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation. James Zelenay is a partner in the Los Angeles office where he practices in the firm's Litigation Department. He is experienced in defending clients involved in white collar investigations, assisting clients in responding to government subpoenas, and in government civil fraud litigation. He also has substantial experience with the federal and state False Claims Acts and whistleblower litigation, in which he has represented a breadth of industries and clients, and has written extensively on the False Claims Act.

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MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

Los Angeles partner James L. Zelenay Jr. and associate attorney Sean S. Twomey are the authors of “Mid-Year Review: False Claims Act Enforcement in 2019” [PDF] published by the Daily Journal on August 1, 2019.

Click for PDF As we progress through the Trump Administration’s third year, robust False Claims Act (“FCA”) enforcement continues. At the same time, the Administration has continued to signal a greater openness to tempering overly aggressive FCA theories. In the past six months, the Department of Justice (“DOJ”) issued long-awaited guidance about cooperation credit in FCA cases and also continued to seek dismissal of some declined cases pursued by whistleblowers (albeit with mixed success). Aside from these efforts, however, DOJ has not evidently relaxed its approach to enforcement: the first half of the year saw DOJ announce recoveries of nearly three-quarters of a billion dollars in settlements, largely from entities in the health care and life sciences industries. The next year should provide insight as to whether the Administration’s policy refinements are the vanguard of a more meaningful shift by DOJ away from its historical enforcement efforts. But even if that were the case, enterprising relators and aggressive state enforcers may end up filling any gaps. In just the past half year, several states took steps to enact or strengthen existing FCA statutes. Regardless of what direction DOJ and the Trump Administration head, federal courts’ FCA decisions from the last six months serve as a reminder that FCA litigation remains hard-fought, given the enormous stakes. At the highest level, the U.S. Supreme Court weighed in on the FCA again this year, resolving a circuit split about the FCA’s statute of limitation in favor of whistleblowers. This marked the third time in four years the land’s highest court interpreted the FCA. Meanwhile, lower courts also remained active in FCA jurisprudence, issuing a number of notable opinions that we have summarized herein. Below, we begin by addressing enforcement activity at the federal and state levels, turn to legislative developments, and then analyze significant court decisions from the past six months. As always, Gibson Dunn’s recent publications regarding the FCA may be found on our website, including in-depth discussions of the FCA’s framework and operation, industry-specific presentations, and practical guidance to help companies avoid or limit liability under the FCA. And, of course, we would be happy to discuss these developments—and their implications for your business—with you.

I.  NOTEWORTHY DOJ ENFORCEMENT ACTIVITY DURING THE FIRST HALF OF 2019

DOJ has announced more than $750 million in settlements this year, a slight uptick from this point in 2018, but somewhat down from half-year highs set in recent years. The dollar totals tell only part of the story, however, as neither DOJ nor qui tam relators have scaled back FCA investigations or whistleblower complaints considerably. As in recent years, DOJ secured the lion’s share of its FCA recoveries from enforcement actions involving health care and life sciences entities. Although DOJ’s recoveries came from cases reflecting a wide variety of theories of FCA liability, cases involving alleged violations of the Anti-Kickback Statute (“AKS”) and the Stark Law, which generally prohibit various types of remunerative arrangements with referring health care providers, continued to predominate. This year, DOJ’s AKS enforcement activity includes several large recoveries, totaling nearly $250 million, from pharmaceutical companies accused of unlawfully covering Medicare copays for their own products through charitable foundations. Further, DOJ backed up its statements regarding its plans to combat the opioid epidemic as it recovered more than $200 million from an opioid manufacturer accused of paying kickbacks. Below, we summarize these and some of the other most notable settlements thus far in 2019.

A.  Health Care and Life Science Industries

• On January 28, a hospital and six of its owners agreed to pay the federal government $8.1 million to settle claims that it violated the FCA by submitting false claims to Medicare and Medicaid programs in violation of the AKS and Stark Law. DOJ alleged that the hospital, its subsidiary, and at least two affiliates recruited a medical director in order to secure his referrals of patients by offering the physician compensation that exceeded fair market value for his services. The whistleblower will receive $1.6 million from the federal government.[1]

• On January 30, a pathology laboratory agreed to pay $63.5 million to settle allegations that it violated the FCA by engaging in improper financial relationships with referring physicians. The settlement resolves allegations that the company violated the AKS and the Stark Law by providing subsidies to referring physicians for electronic health records (“EHR”) systems and free or discounted technology consulting services. The allegations stem from three whistleblower lawsuits, and the whistleblowers’ share of the settlement had not been determined at the time the settlement was announced.[2]

• On February 6, a Florida-based developer of EHR software agreed to pay $57.25 million to resolve allegations that it caused its users to submit false claims to the government by (1) misrepresenting the capabilities of its EHR product (thereby enabling them to seek meaningful use incentive payments) and (2) violating the AKS (by financially incentivizing its client health care providers to recommend its product to prospective customers).[3]

• On February 6, a Georgia-based hospital agreed to pay $5 million to resolve allegations that it violated the FCA by engaging in improper financial relationships with referring physicians between 2012 and 2016. DOJ alleged that the hospital compensated the physicians in amounts that were above fair market value or in a manner that took into account the volume or value of the physicians’ referrals.[4]

• On February 27, a Tennessee-based health care company and its related companies agreed to pay more than $18 million to resolve a lawsuit brought by DOJ and Tennessee alleging they billed the Medicare and Medicaid programs for substandard nursing home services. The settlement also resolves claims brought by DOJ against the company’s majority owners and CEO, as well as the LLC’s former director of operations, who agreed to pay $250,000 toward the settlement.[5]

• On March 11, a medical technology company agreed to pay more than $17.4 million to resolve allegations that it violated the FCA by providing free or discounted practice development and market development support, allegedly amounting to “in-kind” payments to induce physicians in California and Florida to purchase the company’s ablation products. Under the settlement, the company also will pay approximately $1.4 million to California and approximately $1.0 million to Florida for claims paid for by the states’ Medicaid programs. The two whistleblowers, former company employees, will receive approximately $3.1 million as their share of the federal recovery.[6]

• On March 21, a Maryland-based health care company and its affiliates agreed to pay $35 million to settle allegations under the FCA that it paid kickbacks to a Maryland cardiology group in exchange for referrals, through a series of contracts with two Maryland hospitals. The settlement resolved two whistleblower lawsuits brought by cardiac surgeons and former patients, who alleged that the company and its affiliates performed medically unnecessary cardiac procedures for which they submitted false claims to Medicare. The whistleblowers’ share had not been disclosed yet.[7]

• In April, several pharmaceutical companies reached settlements with DOJ over allegations involving charitable funds. For example:
  • As part of a string of investigations by the U.S. Attorney’s Office for the District of Massachusetts, three pharmaceutical companies agreed to pay a total of $122.6 million to resolve allegations that they violated the FCA by illegally paying the Medicare or Civilian Health and Medical Program copays for their own products through purportedly independent foundations that were allegedly used as mere conduits. The government contended that the companies’ payments of the copays were kickbacks aimed at inducing patients to use the companies’ drugs. In all three matters, the government alleged that the foundations were used to generate revenues from prescriptions for patients who would have otherwise been eligible for the companies’ free drug programs. One company agreed to pay $57 million; the second company agreed to pay $52.6 million, and the third company agreed to pay $13 million.[8]
  • On April 30, a Kentucky-based pharmaceutical company agreed to pay $17.5 million to resolve allegations that it violated the FCA and AKS by paying kickbacks to patients and physicians to induce prescriptions of two of its drugs. DOJ alleged that the company increased the drugs’ prices in January 2012, which increased Medicare patients’ copays. Then, DOJ asserted, the company paid these patients’ copays through a third-party Parkinson’s Disease fund, thereby providing illegal inducements to patients to purchase the drugs. The allegations underlying the settlement were originally raised by whistleblowers, who will receive $3.15 million as their share of the recovery.[9]
• On April 12, a California-based health care services provider and several affiliated entities agreed to pay $30 million to resolve allegations that the affiliated entities submitted false information about the health status of beneficiaries enrolled in Medicare Advantage plans, which purportedly resulted in overpayments to the provider.[10]

• On May 6, a West Virginia-based health care company agreed to pay $17 million to resolve allegations of a billing scheme that allegedly defrauded Medicaid of $8.5 million. This represented the largest health care fraud settlement in the history of West Virginia, and the state will collect $2.2 million from the settlement. DOJ alleged that the company, acting through a subsidiary and several of its drug treatment centers, sent blood and urine samples to outside laboratories for testing, and then submitted reimbursement claims to West Virginia Medicaid as if the treatment centers had performed the tests themselves. According to the government, since the company paid the outside laboratories a lower rate than its requested reimbursement to Medicaid, the company wrongfully collected $8.5 million.[11]

• On May 30, a Kansas-based cardiologist agreed to pay $5.8 million to resolve allegations that he and his medical group violated the FCA by improperly billing federal health care programs for medically unnecessary cardiac stent procedures. This marked the DOJ’s third False Claims settlement with the cardiologist and his medical group, who concurrently agreed with U.S. Department of Health and Human Services (“HHS”) to be excluded from participation in federal health programs for three years. The settlement announcement resolves allegations in a whistleblower lawsuit filed by another cardiologist, who will receive approximately $1.16 million from the settlement.[12]

• On May 31, a New Jersey-based pharmaceutical company was charged under the Sherman Act for conspiring with competitors to fix prices, rig bids, and allocate customers. In a separate civil resolution, the company agreed to pay $7.1 million to resolve allegations under the FCA related to the alleged price fixing conspiracy. DOJ asserted that between 2012 and 2015, the company paid and received remuneration through arrangements on price, supply, and allocation of customers with other pharmaceutical manufacturers for certain generic drugs, in violation of the AKS, and that its sale of such drugs resulted in claims submitted to or purchases by federal health care programs.[13]

• On June 5, an opioid manufacturing company agreed to a $225 million global resolution to settle the government’s criminal and civil investigations. DOJ alleged that the company paid kickbacks and engaged in other unlawful marketing practices to induce physicians and nurse practitioners to prescribe its opioid to patients. As part of the criminal resolution, the company entered into a deferred prosecution agreement with the government, and its subsidiary pleaded guilty to five counts of mail fraud. The company also agreed to pay a $2 million criminal fine and a $28 million forfeiture. As part of the civil resolution, the company agreed to pay $195 million. The allegations stem from five whistleblower lawsuits, and the whistleblowers’ share of the settlement has yet to be determined.[14]

• On June 30, the nation’s largest operator of inpatient rehabilitation centers agreed to pay $48 million to resolve allegations that its centers provided medically unnecessary treatment, and also submitted false information to Medicare to achieve higher levels of reimbursement. The settlement involved allegations across multiple facilities and was part of DOJ’s broader efforts to target inpatient treatment facilities nationally.

B.  Government Contracting

• On January 28, a corporation that provides information and technology services agreed to pay $5.2 million to resolve allegations that it violated the FCA by falsely billing labor under its contract with the United States Postal Service (“USPS”). Under the contract, the company would bill the USPS for personnel performing services at rates established by certain billing categories. DOJ alleged that the corporation knowingly billed the USPS for certain personnel services at higher category rates, even though the personnel did not have the education and/or experience to be in these categories.[15]

• On March 25, a private university in North Carolina agreed to pay the government $112.5 million to resolve allegations that it violated the FCA by submitting applications and progress reports that contained purportedly falsified research on federal grants to the National Institutes of Health (“NIH”) and to the Environmental Protection Agency. Among other allegations, DOJ asserted that the university fabricated research results related to mice to claim millions of grant dollars from the NIH. The allegations stem from a whistleblower lawsuit brought by a former university employee, who will receive $33.75 million from the settlement.[16]

• On May 13, a California-based software development company agreed to pay $21.57 million to resolve allegations that it caused the government to be overcharged by providing misleading information about its commercial sales practices, which was then used in General Services Administration (“GSA”) contract negotiations. DOJ alleged that the company knowingly provided false information concerning its commercial discounting practices for its products and services to resellers. These resellers then allegedly used that information in negotiations with GSA for government-wide contracts. DOJ alleged this caused GSA to agree to less favorable pricing, which led the government purchasers to be overcharged. The allegations stemmed from a whistleblower lawsuit filed by a former company employee, who will receive over $4.3 million from the resolution.[17]

II.  LEGISLATIVE AND POLICY DEVELOPMENTS

A.  Federal Developments

1.  Guidance Regarding Cooperation Credit

The first half of 2019 did not witness major legislative developments at the federal level pertaining to the FCA. But DOJ has advanced its recent efforts to more publicly and transparently articulate its approach to FCA cases, as evidenced by the May 2019 release of long-awaited guidance regarding cooperation credit in FCA investigations.[18] We covered this development in detail in our May 14, 2019 alert entitled “Cooperation Credit in False Claims Act Cases: Opportunities and Limitations in DOJ’s New Guidance.” Several key points regarding the guidance bear mention here. The guidance is the latest chapter in a broader effort by DOJ to scale back the “all or nothing” approach to cooperation credit set forth in the 2015 Yates Memorandum. This initiative stems from a belief that that approach, in the words of former Deputy Attorney General Rod J. Rosenstein, had been “counterproductive in civil cases” because it deprived DOJ attorneys of the “flexibility” they needed “to accept settlements that remedy the harm and deter future violations.”[19] In keeping with Mr. Rosenstein’s statements, the new DOJ guidance—codified at Section 4-4.112 of the Justice Manual[20]—provides that defendants may receive varying levels of cooperation credit depending on their efforts across ten non-exhaustive categories of cooperation.[21] These include:

• “[i]dentifying individuals substantially involved in or responsible for the misconduct”;
• making individuals available who have “relevant information”;
• “[a]dmitting liability or accepting responsibility for the relevant conduct”; and
• “[a]ssisting in the determination or recovery” of losses.[22]

The guidance also notes that cooperation must have value for DOJ, as measured by the “timeliness and voluntariness” of the cooperation, the “truthfulness, completeness, and reliability” of the information provided, the “nature and extent” of the cooperation, and the “significance and usefulness of the cooperation” to DOJ. Under the guidance, DOJ’s determination of cooperation credit will consider remediation undertaken by the defendant, including remediation focused on root causes and discipline of relevant individuals.[23] The guidance states that to receive full credit, entities should “undertake a timely self-disclosure that includes identifying all individuals substantially involved in or responsible for the misconduct, provide full cooperation with the government’s investigation, and take remedial steps designed to prevent and detect similar wrongdoing in the future.”[24] Unlike DOJ’s guidance regarding cooperation in criminal cases, the new FCA guidance does not provide for percentage reductions in penalties (or damages) for various levels of cooperation. Instead, the guidance focuses on DOJ’s “discretion . . . [to] reduc[e] the penalties or damages multiple sought by the Department,” and provides that no defendant may receive cooperation credit so great as to result in the payment of an amount less than single damages (including relator’s share, plus lost interest and costs of investigation).[25] The new guidance provides a measure of clarity regarding DOJ’s overall approach to cooperation credit, and the flexible standards the guidance sets forth provide opportunities for defendants to formulate creative negotiation and litigation strategies. On the other hand, the guidance lacks specificity regarding several critical issues (e.g., what constitutes cooperation and how to assess the value that cooperation provides to DOJ).

2.  Application of the Granston Memorandum

As we have previously discussed, DOJ signaled last year that it will increasingly consider moving to dismiss some FCA qui tam actions. Specifically, in January 2018, Michael Granston, the Director of the Fraud Section of DOJ’s Civil Division, issued a memorandum (the “Granston Memo”) stating that “when evaluating a recommendation to decline intervention in a qui tam action, attorneys should also consider whether the government’s interests are served, in addition, by seeking dismissal pursuant to section 3730(c)(2)(A).”[26] The Granston Memo established a list of non-exhaustive factors for DOJ to evaluate when considering whether to dismiss a case under section 3730(c)(2)(A), which states that the government may dismiss an FCA “action notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.”[27] The Granston Memo’s release prompted cautious optimism among FCA observers that DOJ would step in to dismiss unmeritorious cases, but the Memo also left many open questions regarding exactly how DOJ would exercise its discretion. Since the Memo’s release, FCA defendants routinely have pushed DOJ to dismiss cases, and in some cases, DOJ has done just that. But a little more than a year after the Memo’s release, there are signs that DOJ is continuing to calibrate its approach, in response both to defendants’ insistent entreaties and scrutiny by the courts (which must approve any dismissal). First, the memorandum’s namesake, DOJ Civil Fraud Section Director Michael Granston, recently elaborated on how DOJ will apply the Granston Memo’s principles. In remarks at the Federal Bar Association’s FCA Conference in March, Mr. Granston explained that DOJ will not be persuaded to dismiss qui tam actions “[j]ust because a case may impose substantial discovery obligations on the government.”[28] The decision to seek dismissal, he said, will instead be evaluated on a case-by-case basis, with the cost-benefit analysis focusing on the likelihood that the relator can prove the allegations brought on behalf of the government.[29] Mr. Granston cautioned that defendants “should be on notice that pursuing undue or excessive discovery will not constitute a successful strategy for getting the government to exercise its dismissal authority,” and that “[t]he government has, and will use, other mechanisms for responding to such discovery tactics.”[30] Overall, Mr. Granston stated, “dismissal will remain the exception rather than the rule.”[31] Second, Deputy Associate Attorney General Stephen Cox delivered remarks at the 2019 American Conference Institute’s Advanced Forum on False Claims and Qui Tam Enforcement that explained DOJ’s approach to dismissals.[32] Regarding the Granston Memo, Mr. Cox characterized the relationship between qui tam relators and the government as a “partnership,” formed on the belief that relators “are often uniquely situated to bring fraudulent practices to light.”[33] He emphasized, however, that DOJ plays a “gatekeeping role” in ensuring that when a relator prosecutes a non-intervened FCA case, it does not do so in a way that harms the government’s financial interests or creates bad law for the government.[34] Mr. Cox stated that the Granston Memo “is not really a change in the Department’s historical position,” but he acknowledged that DOJ’s use of its dismissal authority has increased since 2017.[35] Mr. Cox told listeners that while DOJ “will remain judicious,” it “will use this tool more consistently to preserve our resources for cases that are in the United States’ interests.”[36] In more recent remarks, Mr. Cox has added that DOJ’s “more consistent[]” use of its dismissal authority will aim at “reign[ing] in overreach in whistleblower litigation.”[37] With DOJ’s increased use of its statutory dismissal authority has come greater judicial scrutiny of the scope of that authority and the standards to be applied in determining whether dismissal is appropriate. In the wake of the Granston Memo, lower courts have been forced to analyze the standard that courts should apply when the government moves to dismiss qui tam cases. These cases have pitted two competing standards against each other, with mixed results. Previously, in United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139 (9th Cir. 1998), the Ninth Circuit held that the government’s dismissal is first examined for: (1) an identification of a valid government purpose by the government; and (2) a rational relation between the dismissal and accomplishment of the government’s purpose. Id. at 1145. If the government’s dismissal meets the two-step test, the burden shifts to the relator to show that the “dismissal is fraudulent, arbitrary and capricious, or illegal.” Id. (quoting United States ex rel. Sequoia Orange Co. v. Sunland Packing House Co., 912 F. Supp. 1325, 1353 (E.D. Cal. 1995)). The Tenth Circuit adopted the Sequoia standard and also applies the above test. Ridenour v. Kaiser-Hill Co., 397 F.3d 925, 936, 940 (10th Cir. 2005). In contrast, in Swift v. United States, 318 F.3d 250, 253 (D.C. Cir. 2003), the D.C. Circuit rejected the Ninth Circuit’s Sequoia standard, holding that nothing in section 3730(c)(2)(A) “purports to deprive the Executive Branch of its historical prerogative to decide which cases should go forward in the name of the United States.” The court observed that the purpose of the hearing provided for in section 3730(c)(2)(A) “is simply to give the relator a formal opportunity to convince the government not to end the case.” Id. Therefore, the D.C. Circuit held that the government has “an unfettered right to dismiss” FCA actions, and so government dismissals are basically “unreviewable” (with a possible exception for dismissals constituting “fraud on the court”). Id. at 252-53. However, the remainder of the federal circuit courts have not weighed in on the standard for government dismissals of qui tam actions thus far. In the meantime, several district courts have confronted this issue, with some following Sequoia, while others followed Swift. Among the courts following Sequoia were the following:

• In United States v. EMD Serono, Inc., 370 F. Supp. 3d 483 (E.D. Pa. 2019), the U.S. District Court for the Eastern District of Pennsylvania adopted the Ninth Circuit’s Sequoia standard after critiquing the D.C. Circuit’s approach in Swift. The court then held that the government’s dismissal had met the Sequoia standard because the government had “articulated a legitimate interest” when it argued that the “allegations lack merit, and continuing to monitor, investigate, and prosecute the case will be too costly and contrary to the public interest.” at 489. Id. at 489.
• In United States ex rel. CIMZNHCA, LLC v. UCB, Inc., No. 17-CV-765-SMY-MAB, 2019 WL 1598109 (S.D. Ill. Apr. 15, 2019), the U.S. District Court for the Southern District of Illinois adopted the Ninth Circuit’s Sequoia standard and rejected the D.C. Circuit’s approach in Swift. Applying the Sequoia standard, the court found that the government’s “decision to dismiss this action is arbitrary and capricious, and as such, not rationally related to a valid governmental purpose.” Id. at *4. Although the government had identified a valid interest of avoiding litigation costs, the court found the government had failed to conduct the requisite “minimally adequate investigation” because it collectively investigated the eleven claims that the relator’s group filed without specifically investigating the relator’s claim against the defendants in this case. Id. at *3.

Other district courts have been persuaded by Swift’s “unfettered” dismissal standard.

• In United States ex rel. Davis v. Hennepin County, No. 18-CV-01551 (ECT/HB), 2019 WL 608848 (D. Minn. Feb. 13, 2019), the U.S. District Court for the District of Minnesota stated that the Swift standard was more consistent with section 3730(c)(2)(A)’s text and with the Constitution, but did not decide the issue because the government was entitled to dismissal under both the Swift and Sequoia standards. According to the court, the government could dismiss because “the Relators were notified of the motion and received the opportunity for a hearing.” Id. at *7. However, the court then observed that the government would still be entitled to dismissal even under Sequoia. Id. The court credited the government’s rationale of avoiding the cost and burden of a case that would likely result in no recovery, and also noted that the relators had put forth no factual evidence that the government was acting capriciously by ignoring evidence. Id.

• In United States ex rel. Sibley v. Delta Reg’l Med. Ctr., No. 17-CV-000053-GHDRP, 2019 WL 1305069 (N.D. Miss. Mar. 21, 2019), the U.S. District Court for the Northern District of Mississippi indicated its agreement with the Swift standard, but then observed that the government was entitled to dismissal under either standard. There, the government declined to intervene, then moved to dismiss her action, arguing that the action would interfere with the government’s efforts to enforce the Emergency Medical Treatment Act, would use scarce government resources, and that the complaint did not allege any viable claims. Id. at *2-*3. Aligning with Swift, the court explained that the government “possesses the unfettered discretion to dismiss a qui tam [FCA] action” and therefore that the court must grant the government’s motion. Id. at *7. Regardless, the government was entitled to dismissal even under Sequoia, as the government had stated a “valid reason for dismissal” that the relator could not refute. Id. at *8.
• In United States ex rel. De Sessa v. Dallas Cty. Hosp. Dist., No. 3:17-CV-1782-K, 2019 WL 2225072 (N.D. Tex. May 23, 2019), the U.S. District Court for the Northern District of Texas also echoed Swift’s reasoning, while concluding that the government was entitled to dismissal under either standard. In a short decision, the court cited to Swift and granted the government’s motion to dismiss the relator’s FCA fraud claim. Id. at *2. The court then explicitly noted that its holding did not dismiss the relator’s FCA retaliation claim, as that claim was not brought on behalf of the U.S. government. Id.

B.  State Developments

As detailed in our 2018 Mid-Year and Year-End False Claims Act Updates, Congress created financial incentives in 2005 for states to enact their own false claims statutes that are as effective as the federal FCA in facilitating qui tam lawsuits, and that impose penalties at least as high as those imposed by the federal FCA.[38] States passing review by HHS’s Office of Inspector General (“OIG”) may be eligible to “receive a 10-percentage-point increase in [their] share of any amounts recovered under such laws” in actions filed under state FCAs.[39] As of June 2019, HHS OIG has approved laws in twenty states (California, Colorado, Connecticut, Delaware, Georgia, Illinois, Indiana, Iowa, Massachusetts, Montana, Nevada, New York, North Carolina, Oklahoma, Rhode Island, Tennessee, Texas, Vermont, Virginia and Washington), while nine states are still working towards FCA statutes that meet the federal standards (Florida, Hawaii, Louisiana, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, and Wisconsin).[40] Five approvals have occurred in 2019 to date (California, Delaware, Georgia, New York, and Rhode Island).[41] While HHS OIG did not publicly state the reasons for these approvals, they likely stemmed at least in part from the fact that all five states recently amended their false claims statutes to peg their civil penalties to those imposed by the federal FCA, including as adjusted for inflation under the Federal Civil Penalties Inflation Adjustment Act of 1990.[42] Some states have continued to consider (or implement) revisions to their false claims acts after federal approval. Most notably, in May 2019, the California Assembly passed Assembly Bill No. 1270, which would amend the California False Claims Act’s definition of materiality, for purposes of the “false record or statement” prong of the statute, to consider only “the potential effect of the false record or statement when it is made, not . . . the actual effect of the false record or statement when it is discovered.”[43] This change could mark a significant pro-plaintiff limiting of the concept of materiality in the wake of Escobar, which held that materiality is a matter of the “effect on the likely or actual behavior of the recipient of an alleged misrepresentation.”[44] The California bill also would expand the state false claims act to apply to certain claims, records, or statements made under the California Revenue and Taxation Code. Specifically, the bill extends the California false claims act to tax-related cases where the damages pleaded exceed $200,000, and where the state-taxable income or sales of any person or corporation against whom the action is brought exceeds $500,000.[45] The new law would require the state Attorney General or prosecuting authority, prior to filing or intervening in any false claims act case related to taxes, to consult with the relevant tax authority.[46] Under the bill, the state Attorney General or prosecuting authority, but not a qui tam relator, would be authorized to obtain from state government agencies otherwise confidential records relating to taxes, fees, or other obligations under California’s Revenue and Taxation Code.[47] The amendment would prohibit the state government authorities from disclosing federal taxation information to the state Attorney General or prosecuting authority without IRS authorization. The amendment would also prohibit disclosure by the state Attorney General or prosecuting authority of any taxation information it does receive, “except as necessary to investigate and prosecute suspected violations” of the California false claims act.[48] The bill is currently being considered by committees in the California Senate.[49] Other states lack false claims statutes and have moved in fits and starts towards enacting them. For example, as of June 2019, a bill to enact the South Carolina False Claims Act remained pending in the state’s legislature after being referred to the state senate’s judiciary committee in January.[50] The bill is nearly identical to the last false claims act bill introduced in South Carolina’s Senate, which died in that body’s judiciary committee after being referred in January 2015.[51] Other states that lack broad false claims acts have nonetheless moved incrementally towards endowing themselves with robust enforcement powers. West Virginia, for example, lacks a false claims statute broadly defined, but does prohibit Medicaid fraud through a statute that in some ways resembles the FCA.[52] Until early 2019, the state’s Medicaid Fraud Control Unit (“MFCU”), which holds the power to investigate possible violations of the statute, sat within the state department of health and human services. However, a bill was passed on March 7, 2019, which will relocate the MFCU to the Office of the Attorney General.[53] Once effective on October 1, 2019, the new law will give primary prosecution authority to the Office of the Attorney General; only if that office declines prosecution will attorneys employed or contracted by the state department of health and human services have authority to take the case forward.[54] This consolidation of power in the Office of the Attorney General could be the first step in a push for enactment of broader false claims enforcement powers.

III.  NOTABLE CASE LAW DEVELOPMENTS

With a U.S. Supreme Court decision, more than a dozen notable circuit court decisions, and a handful of important district court decisions too, the first half of 2019 was an active period on the case law front (as detailed below).

A.  U.S. Supreme Court Extends the Statute of Limitations in Cases Where the Government Does Not Intervene

The FCA provides two different limitations periods for “civil action[s] under section 3730”—(1) six years after the statutory violation occurs, or (2) three years “after the United States official charged with the responsibility to act knew or should have known the relevant facts, but not more than [ten] years after the violation.” 31 U.S.C. § 3731(b). Whichever period is longer applies. In Cochise Consultancy, Inc. v. United States ex rel. Hunt, 139 S. Ct. 1507 (2019), the Supreme Court resolved a circuit split regarding the FCA’s statute of limitations for qui tam actions pursued only by a whistleblower, without government participation. Specifically, the question that had split the circuit courts is whether a relator—pursuing a case where the government has declined to intervene—can take advantage of the longer statute of limitations period of up to ten years. In Cochise, the relator conceded that more than six years had elapsed before he filed his suit from when the alleged FCA violations occurred. Id. at 1511. However, the relator argued that fewer than three years had elapsed between when the relator had revealed the alleged FCA violations to federal agents and when the relator filed his suit. Id. Thus, the relator argued that he should be able to take advantage of the longer statute of limitations period, triggered from when he had disclosed his allegations to the government. Id. The district court initially dismissed the suit, holding that section 3731(b)(2)’s three-year period does not apply to relator-initiated suits in which the government declines to intervene. Id. But the Eleventh Circuit reversed, and held that the longer period could apply to relator-initiated suits in which the government declines to intervene. Id. The Supreme Court, looking to resolve a circuit split, unanimously affirmed the Eleventh Circuit’s ruling. Id. at 1510. The Court reasoned that, because section 3731(b)’s two statute of limitations periods apply to “civil action[s] under section 3730” and because both government and relator-initiated FCA suits constitute “civil action[s] under section 3730,” the statute’s plain text made both of the limitations periods applicable to both types of suits. Id. at 1511-12 (quoting section 3731(b)). The Court also held that private relators in non-intervened suits do not constitute “the official of the United States charged with responsibility to act in the circumstances” under section 3731(b)(2). Id. at 1514. In other words, section 3731(b)(2)’s three-year period does not begin when a private relator who initiates the suit knows or should have known about the fraud. Id. Thus, because section 3731(b)(2)’s three-year period is available in relator-initiated non-intervened suits and because the private relator’s learning of the facts does not begin this three-year period, dismissal of the relator’s suit was not warranted on statute-of-limitations grounds. Id.

B.  Courts Continue to Interpret the FCA’s Materiality Requirement Post-Escobar

As we have previously discussed, courts continue to wrestle with the implications of the Supreme Court’s decision in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the landmark decision that addressed the implied certification theory of liability, and in the process gave renewed emphasis to the concepts of materiality and government knowledge under the FCA.

1.  The Fifth Circuit Applies Escobar in Analyzing Materiality

In United States ex rel. Lemon v. Nurses To Go, Inc., 924 F.3d 155 (5th Cir. 2019), the Fifth Circuit, reviewing a district court’s dismissal of claims, engaged in a thorough application of Escobar, articulating three non-exhaustive “factors” for determining materiality. First, the court asked whether the government expressly conditioned payment on meeting the statutory or regulatory requirements at issue. Second, the court considered whether the government would have denied payment if it had known of the violations, a factor which the court referred to as “government enforcement.” And third, the court asked whether the defendant’s noncompliance was substantial or minor. In Lemon, the relators alleged that a hospice provider submitted claims affirming it had complied with various Medicare statutory and regulatory requirements, despite allegedly violating several requirements related to certifications, face-to-face physician patient encounters, and writing plans of care. Id. at 157. They also alleged that the hospital billed for ineligible services and patients, such as billing for already deceased patients. Id. at 157-58. Applying each of its articulated Escobar factors in turn, the Fifth Circuit began by addressing conditions of payment. The court acknowledged that Escobar held that violating a requirement which is labeled a condition of payment does not alone “conclusively establish materiality.” Id. at 161. Nevertheless, conditioning payment on a requirement is “certainly probative evidence of materiality.” Id. (quoting United States ex rel. Rose v. Stephens Institute, 909 F.3d 1012, 1020 (9th Cir. 2018)). Because the Medicare statute expressly noted that payment can only be made if the certification, face-to-face encounter, and plan-of-care requirements that the defendants allegedly violated were met, the court held that the defendants’ allegedly fraudulent certifications that they had complied with the statutory and regulatory requirements violated the government’s express conditions of payment. Id. Second, the court turned to government enforcement. Id. at 161-62. Here, the relators alleged in their complaint that HHS OIG had previously pursued enforcement actions against other hospice providers that had committed violations similar to the defendants’ alleged violations—namely submitting bills for ineligible services and patients and failing to conduct the required certifications. Id. at 162. Because of these past enforcement actions, the Court held that the relators here had created a reasonable inference that the government would have denied payment had it known of the defendants’ violations. Id. The Court found additional support for this conclusion in the Sixth Circuit’s holding in United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 892 F.3d 822 (6th Cir. 2018) (previously discussed here and here). There, the Sixth Circuit concluded that Escobar does not require relators to allege specific previous government prosecutions for claims similar to the relator’s. Id. Third, the Fifth Circuit analyzed whether the noncompliance was substantial or minor. Id. at 163. Citing Escobar, the court noted that a violation is material either when a reasonable person would “attach importance” to the noncompliance or when the defendant knew or had reason to know that the false representation’s recipient would attach importance to it, even though a reasonable person would not. Id. Because the court had determined in its government enforcement analysis that the government would have denied payment had it known of the defendants’ violations, the court therefore held that government would have attached importance to the violations. Id. Thus, the relators had also satisfied the third factor, showing that the noncompliance was substantial. Id. Given that all three factors were satisfied, the court held that the relators had sufficiently alleged material violations to survive the motion to dismiss. Id.

2.  The Third Circuit Analyzes Post-Escobar Materiality Standards on Summary Judgment

In United States ex rel. Doe v. Heart Solutions, PC, 923 F.3d 308 (3d Cir. 2019), the Third Circuit explored materiality and causation in light of Escobar. There, the government filed an FCA claim alleging that the defendants, an individual and her health care company, had violated Medicare regulations requiring all diagnostic testing to be performed under the proper level of physician supervision. Id. at 311. Specifically, the government alleged that the defendants had falsely represented that a licensed neurologist performed all their company’s neurological testing as required by regulation, when their testing allegedly was not supervised by a neurologist in reality. Id. Applying Escobar to the government’s motion for summary judgment, the Third Circuit found that the government met its initial summary judgment burden to show materiality by submitting evidence that Medicare would not have paid the testing claims without a supervising neurologist’s certification, per regulation. Id. 318. When the defendants failed to introduce any evidence to rebut this, the court held that the government had met its materiality burden. Id. Notably, the court also held that by establishing materiality, the government also had adequately demonstrated causation. Id. According to the court, “because these misrepresentations were material, they caused damage to Medicare,” and therefore “but for the misrepresentations, Medicare would never have paid the claims.” Id. This ruling, which appears to conflate the separate elements of causation and materiality by hinging causation entirely on materiality, will be one to watch in future decisions.

C.  Courts Continue to Analyze Rule 9(b)’s Particularity Requirement in FCA Claims

In last year’s year-end update, we noted that the circuit courts continue to struggle with how to apply Rule 9(b)’s particularity requirement in FCA cases. Rule 9(b) heightens the pleading standard required in fraud claims, stating that a party alleging fraud “must state with particularity the circumstances constituting fraud or mistake.” This year, several circuits further analyzed Rule 9(b)’s application to FCA cases.

1.  The Ninth Circuit Discusses the Relationship between Rule 9(b)’s Particularity Standard and the FCA’s Materiality Requirement

In United States ex rel. Mateski v. Raytheon Co., 745 F. App’x 49 (9th Cir. 2018), cert. denied sub nom. Mateski v. Raytheon Co., No. 18-1312, 2019 WL 1643040 (U.S. May 13, 2019), the Ninth Circuit elaborated on Rule 9(b)’s particularity standard and, in particular, the effect of a lack of particularity on meeting the materiality requirement. In Mateski, the relator filed a qui tam action against his employer, a defense contractor, alleging that it falsely claimed compliance with contract requirements for a satellite system sensor. Id. at *50. The case had been to the Ninth Circuit once before, under the public disclosure bar, at which point the Ninth Circuit reversed the district court’s dismissal of the complaint. Id. This time, however, the Ninth Circuit affirmed dismissal of the case. Id. First, the court held that the complaint failed to meet Rule 9(b)’s particularity requirement with regard “to the ‘what,’ ‘when,’ and ‘how’ of the allegedly false claims.” Id. For example, the relator alleged the defendant failed to comply with its contractual requirements to complete tests and retests on component parts, but never specified which parts, which tests, whether the tests were never done or whether they were instead done incompletely, as well as failing to name approximate dates of these tests. Id. Without these details, the court held that the defendant did not have enough information to defend against the claims, and so the complaint failed to meet Rule 9(b)’s particularity requirement. Id. The Ninth Circuit also concluded that because of this lack of particularity regarding the false claims, the complaint also inadequately pleaded the materiality requirement. Id. Noting that the materiality requirement is a “demanding” standard pursuant to Escobar, the court found itself unable to assess whether the noncompliance was material or minor because of the lack of particularity regarding the false claims. Id.

2.  The Eighth Circuit Provides Further Guidance on Rule 9(b)’s Particularity Requirement

In United States ex rel. Strubbe v. Crawford County Memorial Hospital, 915 F.3d 1158 (8th Cir. 2019), the Eighth Circuit elaborated on its prior holding in United States ex rel. Thayer v. Planned Parenthood of the Heartland, 765 F.3d 914, 918 (8th Cir. 2014), in which the court concluded that relators in FCA cases can meet Rule 9(b)’s particularity requirement either by: (1) pleading representative examples of false claims; or (2) pleading the “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” Strubbe, 915 F.3d at 1163 (quoting Thayer, 765 F.3d at 918). In Strubbe, the relators, emergency medical technicians and paramedics, filed an FCA qui tam action against a hospital, alleging that it submitted false claims for Medicare reimbursement, made false statements to get false claims paid, and conspired to violate the AKS. Id. at 1162. The district court dismissed the claims for failure to plead with the required particularity, finding that the complaint did not allege facts showing any false claims were submitted or show how the relators acquired their information. Id. Over a dissent, the Eighth Circuit affirmed, holding that the complaint did not plead the fraud with the particularity required by Rule 9(b). Id. at 1166. First addressing the relator’s allegation that the hospital submitted false claims, the court found that the relators had not met Thayer’s first prong of submitting representative examples of false claims. Id. at 1164. For example, while they had alleged that the hospital made a false claim for an unnecessary treatment, they failed to include the requisite particularity because they did not identify the date of this incident, the provider, any specific information about the patient, what money was obtained, and crucially, whether the hospital actually submitted a claim for this specific patient. Id. Nor had relators met Thayer’s second prong, according to the court. Id. The court held that the complaint lacked sufficient indicia of reliability to create a strong inference that claims were actually submitted, because the complaint did not provide any details about the hospital’s billing practices. Id. at 1164-65. Moreover, the relators did not identify the basis for their allegations regarding billing; this was especially problematic given the relators lack of personal knowledge about the hospital’s billing due to their lack of access to the hospital’s billing department as EMTs and paramedics. Id. at 1165-66. The relators’ second claim that the hospital made false statements failed to meet Rule 9(b)’s particularity requirement for similar reasons as their first—namely, the complaint did not connect the false statements to claims submitted to the government and did not provide the basis on which the relators’ assertions were founded. Id. at 1166. Finally, their third claim, that the hospital conspired to violate the AKS, failed because they did not provide any details about the conspiracy, and so failed to plead with particularity. Id. Therefore, the court affirmed the complaint’s dismissal. Id. at 1170.

3.  Under Rule 9(b), the Fourth Circuit Requires Allegations Regarding a Sub-Contractor’s Billing and Payment Structure

In United States ex rel. Grant v. United Airlines Inc., 912 F.3d 190 (4th Cir. 2018), the Fourth Circuit held that a relator failed to meet Rule 9(b)’s particularity requirement where his complaint alleged a fraudulent scheme without detailing the billing and payment structure. Because of this omission, the court found that relator’s allegations did not foreclose the possibility that the government was never billed or that the alleged fraud was remedied before billing or payment. The case involved allegations by a relator against his former employer, an airline, alleging that the airline violated the FCA by certifying airplane repairs that did not comply with various aviation regulations and contract requirements in the airline’s work as a sub-sub-contractor for the U.S. Air Force. Id. at 194. Specifically, the relator alleged that the defendant: (1) certified uncompleted work as completed; (2) certified repairs performed by uncalibrated and uncertified tools, in violation of the subcontract’s requirements; and (3) allowed inspectors to continue certifying repairs after their training and eye exams had expired. Id. at 194-95. Affirming dismissal of the claims, the Fourth Circuit held that Rule 9(b)’s “stringent” pleading standard requires the complaint to “provide ‘some indicia of reliability’ to support the allegation that an actual false claim was presented to the government.” Id. (quoting United States ex rel. Nathan v. Takeda Pharm. N. Am., Inc., 707 F.3d 451, 457 (4th Cir. 2013)). Relators can meet this standard either by: (1) alleging with particularity that specific false claims were actually submitted to the government or (2) alleging “a pattern of conduct that would ‘necessarily have led[ ] to submission of false claims’ to the government for payment.” Id. (quoting Nathan, 707 F.3d at 457). Over a dissent, the court concluded that the relator had not pleaded specific claims, and also failed to allege a pattern of conduct that would necessarily have led to the submission of false claims, because he had only particularly alleged that the defendant engaged in fraudulent conduct without connecting the fraudulent conduct to the necessary presentment of false claims to the government. Id. The court reasoned that the complaint failed “to allege how, or even whether, the bills for these fraudulent services were presented to the government and how or even whether the government paid [the defendant] for the services.” Id. at 198. Because the complaint alleged only an umbrella payment without describing the billing or payment structure, the court held that the complaint left open the possibility that no payments were ever made. The court held that alleging a link between the false claims and government payment is especially necessary to meet Rule 9(b)’s requirements where, as here, the defendant is several levels removed from the government because it is a sub-sub-contractor. Id. at 199.

D.  Estoppel and the FCA

As DOJ increasingly pursues parallel criminal and civil investigations in cases involving fraud on the government, the interplay between criminal and FCA charges becomes increasingly important. Several decisions during the first half of the year discussed issues relevant to this interplay.

1.  The Third Circuit Finds That a Company Is Not Estopped by an Individual Employee’s Criminal Conviction

In United States ex rel. Doe v. Heart Solution, PC, 923 F.3d 308 (3d Cir. 2019) (discussed previously in relation to materiality), the Third Circuit held that, although an individual defendant was collaterally estopped from denying the falsity and knowledge elements of a civil FCA claim by her criminal conviction and plea colloquy regarding the same conduct, her employer was not. Id. at 316-17. The case involved an individual defendant who was convicted criminally of defrauding Medicare after having admitted at her plea colloquy that Medicare paid her company for diagnostic neurological testing that she falsely represented was supervised by a licensed neurologist. Id. at 312. After her conviction, the government intervened in a civil qui tam FCA case against her and her health care company regarding the same fraudulent neurologist certifications. Id. In granting summary judgment against the defendant company, the district court had relied on the individual defendant’s criminal conviction and plea colloquy. Id. at 313. But the Third Circuit held that the district court erred in finding that the health care company had conceded all of the essential elements of the FCA claim through the individual defendant’s plea. Id. at 316-17. In so holding, the court relied on the fact that collateral estoppel does not apply unless the party against whom the earlier decision is asserted previously had a “full and fair opportunity to litigate that issue.” Id. at 316 (internal quotation marks omitted) (quoting Allen v. McCurry, 449 U.S. 90, 95 (1980)). Here, the defendant company did not have any opportunity, let alone a “full and fair opportunity,” to contest the fraud claim at the individual’s separate criminal proceedings. Heart Sol., 923 F.3d at 317. Additionally, some of the elements of the FCA claim against the company, as opposed to the individual, were neither actually litigated nor determined by a final judgment in the individual’s criminal case, both of which are required for collateral estoppel to apply. Id. at 317.

2.  The Fourth Circuit Holds That Non-Intervened Qui Tam Actions Decided in Favor of the Defendant Do Not Collaterally Estop the Government from Pursuing Criminal Proceedings

In United States v. Whyte, 918 F.3d 339 (4th Cir. 2019), the Fourth Circuit considered whether the government is collaterally estopped from pursuing its own criminal case by a prior qui tam FCA action in which it did not intervene. See id. at 344. There, the defendant, the owner of a company that supplied armored vehicles to multinational forces in Iraq, was indicted for criminal fraud in July 2012. Id. at 342-43. Then, in October 2012, a relator filed a civil FCA suit, in which the government declined to intervene, against the defendant. Id. at 343. The defendant ultimately prevailed at trial in his FCA civil suit, but then, over two years later, a jury convicted the defendant in the criminal case. Id. at 344. The defendant argued that the government was collaterally estopped in its criminal case by the defendant’s victory in the prior qui tam civil case, but the courts were not convinced. The Fourth Circuit affirmed the district court, holding as a matter of first impression that “the Government is not a party to an FCA action in which it has declined to intervene,” and so is not collaterally estopped by a prior FCA action in which it did not intervene. Id. at 345, 350. In so holding, the court first reasoned that collateral estoppel cannot bar a criminal prosecution when the government did not “have a full and fair opportunity to litigate the issue in the prior proceeding.” Id. at 345 (citation and internal quotation marks removed). Whether the government had that opportunity in turn depends on whether the government was a party to that prior proceeding. Id. Citing precedent, the FCA’s language and structure, and the government’s different interests in intervened versus non-intervened cases, the court held that the government is not a party to an FCA action in which it has not intervened. Id. at 345-49. Therefore, the court concluded that “the Government cannot be considered to have been a party with a full and fair opportunity to litigate” in a prior FCA action in which it declined to intervene, and so the government’s criminal prosecution was not collaterally estopped by a prior, nonintervened FCA qui tam action. Id. at 349-50.

E.  The First Circuit Holds That Unsealing an FCA Complaint Begins the Statute of Limitations for Related Claims

As we previously discussed, RICO suits mirroring FCA suits that challenge off-label drug marketing continue to appear. A recent First Circuit case held that the unsealing of an FCA complaint regarding off-label drug marketing begins the running of RICO’s four-year statute of limitations in these kinds of cases. In In re Celexa & Lexapro Marketing & Sales Practices Litigation, 915 F.3d 1 (1st Cir. 2019), the First Circuit addressed the relationship between FCA claims and the statute of limitations for RICO claims (as well as state consumer fraud claims). There, the government intervened in a qui tam FCA claim alleging that the defendant pharmaceutical companies engaged in illegal off-label drug marketing schemes intended to fraudulently induce doctors to prescribe their drugs for off-label uses. Id. at 5-6. The unsealing of the complaint led to more than a dozen consumers and entities that had paid for these drugs filing suit, including the suits in this case, alleging RICO and state consumer fraud violations related to the defendant’s alleged illegal off-label marketing schemes. Id. at 7. The First Circuit held that, as a matter of law, the unsealing of the government’s FCA complaint put the plaintiffs on notice that the defendants allegedly had been promoting off-label uses of their products. Id. at 15. Therefore, the unsealing of the government’s FCA complaint began the running of the four-year statute of limitations on the plaintiffs’ RICO claims related to the off-label marketing schemes alleged in the FCA complaint. Id. at 15-16.

F.  The Ninth Circuit Upholds an FCA Settlement Agreement’s Confidentiality Provisions

For companies involved in negotiations with DOJ about the terms of settlement agreements under the FCA, there was a bit of good news from the Ninth Circuit. In Brunson v. Lambert Firm PLC, 757 F. App’x 563 (9th Cir. 2018), the Ninth Circuit upheld the confidentiality provisions of an FCA settlement agreement, over objection from the relator. See id. at 566. In that case, the relator entered into an FCA settlement agreement with the defendants and the government, but later filed several post-settlement motions that put at issue the settlement agreement’s confidentiality provisions. See id. at 565. The Ninth Circuit held that the settlement agreement’s confidentiality provisions were not void on public policy grounds, because the settlement did not impede any whistleblower’s ability to bring information to the government, and so did not violate the public interest underlying the FCA’s provisions encouraging disclosures of fraud. Id. at 566. Additionally, the court held that the confidentiality provisions did not interfere with the public’s right to information, given that the entire qui tam complaint was still publicly available. Id. Finally, the Ninth Circuit held that the district court had not abused its discretion in maintaining the seal over the settlement agreement, because the settlement agreement was a “private agreement reached without court assistance” and was only in the judicial record through the relator’s efforts to void its confidentiality provisions. Id.

G.  The Public Disclosure Bar and Its Original Source Exception

The public disclosure bar, as amended in 2010 by the Affordable Care Act, requires courts to dismiss a relator’s FCA claims “if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed,” unless that relator “is an original source of the information.” § 3730(e)(4)(A). One of the statute’s definitions of an original source is an individual “who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions.” § 3730(e)(4)(B) (emphasis added). Although the “materially adds” language has been in effect for nearly a decade, the new language did not apply retroactively, and due to the long timeframe for many FCA cases, it is therefore just in recent years getting serious attention from the appellate courts. In April of this year, the Tenth Circuit became the latest court to opine on the meaning of the original source exception’s “materially adds” language. In United States ex rel. Reed v. KeyPoint Government Solutions, 923 F.3d 729 (10th Cir. 2019), the Tenth Circuit explored what a relator must allege to meet the original source exception by materially adding to publicly disclosed information. In defining the “materially adds” language in the original source exception, the Tenth Circuit cited United States ex rel. Winkelman v. CVS Caremark Corp., 827 F.3d 201 (1st Cir. 2016), and held that a relator satisfies the materially-adds requirement when she “discloses new information that is sufficiently significant or important that it would be capable of” influencing the government’s behavior, as contrasted with a relator who provides only background information or details about a previously disclosed fraud. Reed, 923 F.3d at 757. Under this standard, the court noted that a relator who merely identifies a new specific actor engaged in fraud usually would not materially add to public disclosures of alleged widespread fraud in an industry with only a few companies. Id. at 758. Ultimately, however, the court concluded that the relator here had materially added to the public disclosures about a specific program at her company. Id. at 760-63. Thus, the court held she met the original source exception’s materially-adds requirement, but remanded on whether her knowledge was “independent” and whether her claims should otherwise survive scrutiny under Rule 12(b)(6) and Rule 9(b). Id. at 763.

H.  The First Circuit Holds That the First-to-File Bar Is Not Jurisdictional

The First Circuit joined the D.C. and Second Circuits in holding that the FCA’s first-to-file bar is not jurisdictional, such that arguments under the first-to-file bar do not implicate the court’s subject matter jurisdiction, even if they are a cause for dismissal. This distinction can affect how, and when, arguments under the first-to-file bar may be made, and also the standard of review a court applies. In United States v. Millennium Laboratories, Inc., 923 F.3d 240 (1st Cir. 2019), Relator A, who filed first, alleged that the defendant used inexpensive point-of-care tests to induce physicians into excessive testing, including confirmatory testing, which was then billed to the government. Id. at 245-46. Another relator, Relator B, later filed a complaint against the same defendant related to confirmatory testing, not point-of-care testing, allegedly induced through improper custom profiles and standing orders. Id. at 246-47. The government intervened in Relator B’s action (but not Relator A’s) and pursued an FCA case focused on excessive confirmatory testing induced through improper custom profiles and standing orders. Id. at 247-48. The government and the defendant eventually settled for $227 million plus interest, without resolving which relator was entitled to the relator’s share. Id. at 247. The district court dismissed Relator B’s crossclaim for the relator’s share of the settlement, holding that Relator A was the first to file. Id. at 248. As Relator A was the first to file, the district court therefore held that it did not have subject matter jurisdiction over Relator B’s crossclaim, because the first-to-file bar was jurisdictional. Id. On appeal, the First Circuit reversed, and held that the first-to-file bar is not jurisdictional, overturning its prior precedent, for three reasons. Id. at 248-49. First, the First Circuit pointed to Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, 135 S. Ct. 1970 (2015), in which the Supreme Court addressed a first-to-file issue in an FCA qui tam action on “decidedly non-jurisdictional terms,” implying that the Supreme Court did not consider the first-to-file rule a jurisdictional one. Millennium Labs., 923 F.3d at 249 (internal quotation marks removed) (quoting United States ex rel. Heath v. AT&T, Inc., 791 F.3d 112, 121 n.4 (D.C. Cir. 2015)). Second, the First Circuit noted that its prior cases all predated Carter and also did not substantively analyze whether the first-to-file rule was jurisdictional, but rather assumed it was. Millennium Labs., 923 F.3d at 250. Third, applying the Supreme Court’s “bright line rule” in Arbaugh v. Y & H Corp., 546 U.S. 500 (2006), which held that provisions are only jurisdictional when Congress clearly states that they are, the First Circuit held that the first-to-file bar’s statutory text, context, and legislative history did not describe the bar in jurisdictional terms. Millennium Labs., 923 F.3d at 250-51. For these reasons, the First Circuit held that the first-to-file bar is not jurisdictional. Id. at 251. Therefore, the court held that it had jurisdiction over Relator B’s crossclaim. Id. Next, the First Circuit turned to the issue of whether Relator A or B was the first to file for purposes of the relator’s share of the government’s settlement. Id. at 252-53. To determine whether Relator A was the first to file in the action in which the government intervened, the court analyzed whether Relator A’s complaint contained “all the essential facts” of the fraud that Relator B alleged, on a claim-by-claim basis, looking at the specific mechanisms of fraud alleged. Id. at 252-53. Because Relator A’s complaint never alleged the specific mechanisms of fraud that Relator B alleged—custom profiles and standing orders in the confirmatory, not point-of-care, stage—Relator A’s complaint did not cover the essential facts of the fraud that Relator B and the government alleged. Id. at 254. Thus, as Relator A alleged a different fraud than the fraud that the government pursued, he was not the first to file in this case; Relator B was. Id.

I.  The Second Circuit Holds That a Relator Who Previously Voluntarily Dismissed His FCA Action Is Not Entitled to the Relator’s Share of the Government’s Subsequent Action

In United States v. L-3 Communications EOTech, Inc., 921 F.3d 11 (2d Cir. 2019), the Second Circuit joined several other circuits in holding that a relator who previously voluntarily dismissed his qui tam action and had no other qui tam actions pending at the time the government pursued its own FCA claim is not entitled to the relator’s share of a later government settlement. Specifically, the court examined the FCA’s provision in section 3730(c)(5), which states that, notwithstanding the section of the FCA allowing qui tam actions, the government may pursue an “alternative remedy,” but if the government pursues an alternative remedy, then “the person initiating the action shall have the same rights in such proceeding as such person would have had if the action had continued under this section.” Id. at 24 (quoting § 3730(c)(5)). The court held that section 3730(c)(5) only applied if that relator had a pending qui tam action in which the government could intervene when the government initiated its own FCA action. Id. at 26. Thus, where, as here, the relator had no FCA action pending because the relator had voluntarily dismissed his FCA suit fourteen months before the government commenced its own FCA suit, the relator is not entitled to the relator’s share of the government’s action. Id.

J.  FCA Retaliation Claims

There were also a number of decisions from the courts of appeal that addressed issues under the FCA’s anti-retaliation provision, which protects would-be whistleblowers from retaliation based on certain protected activity undertaken in furtherance of a potential FCA claim. We very briefly summarize these decisions below. In United States ex rel. Reed v. KeyPoint Government Solutions, 923 F.3d 729 (10th Cir. 2019) (previously discussed regarding the public disclosure bar), the Tenth Circuit affirmed the district court’s dismissal of the relator’s retaliation claim, holding that the facts she pleaded were inadequate to show that the defendant was on notice that she was engaged in FCA-protected activity. Id. at 741, 764. Because the relator was a compliance officer, the court explained that she must plead facts to overcome the presumption that she was just doing her job in reporting fraud internally to her employer. That is, she must plead that the actions she took to report the alleged fraud internally went beyond what was required to fulfill her compliance job duties. Id. at 768-69. In that case, the relator did not adequately allege that her employer was on notice she was trying to stop FCA violations, and so the court affirmed the dismissal of her retaliation claim. Id. at 772. In United States ex rel. Strubbe v. Crawford County Memorial Hospital, 915 F.3d 1158 (8th Cir. 2019) (previously discussed regarding Rule 9(b)), the Eighth Circuit limited liability for FCA retaliation claims by affirming the district court’s ruling that relators’ retaliation claim was barred because the complaint did not allege that relators ever told their employer (a hospital) that its practices were fraudulent or potentially violated the FCA. Id. The court found that complaining about the hospital’s finances and changes the hospital made to certain treatments does not provide the hospital notice that the relators are taking action to stop an FCA violation or in furtherance of a qui tam action. Id. In addition, as a matter of first impression for FCA retaliation claims before the Eighth Circuit (but not whistleblower claims more generally), the court held that when there is no direct evidence of retaliation, the McDonnell Douglas framework—from McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973)—applies to FCA retaliation claims. Id. at 1168. Thus, for FCA retaliation claims, the plaintiff must show that: “(1) she engaged in protected conduct, (2) [her employer] knew she engaged in protected conduct, (3) [her employer] retaliated against her, and (4) ‘the retaliation was motivated solely by [the plaintiff’s] protected activity.’” Id. at 1167-68 (quoting Schuhardt v. Washington University, 390 F.3d 563, 566 (8th Cir. 2004)). If the plaintiff establishes a prima facie retaliation claim, then the burden shifts to the employer to “articulate a legitimate reason for the adverse action.” Id. at 1168 (quoting Elkharwily v. Mayo Holding Co., 823 F.3d 462, 470 (8th Cir. 2016)). Then, the burden again shifts back to the plaintiff to show that the employer’s reason was “merely a pretext and that retaliatory animus motivated the adverse action.” Id. (quoting Elkharwily, 823 F.3d at 470). In Guilfoile v. Shields, 913 F.3d 178 (1st Cir. 2019), the First Circuit explored the link between FCA retaliation claims and the AKS. The relator alleged that he was fired in retaliation for internally reporting that his employer, which provides specialty pharmacy services to chronically ill patients, was violating the AKS and making false representations in its contracts with hospitals. Id. at 182-83. The First Circuit affirmed dismissal with respect to his contract violation-based retaliation claim, but vacated the district court’s holding dismissing the plaintiff’s AKS-based retaliation claim, over a dissent. Id. at 195. In so doing, the First Circuit held that for FCA retaliation claims, plaintiffs do not need to meet Rule 9(b)’s particularity requirement, plead the submission of false claims, or plead that compliance with the AKS was material. Id. at 190. Instead, FCA retaliation plaintiffs “need only plead that their actions in reporting or raising concerns about their employer’s conduct ‘reasonably could lead to an FCA action.’” Id. at 189 (quoting United States ex rel. Booker v. Pfizer, Inc., 847 F.3d 52, 59 (1st Cir. 2017)). Under this standard, the court held that the plaintiff had plausibly pleaded that he was engaged in FCA-protected conduct, because by reporting his concerns about paying a consultant to secure contracts at hospitals at which the consultant worked, he was engaging in conduct that could reasonably lead to an FCA action based on the submission of claims resulting from an AKS violation. Id. at 193. Finally, in United States ex rel. Grant v. United Airlines Inc., 912 F.3d 190 (4th Cir. 2018) (discussed previously regarding Rule 9(b)), the Fourth Circuit held that an objective reasonableness standard applies to FCA retaliation claims’ new protected activity category, added in 2010, of “other efforts to stop 1 or more” FCA violations. Prior Fourth Circuit precedent applied a “distinct possibility” standard to evaluate protected activity under § 3730(h), which related to retaliation for actions taken “in furtherance” of an FCA action, meaning employees engage “in protected activity when ‘litigation is a distinct possibility, when the conduct reasonably could lead to a viable FCA action, or when . . . litigation is a reasonable possibility.’” Id. at 200 (quoting Mann v. Heckler & Koch Def., Inc., 630 F.3d 338, 344 (4th Cir. 2010)) (emphasis added). However, the court rejected the “distinct possibility” standard for “other efforts to stop 1 or more” FCA violations, and instead adopted an “objective reasonableness” standard. Id. at 201. Under the second category’s “objective reasonableness” standard, “an act constitutes protected activity where it is motivated by an objectively reasonable belief that the employer is violating, or soon will violate, the FCA.” Id. (emphasis added).

IV.  CONCLUSION

We will monitor these developments, along with other FCA legislative activity, settlements, and jurisprudence throughout the year and report back in our 2019 False Claims Act Year-End Update, which we will publish in January 2020. _________________________ [1] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Avanti Hospitals LLC, and Its Owners Agree to Pay $8.1 Million to Settle Allegations of Making Illegal Payments in Exchange for Referrals (Jan. 28, 2019), https://www.justice.gov/opa/pr/avanti-hospitals-llc-and-its-owners-agree-pay-81-million-settle-allegations-making-illegal. [2] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pathology Laboratory Agrees to Pay $63.5 Million for Providing Illegal Inducements to Referring Physicians (Jan. 30, 2019), https://www.justice.gov/opa/pr/pathology-laboratory-agrees-pay-635-million-providing-illegal-inducements-referring. [3] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Electronic Health Records Vendor to Pay $57.25 Million to Settle False Claims Act Allegations Charges (Feb. 6, 2019), https://www.justice.gov/opa/pr/electronic-health-records-vendor-pay-5725-million-settle-false-claims-act-allegations. [4] See Press Release, U.S. Atty’s Office for the N. Dist. of GA., Union General Hospital to Pay $5 Million to Resolve Alleged False Claims Act Violations (Feb. 6, 2019), https://www.justice.gov/usao-ndga/pr/union-general-hospital-pay-5-million-resolve-alleged-false-claims-act-violations. [5] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Vanguard Healthcare Agrees to Resolve Federal and State False Claims Act Liability (Feb. 27, 2019), https://www.justice.gov/opa/pr/vanguard-healthcare-agrees-resolve-federal-and-state-false-claims-act-liability. [6] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Covidien to Pay Over $17 Million to The United States for Allegedly Providing Illegal Remuneration in the Form of Practice and Market Development Support to Physicians (Mar. 11, 2019), https://www.justice.gov/opa/pr/covidien-pay-over-17-million-united-states-allegedly-providing-illegal-remuneration-form. [7] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, MedStar Health to Pay U.S. $35 Million to Resolve Allegations that it Paid Kickbacks to a Cardiology Group in Exchange for Referrals (Mar. 21, 2019), https://www.justice.gov/opa/pr/medstar-health-pay-us-35-million-resolve-allegations-it-paid-kickbacks-cardiology-group. [8] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Three Pharmaceutical Companies Agree to Pay a Total of Over $122 Million to Resolve Allegations That They Paid Kickbacks Through Co-Pay Assistance Foundations (Apr. 4, 2019), https://www.justice.gov/opa/pr/three-pharmaceutical-companies-agree-pay-total-over-122-million-resolve-allegations-they-paid. [9] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pharmaceutical Company Agrees to Pay $17.5 Million to Resolve Allegations of Kickbacks to Medicare Patients and Physicians (Apr. 30, 2019), https://www.justice.gov/opa/pr/pharmaceutical-company-agrees-pay-175-million-resolve-allegations-kickbacks-medicare-patients. [10] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Medicare Advantage Provider to Pay $30 Million to Settle Alleged Overpayment of Medicare Advantage Funds (Apr. 12, 2019), https://www.justice.gov/opa/pr/medicare-advantage-provider-pay-30-million-settle-alleged-overpayment-medicare-advantage. [11] See Press Release, U.S. Atty’s Office for the S. Dist. of W.V., United States Attorney Announces $17 Million Healthcare Fraud Settlement (May 6, 2019), https://www.justice.gov/usao-sdwv/pr/united-states-attorney-announces-17-million-healthcare-fraud-settlement. [12] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Kansas Cardiologist and His Practice Pay $5.8 Million to Resolve Alleged False Billings for Unnecessary Cardiac Procedures (May 30, 2019), https://www.justice.gov/opa/pr/kansas-cardiologist-and-his-practice-pay-58-million-resolve-alleged-false-billings. [13] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pharmaceutical Company Admits to Price Fixing in Violation of Antitrust Law, Resolves Related False Claims Act Violations (May 31, 2019), https://www.justice.gov/opa/pr/pharmaceutical-company-admits-price-fixing-violation-antitrust-law-resolves-related-false. [14] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Opioid Manufacturer Insys Therapeutics Agrees to Enter $225 Million Global Resolution of Criminal and Civil Investigations (Jun. 5, 2019), https://www.justice.gov/opa/pr/opioid-manufacturer-insys-therapeutics-agrees-enter-225-million-global-resolution-criminal. [15] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Northrop Grumman Systems Corporation Agrees to Pay $5.2 Million to Settle Allegations of False Labor Charges (Jan. 28, 2019), https://www.justice.gov/opa/pr/northrop-grumman-systems-corporation-agrees-pay-52-million-settle-allegations-false-labor. [16] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Duke University Agrees to Pay U.S. $112.5 Million to Settle False Claims Act Allegations Related to Scientific Research Misconduct (Mar. 25, 2019), https://www.justice.gov/opa/pr/duke-university-agrees-pay-us-1125-million-settle-false-claims-act-allegations-related. [17] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Informatica Agrees to Pay $21.57 Million for Alleged False Claims Caused by Its Commercial Pricing Disclosures (May 13, 2019), https://www.justice.gov/opa/pr/informatica-agrees-pay-2157-million-alleged-false-claims-caused-its-commercial-pricing. [18] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Department of Justice Issues Guidance on False Claims Act Matters and Updates Justice Manual (May 7, 2019), https://www.justice.gov/opa/pr/department-justice-issues-guidance-false-claims-act-matters-and-updates-justice-manual. [19] Deputy Attorney General Rod J. Rosenstein Delivers Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0. [20] See U.S. Dep’t of Justice, Justice Manual, Section 4-4.112. [21] Id. [22] Id. [23] Id. [24] Id. [25] Id. [26] See Memorandum, U.S. Dep’t of Justice, Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A) (Jan. 10, 2018), https://assets.documentcloud.org/documents/4358602/Memo-for- Evaluating-Dismissal-Pursuant-to-31-U-S.pdf. [27] Id. at 2–3. [28] See Jeff Overly, DOJ Warns FCA Targets On Discovery Tactics, Law360 (Mar. 2, 2019), https://www.law360.com/articles/1134479/doj-atty-warns-fca-targets-on-discovery-tactics. [29] Id. [30] Id. [31] Id. [32] Press Release, U.S. Dep’t of Justice, Deputy Associate Attorney General Stephen Cox Delivers Remarks at the 2019 Advanced Forum on False Claims and Qui Tam Enforcement (Jan. 28, 2019), https://www.justice.gov/opa/speech/deputy-associate-attorney-general-stephen-cox-delivers-remarks-2019-advanced-forum-false. [33] Id. [34] Id. [35] Id. [36] Id. [37] Press Release, U.S. Dep’t of Justice, Deputy Associate Attorney General Stephen Cox Gives Remarks to the Cleveland, Tennessee, Rotary Club (Mar. 12, 2019), https://www.justice.gov/opa/speech/deputy-associate-attorney-general-stephen-cox-gives-remarks-cleveland-tennessee-rotary. [38] State False Claims Act Reviews, Dep’t of Health & Human Servs.—Office of Inspector Gen., https://oig.hhs.gov/fraud/state-false-claims-act-reviews/index.asp. [39] Id. [40] Id. Wisconsin repealed its false claims act in 2015. Assembly Bill 1021 would have reinstated the statute, but failed to pass in March 2018. See Wisconsin State Legislature, Assembly Bill 1021, http://docs.legis.wisconsin.gov/2017/proposals/reg/asm/bill/ab1021. [41] Id. [42] See Cal. Gov’t Code § 12651 (West 2018); Ga. Code Ann. § 49-4-168.1 (2018); Del. Code Ann. tit. 6, § 1201 (2018); N.Y. State Fin. Law §§ 189-190-b; 2018 R.I. Gen. Laws § 9-1.1-3 (2018). [43] Cal. AB-1270, 2019 Leg. Reg. Sess. (Cal. 2019). [44] Escobar, 136 S. Ct. at 2002 (emphasis added) (citation and internal quotation marks removed). [45] Cal. AB-1270, 2019 Leg. Reg. Sess. (Cal. 2019). [46] Id. [47] Id. [48] Id. [49] AB-1270 False Claims Act, California Legislative Information (July 9, 2019), http://leginfo.legislature.ca.gov/faces/billStatusClient.xhtml?bill_id=201920200AB1270. [50] See S. 40, A Bill to Amend Title 15 of the 1976 Code, by Adding Chapter 85, to Enact the “South Carolina False Claims Act” (123d Session), https://www.scstatehouse.gov/sess123_2019-2020/bills/40.htm. [51] See S. 223, A Bill to Amend the South Carolina Code of Laws, 1976, by Adding Chapter 85 to Title 15, so as to Enact the “South Carolina False Claims Act” (121st Session), https://www.scstatehouse.gov/sess121_2015-2016/bills/223.htm. [52] Notably, though, the statute covers claims a defendant “reasonably should have known” were false, thereby creating potential liability for mere negligence (unlike the federal FCA, which requires at least reckless disregard). The West Virginia law also lacks a qui tam provision. See W.Va. Code § 9-7-6 (2018). [53] See 2019 W.Va. Laws S.B. 318 (2019 Regular Session). [54] See id. at § 9-7-6.

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The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Charles Stevens, Stuart Delery, Benjamin Wagner, Timothy Hatch, Joseph West, Robert Walters, Robert Blume, Andrew Tulumello, Karen Manos, Monica Loseman, Geoffrey Sigler, Alexander Southwell, Reed Brodsky, Winston Chan, John Partridge, James Zelenay, Jonathan Phillips, Ryan Bergsieker, Sean Twomey, Reid Rector, Allison Chapin, Michael Dziuban, Jillian N. Katterhagen Mills, and summer associate Marie Zoglo.

Gibson Dunn's lawyers have handled hundreds of FCA investigations and have a long track record of litigation success.  From U.S. Supreme Court victories, to appellate court wins, to complete success in district courts around the United States, Gibson Dunn believes it is the premier firm in FCA defense.  Among other notable recent victories, Gibson Dunn successfully overturned one of the largest FCA judgments in history in United States ex rel. Harman v. Trinity Indus. Inc., 872 F.3d 645 (5th Cir. 2017), and the Daily Journal recognized Gibson Dunn’s work in U.S. ex rel. Winter v. Gardens Regional Hospital and Medical Center Inc. as a Top Defense Verdict in its annual feature on the top verdicts for 2017.  Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases.  The firm has dozens of attorneys with substantive FCA experience, including nearly 30 Assistant U.S. Attorneys and DOJ attorneys.  For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the following attorneys. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Geoffrey M. Sigler (+1 202-887-3752, gsigler@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) James L. Zelenay Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Deborah L. Stein (+1 213-229-7164, dstein@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)
Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Click for PDF On May 7, 2019, the U.S. Department of Justice (“DOJ”) released long-awaited guidance on when DOJ will award cooperation credit to targets of False Claims Act (“FCA”) enforcement.  But those familiar with FCA enforcement are unlikely to find any big surprises in the guidance.  Instead, the guidance echoes longstanding DOJ expectations with respect to cooperation and remediation and reaffirms recent DOJ pronouncements regarding how companies may secure credit by identifying individual wrongdoers.  Further, DOJ emphasizes, yet again, that entities seeking maximum cooperation credit should voluntarily self-disclose misconduct.  As to the value of cooperation to defendants, DOJ’s new guidance caps the credit a defendant may receive: under the guidance, the credit may not result in a defendant paying less than single damages.  But DOJ offers little detail on the quantum of cooperation necessary to secure single damages, and the award of cooperation credit remains discretionary.  This discretion creates uncertainty, but may also present FCA defendants with the opportunity to argue for lower settlement payments during settlement negotiations with DOJ.  It remains to be seen which way this discretion cuts in practice.

Background

DOJ’s guidance results from a long-running effort, started after the issuance of the 2015 Yates Memorandum, to describe in more detail the bases for cooperation credit in a variety of civil and criminal enforcement contexts.  As discussed in a previous Gibson Dunn alert, DOJ announced in June 2018 that it was working to promote more fair and consistent enforcement activities under the FCA, and it pledged to promulgate new and potentially expanded policies on cooperation credit.  In November 2018, Deputy Attorney General Rod Rosenstein likewise signaled a retreat from the “all or nothing” approach to cooperation set forth in the Yates Memorandum, announcing, for example, that partial cooperation credit might be available in civil fraud cases, and that companies need not identify all individuals involved in the misconduct at issue, just those “substantially involved.”

Forms of Cooperation

The FCA guidance released on Tuesday, which is codified in Section 4-4.112 of DOJ’s Justice Manual, follows those announcements by allowing more flexibility in terms of what defendants can provide to the government in exchange for cooperation credit. Self-Disclosure.  In a press release issued along with the new guidance, Assistant Attorney General Jody Hunt made clear that voluntary self-disclosure—i.e., proactively approaching the government to report potential violations—is still “the most valuable form of cooperation.”  Under the new guidance, such disclosure should be both “proactive” and “timely”—characteristics the guidance leaves open to interpretation.  Disclosure of misconduct going beyond the scope of concerns known to DOJ will further qualify a defendant for credit. Other Forms of Cooperation.  The new DOJ guidance also includes an illustrative, non-exhaustive list of ten forms of cooperation that may earn a defendant “some cooperation credit.”  In addition to voluntary disclosure, defendants may also earn credit for taking other actions that “meaningfully assist[]” DOJ in its FCA investigation.  Such actions include:

• identifying individuals “substantially involved in or responsible for” misconduct;
• disclosing facts or evidence relevant to potential misconduct by third parties (or facts or evidence not already known to the government);
• preserving and disclosing relevant information beyond existing business practices or legal requirements;
• identifying and making available individuals with relevant information;
• attributing facts to specific sources and providing updates on any internal investigation;
• admitting liability or accepting responsibility for the relevant conduct; and
• assisting in the determination or recovery of losses.

The guidance emphasizes that defendants are not required to waive attorney-client privilege or work product protection to be eligible for credit. Not surprisingly, actions that do not qualify for cooperation credit under the guidance include disclosure of information that is required by law or is under “imminent threat” of discovery or investigation, as well as “merely” responding to a subpoena or demand for information.  The guidance does not define terms such as “imminent threat,” potentially opening the door to significant DOJ discretion.

The Value of Cooperation

Under the new guidance, the “value” of any cooperation also will impact DOJ’s calculus regarding cooperation credit.  To assess value, DOJ will consider four factors relating to the assistance or information provided by a defendant:  (1) timeliness and voluntariness; (2) truthfulness, completeness, and reliability; (3) nature and extent; and (4) significance and usefulness to the government.  In the new guidance, DOJ also emphasizes the importance of remedial measures, such as implementing or improving a compliance program and acknowledging and accepting responsibility.

Benefits of Cooperation

As noted, one aspect of the new guidance that may be met with disappointment is the general lack of clarification or concrete details regarding the benefits of cooperation. The guidance sets a ceiling for the credit a defendant may receive.  Specifically, cooperation credit may not result in the government receiving less than “full compensation for the losses caused by the defendant’s misconduct,” including damages, interest, the costs of investigation, and any relator’s share.  Further, the guidance lists some non-monetary ways in which DOJ might recognize cooperation, such as notifying another agency of, or publicly acknowledging, the cooperation, or assisting the defendant in qui tam litigation. As members of the FCA defense bar know, double damages are the frequent result when negotiating resolutions of FCA investigations—so the promise of single damages in return for full cooperation has some value.  But the guidance provides no specific information about how much of a benefit defendants might expect for cooperation, nor does it offer a means by which a defendant might quantify, calculate, or estimate the benefit.  This lack of specific information, while contributing to ongoing uncertainty, may also create an opportunity for defendants to advocate for cooperation credit and lower settlement amounts without any fixed set of limitations on what DOJ may agree to provide, aside from the floor of single damages.  Yet, even in the case of single damages, the guidance is silent as to how those single damages must be calculated and whether litigation risk may factor into the calculation.  All of these factors combined create the possibility of robust negotiations over cooperation credit, even under this new framework. DOJ’s silence on the precise benefits of cooperation in the FCA context stands in contrast to cooperation frameworks in other contexts.  For example, under the FCPA Corporate Enforcement Policy (“FCPA Policy”), it is clear that companies that (1) voluntarily disclose, (2) fully cooperate, and (3) timely and appropriately remediate misconduct “will receive a declination” absent aggravating circumstances.  The FCPA Policy defines each of the three elements of cooperation—which are similar in substance to those set out in the new guidance—providing a clearer, albeit not ambiguity-free, roadmap to receiving credit.  Notably, the FCPA Policy also quantifies the value of cooperation, stating, for example, that a defendant that did not initially disclose misconduct but later does can expect to receive “up to a 25% reduction” off the low end of the sentencing guidelines.  DOJ’s guidance in the FCA context is not so explicit.

Cooperation Versus “Outsourced” Investigations

Although DOJ’s new guidance is unabashed in its solicitation of “meaningful[]” investigative assistance, just how prescriptive DOJ may be without risking exclusion of some evidence it gathers remains an open question. Just over a week ago, Chief Judge McMahon of the U.S. District Court for the Southern District of New York issued an opinion (in a criminal, non-FCA case) stating that she was “deeply troubled” by the government in effect “outsourcing” its investigation to its target, which was seeking to cooperate.  See Mem. Decision and Order Den. Def. Gavin Black’s Mot. for Kastigar Relief, United States v. Connolly, No. 16 Cr. 0370 (CM) (S.D.N.Y. May 2, 2019).  Judge McMahon concluded that the target’s lawyers appeared to have done “everything that the Government could, should, and would have done had the Government been doing its own work,” id. at 24, and that the internal investigation was therefore fairly attributable to the government, id. at 29.  As a result, Judge McMahon held that the individual defendant’s statements to a law firm conducting an investigation on behalf the individual’s corporate employer were effectively compelled statements to the government (under the line of cases beginning with Garrity v. New Jersey, 385 U.S. 493 (1967)).  See Connolly, No. 16 Cr. 0370 (CM), at 21, 28–29. As a criminal case, Connolly involves different considerations (and constitutional protections).  Nevertheless, it suggests that courts may play—and potentially embrace—a role in distinguishing “cooperation” from compulsion in future cases (particularly FCA matters with parallel civil and criminal components).

* * * * *

Time will tell whether DOJ’s lack of specificity with respect to the benefits of cooperation will limit the impact of the new guidance on cooperation credit in FCA enforcement.  But, at the very least, defendants will have factors to consider—and single damages to hope for—based on DOJ’s latest addition to the Justice Manual.

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The following Gibson Dunn lawyers assisted in preparing this client update:  F. Joseph Warin, Stuart Delery, John Partridge, Jonathan Phillips, Julie Hamilton and Reid Rector. Gibson Dunn's lawyers have handled hundreds of FCA investigations and have a long track record of litigation success. Our lawyers are available to assist in addressing any questions you may have regarding the above developments. For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the any of the following. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Stephen C. Payne (+1 202-887-3693, spayne@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) James L. Zelenay Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)
Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com)

Los Angeles partners Debra Wong Yang, Michael Farhang and James Zelenay, and associate Sean Twomey are the authors of "Looking back and ahead at the False Claims Act" [PDF] published by The Daily Journal on February 14, 2019.

Click for PDF This is the latest update of significant developments related to regulatory, administrative, and legal actions involving schools.  This quarter saw the Ninth Circuit issue its long-awaited decision in United States ex rel. Rose v. Stephens Institute, a number of other interesting developments related to the False Claims Act ("FCA"), a flurry of activity from the Department of Education and other federal agencies, and more.

A.   Strict Rules in Name Only?

On August 24, 2018, the United States Court of Appeals for the Ninth Circuit issued its opinion in United States ex rel. Rose v. Stephens Institute, No. 17-1511, 901 F.3d 1124 (9th Cir. 2018).  As discussed in the February alert, the three judges on the panel appeared to be struggling at oral argument with what the Supreme Court held in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016); how the Ninth Circuit had previously interpreted the FCA and Escobar; and how that might apply to the situation of a for-profit school.  That struggle carried over to the opinion. All three judges agreed that a relator in the Ninth Circuit could only establish liability under the so-called implied certification theory—whereby FCA liability can exist for claims for payment that falsely, implicitly represent compliance with a law—if "'first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant's failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.'"  Rose, 901 F.3d at 1129–30 (quoting Escobar, 136 S. Ct. at 2001).  The court explained, however, that it did not believe these "two conditions" were actually required by Escobar and instead followed that rule only because the Ninth Circuit's "post-Escobar cases … appear to require Escobar's two conditions."  Id.  The three judges even went so far as to indirectly call for en banc (11-judge) review.  Id. The three judges also agreed, however, that the relator had met both of those requirements.  The Ninth Circuit reasoned that the Federal Stafford Loan Certification form contained the required representation about goods or services provided:  "Defendant specifically represented that the student applying for federal financial aid is an 'eligible borrower' and is 'accepted for enrollment in an eligible program.'"  Id. at 1130.  And the Ninth Circuit believed "those representations could be considered 'misleading half-truths'" because "Defendant failed to disclose its [alleged] noncompliance with the incentive compensation ban."  Id.  This aspect of the decision is troubling.  Compliance with the incentive compensation provision is nowhere in the Federal Stafford Loan Certification form, but the panel found that the representations in the form that the student was an "eligible borrower" and would be attending an "eligible program" were sufficient to impliedly certify compliance with the incentive compensation provision, as such is a condition of participation in the Title IV program. The Ninth Circuit also reached a troubling conclusion on the second issue in the case:  whether the alleged violations of the incentive compensation provision were material—and therefore actionable—under the FCA.  Relying on a pre-Escobar decision on the pleadings in United States ex rel. Hendow v. University of Phoenix, 461 F.3d 1166 (9th Cir. 2006), the Ninth Circuit held that, even on the more demanding summary judgment standard and even after Escobar, the relator in Rose had met the materiality standard because of: (1) the "triple-conditioning of Title IV funds on compliance with the incentive compensation ban" in the statute, regulations, and program participation agreement; (2) "evidence … that [ED] did care about violations of the incentive compensation ban," including evidence it issued fines or corrective actions for such alleged violations; and (3) the "magnitude" of the alleged violation in the case was purportedly "substantial" because the "large monetary awards" for enrollments were in the tens of thousands of dollars.  Id. at 1132–34. Judge Smith dissented on this aspect of the decision, explaining that "caring is not enough to make it material under the Escobar standard."  Id. at 1137.  What is needed, and was missing according to Judge Smith, was evidence "about what the Government would actually do in this case (or even in a similar case)"—i.e., would the alleged improper payments to employees have affected the Government's "payment decision" of financial aid.  Id. at 1137 & n.3. What was perhaps most shocking about the majority's opinion, claiming to enforce the "rigorous" materiality standard from Escobar, is that the panel did not even mention—let alone discuss—the Department of Education's 2002 memorandum from the then Deputy Secretary of Education (William D. Hansen), in which Mr. Hansen explained that the incentive compensation provision generally should not provide the basis for a loss of institutional or student eligibility and should instead be handled by a fine.  That memorandum is strong evidence that the Department did not condition eligibility—including student or institution eligibility—or payment decisions on the incentive compensation provision.  But it was ignored by the Ninth Circuit. Stephens Institute is seeking en banc review.

B.   Other False Claims Act Developments

While the case law on the FCA may not have been particularly positive for schools in the last quarter, the Department of Justice ("DOJ") continued to show a more considered approach to FCA enforcement.  Specifically, on June 14, 2018, acting Associate Attorney General Jesse Panuccio gave a speech about the DOJ's ongoing efforts to promote a fair application of the FCA.  As discussed in our February report, the DOJ issued two memoranda in January that: (i) outlined factors for when the Government should intervene and voluntarily dismiss qui tam FCA lawsuits; and (ii) clarified that the "Department may not use its enforcement authority to effectively convert agency guidance documents into binding rules."  In his speech, Mr. Panuccio discussed those two initiatives and also (1) formalizing cooperation credits, (2) rewarding "companies that invest in strong compliance measures," and (3) promoting coordination within the agency and with other regulatory bodies to prevent "piling on." On the FCA front, a few other developments:

• The U.S. District Court for the Western District of Pennsylvania ordered the Government to produce to a law clinic at Harvard Law School documents the Government obtained from a 2007 FCA case filed against Education Management Corp.
• The qui tam lawsuit filed against EduTrek and a number of schools in the United States District Court for the District of Utah was voluntarily dismissed.
• The U.S. District Court for the District of Utah ordered supplemental briefing in U.S. ex rel. Brooks v. Stevens-Henagar College about whether a relator and the United States are entitled to separately pursue different claims in the same FCA case.

C.   Activity by the Department of Education

As readers of this alert likely know, the Department of Education (ED) has had a busy quarter: Borrower Defense:  On July 31, ED released a notice of proposed rulemaking on the Borrower Defense to Repayment (BDR) regulations.  The proposed regulations are intended to supplant the BDR rule promulgated by the Obama Administration in November 2016.  Some of the proposed changes include (1) establishing a federal standard for review of BDR claims; (2) limiting the basis of a claim to misrepresentation by a school; (3) requiring that such misrepresentation be (i) false, misleading, or deceptive, and (ii) made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth, (iii) clearly related to the making of the loan or provision of educational services; and (iv) requiring the borrower to establish reasonable reliance on the misrepresentation and resulting financial harm. After the notice of rulemaking was published, ED received a large number of comments and has announced that the earliest implementation date would be July 2020. In the meantime, at least for the time being, the old 2016 BDR regulations will remain in effect.  That is because 19 states and the District of Columbia previously sued Secretary DeVos for wrongly delaying implementation of the 2016 BDR regulations.  On September 12, the judge ruled that ED's postponement measures of the 2016 BDR regulations were procedurally improper.  Instead of ordering ED to immediately implement the 2016 BDR rule, the judge issued a temporary suspension to permit ED to remedy deficiencies with the procedures it had followed.  However, ED did not do so before the deadline of October 16, and the 2016 version of the BDR rule is now in effect.  Secretary DeVos has indicated she will implement the 2016 rule, even as she works to rescind it. ED also suffered setbacks in another lawsuit involving the BDR rules.  As reported in our last alert, former Corinthian College students filed a class action lawsuit for declaratory and injunctive relief against Secretary DeVos and ED in December 2017, alleging that after Corinthian closed, ED promised the students complete loan forgiveness but then, in December 2017, announced a plan to award only partial relief using a formula based on students' earnings.  On May 25, a magistrate judge issued a preliminary injunction, blocking enforcement of ED's partial loan relief program.  In June, the magistrate clarified that ED did not presently need to provide the full debt relief the students claimed but that ED must stop collecting loan payments from all former Corinthian students who applied for debt relief—not just the four named plaintiffs in the case.  And on October 15, the judge certified a nationwide class of approximately 110,000 students. Gainful Employment:  On August 14, ED filed a notice of proposed rulemaking that proposed rescinding the Gainful Employment regulations.  Instead of these regulations, ED plans to update the College Scorecard, or a similar web-based tool, to provide program-level outcomes for all higher education programs at all institutions that participate in programs authorized by Title IV.  The public comment period closed on September 13. State Authorization:  On July 3, ED further delayed the effective date of four provisions of the State Authorization rules that had been published in December 2016 and were scheduled to go into effect on July 1, 2018.  The new effective date is now July 1, 2020.  The State Authorization rules would have required institutions that offer distance education to students in states where the institution is not physically located to either meet those states' requirements for offering postsecondary education or to participate in a state authorization reciprocity agreement and then document that there is a state process for review and action on student complaints.  In response to this delay, the National Student Legal Defense Network filed a lawsuit on August 23 in the U.S. District Court for the Northern District of California, arguing that the methods ED used to delay implementation of the rules violated both the Higher Education Act and the Administrative Procedure Act.  The case has been assigned to a magistrate judge. Accreditation:  On July 31, ED announced a new round of rulemaking related to accreditation and proposed negotiation of the following topics:  requirements for accrediting agencies in their oversight of member institutions; requirements for accrediting agencies to honor institutional mission; criteria used by the Secretary to recognize accrediting agencies, emphasizing criteria that focus on educational quality; developing a single definition for purposes of measuring and reporting job placement rates; and simplifying ED's process for recognition and review of accrediting agencies.  Negotiations are expected to begin in January 2019. Speaking of accreditors, in late September, after having tentatively restored its accrediting status in April, ED sent a letter to the Accrediting Council for Independent Colleges and Schools (ACICS), stating that the accreditor was in compliance with all but two of the necessary standards for recognition and that it has 12 months to meet the final two criteria. To round out the news about ED, on June 21, the White House unveiled a plan to merge the Education and Labor departments into a single Cabinet agency:  the Department of Education and the Workforce.  The change would require congressional approval.  The merger reflects the Administration's desire to streamline government and focus on career technical education and skill-building.

D.   Activity by Other Federal Agencies

ED is not the only federal body that has kept busy. The SEC settled its case against two executives of ITT Educational Services, Inc., days before trial was to begin.  The two executives were alleged to have hidden ITT's financial condition from investors.  The settlements include penalties of $200,000 and $100,000 and temporary suspensions from serving on boards of publicly-traded companies.  In the meantime, the bankruptcy trustee representing ITT's debtors filed suit against one of the executives and eight former board directors, alleging that they breached their fiduciary duties by not taking steps that might have kept the company out of bankruptcy.  In September, the bankruptcy trustee also filed suit against ED and lenders who backed ITT's private loan program, alleging that ED failed to adequately protect students. On the CFPB front, CFPB has accused ED of blocking Navient from producing student borrower documents to CFPB in its lawsuit against Navient.  On August 10, the court held that Navient must produce the documents if they are in Navient's possession, regardless of whether they are "owned" by ED. The FTC reached settlements of over $60 million with eight separate parties accused of scamming consumers out of millions of dollars by promising to reduce or eliminate their loan debt.  The settlements are part of a coordinated federal-state law enforcement initiative targeting deceptive student loan debt relief scams announced by the FTC in October 2017, called Operation Game of Loans. Finally, in July, the FBI concluded an investigation into an alleged "bait-and-switch" scheme that purportedly affected more than 2,500 student veterans.  A company called Ed4Mil allegedly recruited service members and veterans for what they thought were classes taught by a private liberal arts school, but were actually unaccredited correspondence classes.  Ed4Mil allegedly charged the government the university tuition rates and pocketed the difference.  Ed4Mil's founder pleaded guilty to conspiracy to commit wire fraud and was sentenced to five years in prison.  He was also ordered to pay $24 million in restitution.  Two co-conspirators pleaded guilty to conspiracy to commit wire fraud and were sentenced to probation.

E.   State Attorney General Activity

As we've reported, state attorneys general also remain busy in their policing of the education sector.

1.   California Attorney General Gets Mixed Results.

California, one of the busiest state AG offices, has seen mixed results in recent months.  In one win, Attorney General Javier Becerra settled with Balboa Student Loan Trust for $67 million in debt relief for former students of Corinthian College.  The settlement calls for Balboa to immediately halt debt collection, forgive 100 percent of the balances on over 30,000 private student loans, and to refund past payments. The Attorney General next announced a suit against student loan servicer, Navient, alleging Navient violated California's unfair competition and false advertising laws by failing to sufficiently disclose how borrowers could be considered for income-driven repayment plans, thus steering borrowers to more expensive plans.  Navient has stated that the allegations are baseless and that it will "vigorously defend" the suit. In August, a magistrate judge in the U.S. District Court for Northern District of California dismissed California's complaint against ED and Secretary DeVos alleging ED had improperly halted debt relief claims of former Corinthian Colleges students.  The court held that California lacked standing to challenge the Trump administration's actions.  California has filed an amended complaint that seeks to remedy the deficiencies identified by the court. California also suffered another defeat in August when a court issued a temporary restraining order, halting the practice by the California State Approving Agency for Veterans Education (CSAAVE)—which certifies colleges to award federal education aid to veterans—of suspending the eligibility of colleges from other states based on its interpretation of a rule to require "extension" campuses to be operationally dependent on a campus in California.  The college plaintiffs alleged that CSAAVE's interpretation has no basis in governing law and that its implementation of this interpretation violated the California Administrative Procedures Act.  The Agency stated its decisions were based on the inadequacy of the colleges' locations in California, but the colleges' lawsuit alleged that the Agency's own documentation demonstrated that the colleges were compliant with all rules.

2.   Massachusetts Attorney General Sues New England Institute of Art for Fraud.

In July, Massachusetts Attorney General Maura Healy sued the New England Institute of Art (NEIA) and Education Management Corporation (EDMC) for fraud.  Massachusetts's lawsuit alleges NEIA and EDMC targeted and aggressively recruited students by misrepresenting job placement rates, NEIA's job search assistance resources, and the availability of financial aid.  NEIA closed in 2017, and EDMC filed for bankruptcy in June.  Nevertheless, it appears Massachusetts is pursuing its claims.

3.   New York City Department of Consumer Affairs Alleges Berkeley College Violated Consumer and Local Debt Protection Laws.

In New York, it appears other agencies are participating in enforcement as well.  After a two-year investigation of Berkeley College, the New York City Department of Consumer Affairs has sued the for-profit institution, alleging that it employed "predatory marketing tactics," made misrepresentations about financial aid and employment prospects, and attempted to collect debts not actually owed.  The investigation reportedly included undercover investigators who communicated with recruiters and students and the review of over 50,000 pages of documents produced by the college.

4.   Investigations and Press Reports Demonstrate Vulnerability of Schools Beyond the For-Profit Sector.

In July, Pennsylvania Attorney General Josh Shapiro announced his office would investigate claims that Temple University knowingly provided false data to U.S. News & World Reports to boost the rankings of its online MBA program.  And in August, the Commission on Institutions of Higher Education at the New England Association of Schools and Colleges voted to place on probation two independent nonprofit schools—College of St. Joseph and Newbury College.  The accreditor reports that the two schools, both facing declining enrollment, failed to meet a standard on institutional financial resources. Further, at least one news outlet recently reported on alleged disgruntled customers of Woz U, the coding boot camp started by Apple co-founder Steve Wozniak.  In the report, Woz U's President acknowledged errors in the program and stated that a quality control system has been adopted.

F.   Corporate Transactions and For-Profit to Nonprofit Status Changes

There were several notable developments in the area of sales and mergers. Strayer Education, Inc. finalized its merger with Capella Education Company in August.  The new combined entity, called Strategic Education, Inc. (SEI) will continue to operate Strayer University and Capella University as separately accredited institutions. ED has given primary approval to Adtalem Global Education's proposed transfer of DeVry University to Cogswell Capital LLC.  The transfer will still need approval from the Higher Learning Commission.  (Unrelated to the transfer but also notable is a recent class action lawsuit against DeVry, filed by former students who say DeVry falsely advertised employment and graduation rates to induce them to enroll.) Adtalem also finalized a deal to transfer ownership of Carrington College to San Joaquin Valley College, Inc.  The deal will need regulatory and creditor approval and is expected to be finalized in mid-2019. Bridgepoint Education announced in July that its accreditor has given initial approval for a merger of two of Bridgepoint's subsidiary institutions, Ashford University and University of the Rockies.  Ashford University will be the surviving entity of the merger, which will now seek approval from state regulators and ED. This quarter also saw more examples of a trend we've reported previously:  for-profit institutions seeking to become nonprofit entities.  In July, National University System, a nonprofit network of universities, announced it will acquire for-profit Northcentral University to expand its online graduate and doctoral program offerings.  Grand Canyon University, which had tried for several years to convert back to a nonprofit, sold off assets necessary to complete the status change.  This trend has gained so much steam that the National Advisory Committee on Institutional Quality and Integrity (NACIQI) recently held an event on it, hosting 22 panelists to weigh in on the topic of for-profit to nonprofit conversions in higher education.  Most of the panelists cited regulatory and public scrutiny as the major factor driving these conversions. Not all of these deals have been successful.  The proposed acquisition of 31 Art Institute schools by nonprofit Dream Center Education Holdings faces a new hurdle.  The Higher Learning Commission temporarily suspended accreditation of four Art Institute schools.  Senator Dick Durbin (D-Ill.) has called for an investigation of Dream Center, in part because Dream Center's websites allegedly continued to list the schools as accredited.

G.   Other News

The American Bar Association (ABA) has revoked the accreditation of Arizona Summit Law School.  The revocation follows a year-long probation period for allegedly failing to meet academic and admissions standards.  Arizona Summit plans to appeal the decision. During the probationary period, InfiLaw Corp., which owns Arizona Summit, fought back by suing the ABA, alleging it discriminated against for-profit law schools.  In August, the ABA had a setback in that lawsuit when the U.S. Judicial Panel on Multidistrict Litigation rejected the ABA's argument that that three separate lawsuits brought by InfiLaw schools should be consolidated.  The Panel reasoned that the number of suits was small and discovery would be minimal given that the suit would likely turn on questions of law.  The three cases will now proceed independently.

*   *   *

As always, we will continue to monitor all of these developments, and you can look forward to updates in our next report.

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Los Angeles Timothy Hatch (+1 213-229-7368, thatch@gibsondunn.com) Marcellus McRae (+1 213-229-7675, mmcrae@gibsondunn.com) Julian W. Poon (+1 213-229-7758, jpoon@gibsondunn.com) Eric D. Vandevelde (+1 213-229-7186, evandevelde@gibsondunn.com) James Zelenay (+1 213-229-7449, jzelenay@gibsondunn.com) Jeremy S. Smith (+1 213-229-7973, jssmith@gibsondunn.com) Denver Jeremy S. Ochsenbein (+1 303-298-5773, jochsenbein@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Washington, D.C. Douglas Cox (+1 202-887-3531, dcox@gibsondunn.com) Michael Bopp (+1 202-955-8256, mbopp@gibsondunn.com) Jason J. Mendro (+1 202-887-3726, jmendro@gibsondunn.com) Amir C. Tayrani (+1 202-887-3692, atayrani@gibsondunn.com) Lucas C. Townsend (+1 202-887-3731, ltownsend@gibsondunn.com)

The False Claims Act (FCA) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. While the U.S. Department of Justice has recently issued statements indicating some new thinking about FCA enforcement, newly filed cases remain at historical peak levels and the DOJ has enjoyed seven straight years of more than $3 billion in annual FCA recoveries. As much as ever, any company that deals in government funds—especially in the health care and life sciences, government contracting and financial services sectors—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves. Please join Gibson Dunn for a 90-minute discussion of the latest developments in FCA, including:

• The latest trends in FCA enforcement actions and associated litigation involving your industry sector;
• Updates on the Trump Administration’s approach to FCA enforcement;
• Notable legislative and administrative developments affecting the FCA’s statutory framework and application; and
• The latest developments in FCA case law, including the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision.

View Slides [PDF] https://player.vimeo.com/video/289371961

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PANELISTS: John Chesley is a partner in the Washington, D.C. office. He represents corporations, audit committees, and executives in internal investigations and before government agencies in matters involving the FCPA, procurement fraud, environmental crimes, securities violations, antitrust violations, and whistleblower claims. He also litigates government contracts disputes in federal courts and administrative tribunals. Jim Zelenay is a partner in the Los Angeles office where he practices in the firm's Litigation Department. He is experienced in defending clients involved in white collar investigations, assisting clients in responding to government subpoenas, and in government civil fraud litigation. He also has substantial experience with the federal and state False Claims Acts and whistleblower litigation, in which he has represented a breadth of industries and clients, and has written extensively on the False Claims Act. Jonathan Phillips is a partner in the Washington, D.C. office where he focuses on compliance, enforcement, and litigation in the health care and government contracting fields, as well as other white collar enforcement matters and related litigation. A former Trial Attorney in DOJ’s Civil Fraud section, he has particular experience representing clients in enforcement actions by the DOJ, Department of Health and Human Services, and Department of Defense brought under the False Claims Act and related statutes. Erin Rankin is an associate in the Washington, D.C. office, where she is a member of the firm’s Litigation Department. She represents clients on government contracts matters relating to contract claims and terminations, suspension and debarment proceedings, internal investigations, and due diligence.

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MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.50 credit hours, of which 1.50 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

The False Claims Act (FCA) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. While the U.S. Department of Justice has recently issued statements indicating some new thinking about FCA enforcement, newly filed cases remain at historical peak levels and the DOJ has enjoyed seven straight years of more than $3 billion in annual FCA recoveries. As much as ever, any company that deals in government funds—especially in the health care and life sciences, government contracting and financial services sectors—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves. Please join Gibson Dunn for a 90-minute discussion of the latest developments in FCA, including:

• The latest trends in FCA enforcement actions and associated litigation involving your industry sector;
• Updates on the Trump Administration’s approach to FCA enforcement;
• Notable legislative and administrative developments affecting the FCA’s statutory framework and application; and
• The latest developments in FCA case law, including the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision.

View Slides [PDF] https://player.vimeo.com/video/287465636

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PANELISTS: Joseph Warin is a partner in the Washington, D.C. office, chair of the office’s Litigation Department, and co-chair of the firm's White Collar Defense and Investigations practice group. His practice focuses on complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation. Stuart Delery is a partner in the Washington, D.C. office. He represents corporations and individuals in high-stakes litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement. Previously, as the Acting Associate Attorney General of the United States (the third-ranking position at the Department of Justice) and as Assistant Attorney General for the Civil Division, he supervised the DOJ's enforcement efforts under the FCA, FIRREA and the Food, Drug and Cosmetic Act. Jim Zelenay is a partner in the Los Angeles office where he practices in the firm's Litigation Department. He is experienced in defending clients involved in white collar investigations, assisting clients in responding to government subpoenas, and in government civil fraud litigation. He also has substantial experience with the federal and state False Claims Acts and whistleblower litigation, in which he has represented a breadth of industries and clients, and has written extensively on the False Claims Act.

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MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.50 credit hours, of which 1.50 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

The False Claims Act (FCA) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. While the U.S. Department of Justice has recently issued statements indicating some new thinking about FCA enforcement, newly filed cases remain at historical peak levels and the DOJ has enjoyed seven straight years of more than $3 billion in annual FCA recoveries. As much as ever, any company that deals in government funds—especially in the health care and life sciences, government contracting and financial services sectors—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves. Please join us for a 90-minute discussion of the latest developments in FCA, including:

• The latest trends in FCA enforcement actions and associated litigation involving your industry sector;
• Updates on the Trump Administration’s approach to FCA enforcement;
• Notable legislative and administrative developments affecting the FCA’s statutory framework and application; and
• The latest developments in FCA case law, including the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision.

View Slides [PDF] https://player.vimeo.com/video/286401490

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PANELISTS: Stuart Delery is a partner in the Washington, D.C. office. He represents corporations and individuals in high-stakes litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement. Previously, as the Acting Associate Attorney General of the United States (the third-ranking position at the Department of Justice) and as Assistant Attorney General for the Civil Division, he supervised the DOJ's enforcement efforts under the FCA, FIRREA and the Food, Drug and Cosmetic Act. Marian J. Lee is a partner in the Washington, D.C. office where she provides FDA regulatory and compliance counseling to life science and health care companies. Ms. Lee has significant experience advising clients on FDA regulatory strategy, risk management, and enforcement actions. John Partridge is a partner in the Denver office where he focuses on white collar defense, internal investigations, regulatory inquiries, corporate compliance programs, and complex commercial litigation. He has particular experience with the False Claims Act and the Foreign Corrupt Practices Act ("FCPA"), including advising major corporations regarding their compliance programs. Jonathan Phillips is a partner in the Washington, D.C. office where he focuses on compliance, enforcement, and litigation in the health care and government contracting fields, as well as other white collar enforcement matters and related litigation. A former Trial Attorney in DOJ’s Civil Fraud section, he has particular experience representing clients in enforcement actions by the DOJ, Department of Health and Human Services, and Department of Defense brought under the False Claims Act and related statutes.  

---

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.50 credit hours, of which 1.50 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

Click for PDF A year and a half into the new Administration, we are seeing new and shifting enforcement and regulatory trends in the health care provider space. While the staying power of these trends remains uncertain, it is increasingly clear that the Administration is implementing changes—including potentially significant ones—at each of the principal health care enforcement agencies. The first half of 2018 also saw notable case law developments on some of the most hot-button issues facing health care providers, helping to round out an eventful six months across the health care compliance and enforcement landscape. We cover all of these trends and developments in greater depth below. First, while the U.S. Department of Justice ("DOJ") and U.S. Department of Health and Human Services ("HHS") stepped up their opioid-related enforcement efforts, other areas of enforcement saw less aggressive pursuit over the past six months compared to the first half of 2017. Notably, DOJ gave several indications of letting up on affirmative enforcement actions, including with the release of then-Associate Attorney General Rachel Brand's memorandum (the "Brand Memo"), which prohibits DOJ from using guidance documents and sub-regulatory actions to "create binding requirements that do not already exist by statute or regulation." The Brand Memo and other recent DOJ pronouncements are particularly salient for health care providers, for whom enforcement actions can often be grounded in agency and contractor guidance. That said, if the degree of ongoing criminal and civil enforcement efforts related to opioids is any indication, we anticipate a very busy second half of 2018 for both DOJ and the HHS Office of Inspector General ("HHS OIG"), and the Administration may be poised for a net increase in resolution numbers in the second half of the year and into 2019, notwithstanding the let-up in other areas. Second, the first six months of 2018 also saw several notable case law developments that could have a lasting impact on health care providers. We report below on courts' ongoing efforts to make sense of the implied certification basis for False Claims Act ("FCA") liability recognized by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar. We also survey key developments regarding FCA liability in cases where a difference of medical opinion underlies providers' alleged liability, as well as courts' recent approaches toward statistical sampling to prove liability and damages in FCA cases. Finally, we discuss recent regulatory and case law developments salient to two of the most important and prevalent issues for health care providers—the Anti-Kickback Statute ("AKS") and the Stark Law. As always, a collection of Gibson Dunn's recent publications and presentations on health care issues impacting providers may be found on our website. And, of course, we would be happy to discuss these developments—and their implications for your business—with you.

I. DOJ Enforcement Activity

A. False Claims Act Enforcement Activity

Between January 1 and June 30, 2018, DOJ announced approximately $201 million in FCA recoveries through settlements with health care providers, significantly below the $817 million figure recovered by DOJ through settlements as of June 30, 2017.[1] This is likely due to the fact that in the first half of 2017, DOJ settled eight cases for more than $30 million (the approximate amount of the single highest settlement in the first half of 2018) including one for $155 million.[2] The total of forty health care provider settlements announced by DOJ during the first half of 2018 is also considerably lower than the fifty-four health care provider settlements announced during the first half of 2017, the forty-nine settlements announced during the first half of 2016, and the fifty-seven settlements announced during the first half of 2015. Given the long road most FCA matters take to resolution—the average FCA case can take two years or more to investigate before the government decides whether to pursue it—it is hard to tell if the lower number of settlements in the first half of 2018 compared to last year is a result of a change in DOJ policies or priorities. But there is reason to think providers may have success pushing back on aggressive FCA enforcement going forward, if the Brand Memo and related statements by DOJ are any indication. The January 25, 2018 Brand Memo cabined the ability of prosecutors to use non-compliance with agency guidance as the basis of an FCA claim.[3] Specifically, the Brand Memo prohibits (1) using non-compliance with other agencies' "guidance documents as a basis for proving violations of applicable law" in affirmative civil enforcement cases, and (2) using an agency's "enforcement authority to effectively convert agency guidance documents into binding rules." The Brand Memo applies to administrative guidance issued by DOJ or any other executive agency. The Brand Memo may have particular relevance to providers in medical necessity cases, which frequently involve non-binding guidance and recommendations, such as where the government's or relator's theories are grounded in provisions of the Medical Benefit Policy Manual and/or contractors' local coverage determinations (NCDs and LCDs). Although the memo's author, Rachel Brand, has left DOJ, in a June speech, Acting Associate Attorney General Jesse Panuccio reiterated the Brand Memo's importance to DOJ in its reform of FCA enforcement. As we described in more detail in our June 2018 Client Alert, he also highlighted other measures DOJ is undertaking, including formalizing cooperation credit processes, in an effort to improve FCA enforcement. We will continue to monitor these developments and settlement numbers and will report further in our 2018 Year-End Update.

Notwithstanding the lower overall number of settlements, the FCA settlements announced so far this year have rested on the same mélange of legal theories as past years and have involved a number of different types of providers, including hospitals, clinics and single providers, skilled nursing and rehabilitation services, home health care services, and pharmacies. As indicated in the chart above, for the first half of 2018, the vast majority of FCA health care provider settlements have involved clinics and single providers; however, these settlements made up a disproportionately small amount of the financial recoveries—averaging roughly $2.3 million per case. Within this category, the majority of settlements have resolved actions primarily predicated on legal theories of services not provided (eleven cases), while smaller numbers of settlements included additional theories of medically unnecessary or unreasonable services (five cases), unqualified personnel providing care (four cases), upcoding (three cases), AKS claims (two cases), physician self-referral claims (one case), and the provision of sub-standard care (one case).[4] The second highest number of settlements were with "other" medical services, as depicted in the chart. These services included ambulance services, diagnostic laboratory testing, radiation services, ophthalmology services, intra-operative monitoring services, health management/mental health services, and wound care services.

Consistent with the recent past, the most prevalent legal theory among health care provider settlements was that the provider had billed government health programs for items or services that were not medically necessary. In many of those cases, medical necessity was the sole underlying theory of liability, reflecting DOJ's continued focus on issues of medical necessity. DOJ also commonly includes medical necessity allegations in broader and more complex allegations of misconduct. For example, an Arizona-headquartered health care organization, that owns and operates twenty-eight acute-care hospitals in multiple states, agreed to pay over $18 million to settle allegations that twelve of its hospitals in Arizona and Colorado had "knowingly submitted false claims to Medicare by admitting patients who could have been treated on a less costly outpatient basis."[5] According to the press release, these twelve hospitals had knowingly overcharged Medicare patients for short-stay inpatient procedures that should have been billed on an outpatient basis. In addition to these medically unnecessary inpatient admissions, the hospitals allegedly provided falsified documentation in their reports to Medicare by artificially inflating the number of outpatient observation hours received by patients. In addition to the monetary settlement, the health care organization entered into a corporate integrity agreement with HHS OIG, requiring the company to engage in "significant compliance efforts" over the next five years, including retaining an independent review organization to review the accuracy of the company's claims for services furnished to Medicaid and Medicare beneficiaries. Lack of medical necessity also served as the underlying legal theory in a settlement with a provider of opioids and other prescription pain killers, as part of the recent focus on cracking down on the nation's opioid epidemic. In that case, a Tennessee chiropractor and his pain management company agreed to pay $1.45 million, and a pain clinic nurse practitioner agreed to pay $32,000 and surrender her DEA registration, to resolve claims that from 2011 through 2014, the chiropractor and his company "caused pharmacies to submit requests for Medicare and TennCare payments for pain killers, including opioids . . . which had no legitimate medical purpose."[6] With respect to this settlement, Attorney General Jeff Sessions noted, "[i]f we're going to end this unprecedented [opioid] drug crisis, which is claiming the lives of 64,000 Americans each year, doctors must stop overprescribing opioids and law enforcement must aggressively pursue those medical professionals who act in their own financial interests, at the expense of their patients' best interests."[7] We address the ongoing opioid enforcement efforts further below. In addition to the settlement involving the Arizona-based health care organization, the first half of 2018 saw a number of other settlements involving multiple-facility providers nationwide, many under more than one theory of liability. For example, in one case involving a Louisville, Kentucky-based company that owns and operates about 115 skilled nursing facilities, DOJ alleged that the company had "knowingly submitted false claims to Medicare for rehabilitation therapy services that were not reasonable, necessary and skilled."[8] The settlement, which was initiated by two individuals under the qui tam provisions of the FCA, required the company to pay more than $30 million and also resolved allegations that the company had submitted forged pre-admission certifications of patient need for skilled nursing to the State of Tennessee's Medicaid program. In another case, DOJ settled with a dental provider for $23.9 million following allegations that the company had, throughout clinics in seventeen states, submitted false claims for medically unnecessary dental procedures and for procedures not actually provided.[9] DOJ's case was initiated by five lawsuits filed under the qui tam provision of the FCA. DOJ likewise settled for $22.51 million with a company that manages nearly 700 hospital-based wound care centers nationwide to resolve allegations that the company had knowingly caused wound care centers to bill Medicare for medically unnecessary and unreasonable procedures.[10] That case arose from two separate lawsuits filed by former employees of the company under the qui tam provision of the FCA. The first half of 2018 also saw a relatively high number of resolutions resting on theories of services not provided, including nine settlements based on allegations that services billed for were not provided at all. In one settlement, which involved the coordinated effort of the Alaska Medicaid Fraud Control Unit, HHS OIG, and the Alaska Medicaid Program, an Anchorage-based provider of services to individuals with intellectual and developmental disabilities agreed to pay nearly $2.3 million to resolve allegations it had billed for services not provided and for overlapping services with the same provider.[11] The settlement also required the health care provider to enter into a five-year corporate integrity agreement with HHS OIG. Finally, in one of the largest civil resolutions of the first half of 2018,[12] a judge found a Houston-area laboratory liable for nearly $30.6 million for overbilling Medicare for services (transportation miles) that the company's lab technicians had never actually traveled.[13]

B. FCA-Related Case Law Developments

1. Developments in Implied False Certification Theory

Our previous updates discussed in detail the unanimous 2016 Supreme Court decision in Universal Health Services, Inc. v. United States ex rel. Escobar,[14] affirming the validity of an "implied certification" theory for FCA liability following a "rigorous" and "demanding" analysis of whether the alleged fraud was "material" to the government's decision to pay the claim at issue. Courts have continued to interpret Escobar and unpack the meaning of "materiality" in this context. In January 2018, the Middle District of Florida overturned a $350 million jury verdict on the grounds that the evidence did not support a finding of FCA materiality and scienter where the government continued making payments to the defendants despite being on notice of defendants' alleged misconduct.[15] Plaintiffs alleged that the defendants, operators of a chain of skilled nursing facilities and a management services organization, misrepresented the conditions of and treatments provided to patients in its facilities. In support of these allegations, plaintiffs presented a variety of paperwork containing defects such as missing dates or signatures. The judge noted that while the defective paperwork was demonstrably non-compliant with contractual requirements for comprehensive care plans, the government nonetheless made payments and took no steps to enforce compliance. With these facts in mind, the judge concluded there was no reason to believe the deviations from the terms of the comprehensive care plans were material to payment, and that overturning the jury verdict was consistent with Escobar which "rejects a system of government traps, zaps, and zingers that permits the government to retain the benefit of a substantially conforming good or service but to recover the price entirely—multiplied by three—because of some immaterial contractual or regulatory non-compliance."[16] An appeal of this ruling was filed in early July and is pending in the Eleventh Circuit. Courts nationwide continue to disagree about the extent to which government payment after awareness of non-compliance defeats the materiality standard. We will continue to watch as the Supreme Court considers whether to hear at least one cert petition seeking clarification of that precise issue, in United States ex rel. Campie v. Gilead Sciences, Inc., during the 2018 term.[17]

2. Developments in "Objective Falsity" Jurisprudence

As we have discussed in prior updates, courts continue to consider the animating logic of the March 2016 AseraCare case, in which the District Court for the Northern District of Alabama, after the government prevailed in the first phase of a bifurcated trial, granted summary judgment sua sponte for the hospice provider on the grounds that the government failed to show evidence of an objective falsehood. In support of its allegation that the defendant hospice provider submitted false claims for services where the patient did not qualify for hospice care, the government had proffered a trial expert's review of patient medical records. The district court found that a "contradiction based on clinical judgment or opinion alone [i.e. between the government's expert and another expert or the treating physician] cannot constitute falsity under the FCA as a matter of law."[18] Other courts have similarly declined to find objective falsity in cases where the challenged care and services were the product of providers' clinical judgment. For example, in a December 2017 decision, the Central District of California reached a similar conclusion in United States ex rel. Winter v. Gardens Regional Hospital and Medical Center, finding no basis for liability in pleadings premised on questions of medical judgment regarding the appropriateness of hospital admissions.[19] In a similar vein, in June 2017, the district court in United States ex rel. Dooley v. Metic Transplantation Lab held that defendants could only be found to have submitted objectively false claims if they, in their medical opinion, knew that they were selecting medically unnecessary tests.[20] Two recent circuit court decisions, however, held that medical judgments can be challenged as false or fraudulent for purposes of the FCA, at least in certain circumstances. First, in United States v. Paulus, the Sixth Circuit rejected a district court's decision to overturn the conviction of a medical doctor for allegedly fraudulently ordering an unusually high number of angiograms, and then finding high levels of stenosis based on erroneous and exaggerated readings of those angiograms.[21] The district judge found that the medical interpretation of the amount of stenosis shown on angiograms was "incapable of confirmation or contradiction" and not an "objectively verifiable fact,"[22] but the Sixth Circuit strongly disagreed, stating "[w]e believe we were clear then, but we make it explicit now: The degree of stenosis is a fact capable of proof or disproof."[23] The Department of Justice lauded the Paulus decision, filing a letter with the Eleventh Circuit stating that Paulus "squarely rejected" the reasoning of AseraCare. In a responsive filing, AseraCare argued that the cases are distinguishable due to the factual nature of the determinations being made—while Paulus involved a factual determination about the measurable degree of blockage in arteries, the judgments in AseraCare centered on life expectancy, which AseraCare describes as a judgment that "necessarily and by law involves a subjective opinion." The Eleventh Circuit heard oral arguments in AseraCare in March 2017, and a decision is forthcoming. Second, in United States ex rel. Polukoff v. St. Mark's Hospital,[24] a Tenth Circuit panel held that certifications of "reasonable and necessary" care can be deemed false for purposes of FCA liability if procedures are found to be "not reasonable and necessary under the government's definition of the phrase."[25] This decision overturned a District of Utah opinion declaring that a doctor's opinion regarding the potential uses for patent formen ovale ("PFO") closures could not be objectively false since the doctor exercised his professional medical judgment in reaching this conclusion.[26] Although PFO closures are typically conducted only on patients who have previously endured a stroke, the provider-defendant believed they had the potential to serve as a "preventative measure" for patients with an "elevated risk of stroke."[27] As a result of his view that PFO closures had broader potential usage, the doctor performed PFO closures far more often than normal in the industry: in a time period where the Cleveland Clinic performed 37 PFO closures, the defendant performed 861.[28] The Tenth Circuit unanimously rejected the district court's decision that the doctor's view of the wider usefulness of PFO closures was sufficient to defeat a finding of falsity, emphasizing that providers cannot use professional judgment as a shield against liability for unnecessary procedures. Rather, for purposes of determining whether a claim is reimbursable, the Tenth Circuit found that government guidance such as the Medicare Program Integrity Manual provides a reliable rulebook for what constitutes "reasonable and necessary" under the FCA.[29] The case will now return to the district court for reconsideration. The extent to which a disagreement in professional opinion can be construed as an indicator of falsity is not fully settled. Following recent cases, it is clear that prosecutors must provide evidence of falsity beyond mere disagreement of another health professional. Nonetheless, the Paulus and Polukoff decisions suggest that providers' medical judgment may not be protected when other factors suggest that they veer significantly from the mainstream. The Tenth Circuit's statements about using government manuals to define "reasonable and necessary" for FCA purposes may prompt particular controversy because as other courts have recognized, these manuals lack the force of law, and in any event, they, too, have vague standards that are susceptible to multiple interpretations. In that regard, key questions remain about the parameters of defining falsity in medical necessity determinations; we will continue to monitor pending litigation in this area and will report on further judicial developments.

3. Developments Regarding the Use of Statistical Sampling

As noted in prior updates, dating back to our 2014 Year-End Update, we continue to track developments in the use of statistical evidence and sampling to support wide-scale FCA allegations, especially against multi-site providers. Two courts recently rejected plaintiffs' attempts to use statistical data to establish fraud under the FCA. In United States ex rel. Wollman v. The General Hospital Corporation, the District of Massachusetts granted defendants' motion to dismiss on the grounds that relator's allegations based on statistical data fell short of pleading specific details regarding the actual submission of claims.[30] Although the First Circuit generally has relaxed pleading standards and allows the use of statistical evidence to strengthen an inference of fraud, the Wollman court found that relators' use of statistical data fell short of creating any inference that surgeons committed fraud by billing Medicare and Medicaid for "overlapping" surgeries.[31] Similarly, in April 2018, in United States ex rel. Conroy v. Select Medical Corporation, a magistrate judge in the Southern District of Indiana rejected a relator's attempt to use statistical sampling to determine "the number of fraudulent Medicare claims and the damages flowing from them."[32] The court held that the plaintiffs failed to provide any evidence in support of the proposition that showing "a particular Medicare reimbursement claim was fraudulent based on a theory of lack of medical necessity can be done by a random-sampling method." Instead, the court found that a case-by-case analysis would be necessary to "evaluate whether each particular claim for which the plaintiffs seek relief was actually knowingly false within the meaning of the FCA."[33] DOJ, despite initially declining to intervene in the case, filed a letter of interest challenging the magistrate judge's discovery order as "contrary to long-established precedent recognizing statistical sampling as admissible and valid method of proof" in contexts applicable to the FCA.[34] The court has not yet addressed DOJ's letter. As the government and FCA relators continue to attempt to support region-wide or nationwide cases against multi-facility providers using statistical sampling evidence, these issues are sure to have an important presence in the FCA case law, and we will continue to monitor and report on them.

C. Opioid Crisis Enforcement Efforts

The government continues to aggressively target the opioid crisis in its criminal, as well as civil, enforcement efforts, with the initial focus on opioid manufacturers widening to include prescribers, and even pharmacy dispensers, of opioids. On June 6, the CEO of a health care company and four physicians were charged in a superseding indictment as part of an investigation into an alleged $200 million health care fraud scheme involving the distribution of medically unnecessary controlled substances and injections that resulted in patient harm.[35] The indictment alleges that the physicians prescribed over 4.2 million dosage units of medically unnecessary controlled substances to Medicare beneficiaries, including some who were addicted to narcotics. Further, the physicians allegedly required the Medicare beneficiaries to consent to medically unnecessary injections, which were billed to Medicare in order to increase revenue for all defendants. Trial in the Eastern District of Michigan is scheduled to begin at the end of July. In our 2017 Mid-Year Update, we highlighted DOJ's announcement of what was then the largest-ever health care fraud enforcement action, involving charges against more than 400 defendants for more than $1.3 billion in fraud. The enforcement action focused heavily on the prescription and distribution of medically unnecessary prescription drugs, including opioids and other narcotics. On June 28, DOJ announced a new record for the largest health care fraud enforcement action in history.[36] This enforcement action involved charges against 601 individuals across 58 federal districts, allegedly responsible for over $2 billion in fraud losses. Of the individuals charged, 162 defendants (including seventy-six doctors) were charged for playing a role in prescribing and distributing opioids and other narcotics. In the press release, Attorney General Jeff Sessions described the underlying conduct as "despicable crimes" that led DOJ to take "historic new steps to go after fraudsters, including hiring more prosecutors and leveraging the power of data analytics."[37] Attorney General Sessions emphasized that "[t]his is the most fraud, the most defendants, and the most doctors ever charged in a single operation—and we have evidence that our ongoing work has stopped or prevented billions of dollars' worth of fraud."[38] The enforcement action involved coordinated efforts by DOJ's Criminal Division and Health Care Fraud Unit, HHS OIG, the Drug Enforcement Administration, the Centers for Medicare and Medicaid Services, IRS Criminal Investigations, the Department of Labor, State Medicaid Fraud Control Units, and others. HHS Secretary Alex Azar lauded the "Takedown Day" as "a significant accomplishment for the American people," stating that every dollar recovered in the operation is "a dollar that can go toward providing healthcare for Americans in need[.]"[39] In the middle of July, DOJ announced Operation Synthetic Opioid Surge, or Operation S.O.S., in an effort to target distribution of synthetic opioids in the districts with the highest rates of overdose deaths.[40] U.S. Attorney's Offices in key districts will identify a county in which it will prosecute "every readily provable case involving . . . synthetic opioids, regardless of drug quantity." The goal of the intensive effort, which will be coordinated with the DEA Special Operations Division, is to use these smaller prosecutions to identify larger distribution networks for synthetic opioids and ultimately reduce overdose deaths. The recent takedown and Operation S.O.S. initiative are further evidence of DOJ's continued prioritization of the opioid crisis by criminally targeting fraudulent distribution of prescription medications; however, DOJ continues to target these issues through civil remedies as well. On February 27, 2018, DOJ announced the formation of a Prescription Interdiction and Litigation Task Force designed to enforce compliance with federal regulations created to prevent improper prescribing of medications. In his speech announcing the Task Force formation, Attorney General Sessions noted that the Task Force would coordinate with various agencies and employ a wide range of enforcement tools—including the FCA—to crack down on illegal prescriptions.

II. HHS Enforcement Activity

A. HHS OIG Activity

1. 2017 and 2018 Developments and Trends

In the period between October 1, 2017, and March 31, 2018, HHS OIG reported 424 criminal actions, a decrease of approximately 9% from the 468 criminal actions reported in the first half of FY 2017.[41] HHS OIG experienced a larger drop—nearly 25%—in the number of civil actions, reporting 349 in the first half of FY 2018, compared to 461 in the first half of FY 2017.[42] While the yearly number of criminal actions has fluctuated over the past several years (see the chart below), the yearly number of civil actions has been steadily rising—a streak which may break in 2018 based on first-half numbers.

In the first half of FY 2018, HHS OIG also reported expected investigative recoveries of $1.46 billion.[43] In the first half of FY 2017, by contrast, this figure was approximately $2.04 billion.[44] These recovery figures suggest that FY 2018 may continue the general downward shift in HHS OIG's yearly expected recoveries over the last several years, as depicted in the chart below. This downward trend may be due in part to decreases in the frequency and magnitude of large settlements with pharmaceutical companies. In FY 2012 and FY 2013, for example, HHS OIG's year‑end reports highlighted a total of approximately $4.35 billion in settlements with pharmaceutical companies, whereas HHS OIG's year‑end reports for FY 2014 through FY 2017 highlighted a total of only about $1.32 billion in settlements with pharmaceutical companies.[45]

2. Significant HHS OIG Enforcement Activity

a) Exclusions

HHS is required to exclude from participation in the federal health care programs any individual or entity that is (1) convicted of a crime related to Medicare, (2) convicted of a crime related to patient abuse or neglect, (3) convicted of felony health care fraud, or (4) convicted of a felony related to the manufacturing, distribution, prescription, or dispensing of a controlled substance.[46] HHS also has permissive authority to exclude individuals and entities falling into sixteen other categories, including those convicted of fraudulent conduct related to health care, those excluded or suspended from a state health care program, and those HHS determines have paid kickbacks as defined by the Anti‑Kickback Statute.[47] In the first half of calendar year 2018, HHS OIG reported 1,525 exclusions from the federal health care programs.[48] Of that number, thirty exclusions were of entities, a 9% drop compared to the same period in calendar year 2017 and a 3% drop compared to the same period in calendar year 2016.[49] Notably, this number is an increase as compared to calendar years 2015 and 2014. The entity exclusions included thirteen pharmacies and four entities identified as either community mental health centers or psychology practices.[50] The remaining 1,495 exclusions reported in the Exclusions Database for the first half of FY 2018 were of individuals, 158 of whom were classified as business owners or executives, and 104 of whom were classified as physicians.[51] Among business owners or executives, approximately 25% were affiliated with home health agencies, approximately 7% with pharmacies, and approximately 12% with clinics.[52] Of the excluded physicians, approximately 66% were family practitioners, general practitioners, internists, or psychiatrists.[53] Consistent with HHS OIG's focus on pharmacies and on combating the illegal provision of opioids, HHS OIG's semiannual report to Congress covering the first half of FY 2018 highlighted an exclusion case involving a pharmacy owner in Kentucky who was convicted of illegally dispensing oxycodone, hydrocodone, and pseudoephedrine and was sentenced to thirty years in prison. The pharmacy owner's exclusion from the federal health care programs will last at least fifty years.[54]

b) Civil Monetary Penalties

Compared to the same period in calendar year 2017, the first half of calendar year 2018 witnessed an uptick in civil monetary penalties ("CMPs") as a result of settlement agreements and voluntary self‑disclosures. HHS OIG announced 61 CMPs totaling approximately $46 million,[55] marking an increase of nearly 30% in the number of cases, and a 100% increase in total recovery amount, compared to the first half of calendar year 2017.[56] CMPs resulting from self‑disclosures represented approximately 86% of the CMPs, in terms of dollar value, in the first half of the 2018 calendar year, with the largest self‑disclosure settlement representing approximately six times the amount of the largest settlement not involving self‑disclosure. Self‑disclosure cases also accounted for eight of the top ten settlements by dollar amount. Consistent with the trend in the first half of last year, cases involving allegedly false claims or improper billing practices accounted for the lion's share—thirty-one cases totaling nearly $35 million— of CMPs imposed by HHS OIG. Employment of individuals who had been excluded from the federal health care programs was the second most common basis for CMPs, accounting for fourteen cases totaling nearly $1.9 million. However, these cases were overshadowed in terms of dollar amount by the eight CMPs involving alleged AKS or Stark Law violations and amounting to nearly $8.9 million in penalties and settlements. The three largest CMPs assessed against providers in the first half of 2018 are summarized below:

• Northwell Health Inc. (Northwell): On February 13, 2018, after self-disclosing conduct, Northwell agreed to pay approximately $12.7 million to resolve allegations from HHS OIG that Northwell submitted Medicare claims that lacked sufficient documentation for a certain Medicare Local Coverage Determination, "Vertebroplasty and Vertebral Augmentation – Percutaneous, L26439."[57]
• Shands Jacksonville Medical Center, Inc. (Shands) and University of Florida Jacksonville Physicians, Inc. (UF JPI): Shands and UF JPI made a self‑disclosure to HHS OIG, and on January 30, 2018, reached a settlement of approximately $4.5 million to resolve allegations that Shands and UF JPI submitted Medicare and Medicaid claims for ophthalmology surgical procedures that were not medically necessary.[58]
• Nazareth Hall (Nazareth): Following a self‑disclosure, on February 23, 2018, Nazareth reached a settlement of approximately $4 million to resolve HHS OIG allegations that Nazareth submitted Change of Therapy forms for rehabilitative therapy services without following Medicare requirements.[59]

c) Corporate Integrity Agreements

Although we frequently make observations regarding the types of integrity agreements entered into by HHS OIG, the Government Accountability Office ("GAO") issued a report earlier this year that provides a comprehensive survey of these agreements from the period spanning from July 2005 through July 2017.[60] The report found that, during this period, HHS OIG entered into 652 agreements[61] with thirty types of entities, but that individual or small group practices, hospitals, and skilled nursing facilities together accounted for over half of all agreements.[62] Cases that ended with integrity agreements most often started with allegations that the relevant entity or individual billed for medically unnecessary services or for services not provided.[63] Significantly, the report also noted that DOJ settlements accompanied 619 of the 652 integrity agreements reached in the period reviewed.[64] Overall, however, the total number of integrity agreements in effect decreased by 44% from 2006 to 2016,[65] as a result of HHS OIG's self‑described efforts to prioritize entities that pose the most significant fraud risks.[66] In the first half of calendar year 2018, HHS OIG entered into thirteen corporate integrity agreements ("CIAs"), down from twenty-four in the same period in 2017.[67] In one particularly notable example, an Anchorage, Alaska, non‑profit organization that provides services to individuals with developmental disabilities entered into a five‑year CIA with HHS OIG. Under the agreement, the organization was required to implement significant compliance enhancements, including the appointment of a compliance officer and the establishment of a compliance committee, as well as the implementation of specific compliance controls and review procedures at the board of directors level.[68] HHS OIG has signaled that it views these sorts of requirements as a floor, not a ceiling, for providers' compliance programs. For example, in a case involving a non‑profit hospital operator accused of violating the FCA by seeking Medicare reimbursement for inpatient services that could have been provided on a less costly outpatient basis,[69] HHS OIG imposed a five‑year CIA that specified similar board- and management-level compliance enhancements, despite the fact that the entity had "voluntarily established a Compliance Program" before the CIA was executed.[70] The agreement specified that the procedures it imposed on the hospital operator were to be treated as minimum requirements for its compliance program.[71] In other instances, HHS OIG has used CIAs to require significant compliance undertakings more closely tailored to the alleged conduct at issue. For example, in a CIA that involved a parallel settlement with DOJ, a radiation therapy provider that allegedly violated the AKS was required to implement an oversight program to ensure that certain contractual arrangements were "supported by and consistent with fair market valuation reports conducted by independent, objective, and qualified individuals or entities with fair market valuation expertise[.]"[72] Fair market valuations help provide shelter from liability under AKS and the Stark Law for certain contractual arrangements, such as employment compensation arrangements, as they support the relevant arrangement as an arm's-length transaction that does not account for the value or volume of referrals. Notably, several of the CIAs entered into so far this year involved individuals in addition to entities. For example, in February, HHS OIG reached a three‑year CIA with a North Carolina eye-care provider and its physician-owner that requires, among other provisions: enhanced training and education, the retention of an independent review organization ("IRO"), and enhanced screening processes for employees and third-party service providers. The physician-owner is required to submit certifications of the practice's compliance in conjunction with the IRO's review and reporting activities.[73] In another case, the individual owner of a hospice provider was made a party to a CIA with the provider itself, which imposes a five‑year term and the implementation of a detailed set of management‑level compliance enhancements and controls.[74] And, in at least one case, HHS OIG put in place a CIA that imposes obligations on an individual only, without placing parallel obligations on any entity affiliated with the individual.[75] The agreement requires the individual to do the following, among other things: undergo training on billing, coding, and record documentation, and ensure that the individual's employees and contractors received such training; engage an IRO to audit the individual's claims submitted to Medicare and Medicaid; screen the individual's employees and contractors to ensure their eligibility to participate in the federal health care programs, and remove any individuals who have been excluded from participation; and track and communicate certain "reportable events" to HHS OIG.[76] Under the agreement, breach of any of these obligations would trigger a daily stipulated penalty of $1,000 or $1,500, depending on the obligation breached—as well as the possibility of exclusion from the federal health care programs in the event of certain material breaches.[77]

B. CMS Activity

1. Transparency and Data Accessibility

Over the past few years, CMS has prioritized improving access to data related to the use of Medicare and Medicaid services. On April 13, 2018, CMS released the seventh update of the Market Saturation and Utilization Tool.[78] This tool provides interactive maps and related data sets showing provider services and utilization data for selected health services, and is one of many tools used by CMS to monitor and manage market saturation as a means to help prevent potential fraud, waste, and abuse. The seventh update includes a trend analysis graphing tool that shows the percentage change and trend over time across the available metrics and health service areas. CMS explained that in addition to serving as a monitoring tool to prevent potential fraud and abuse, "[t]he data can also be used to reveal the degree to which use of a service is related to the number of providers servicing a geographic region."[79] CMS noted that one of the secondary objectives of making the data public is to "assist health care providers in making informed decisions about their service locations and the beneficiary population they serve."[80]

2. Continued Implementation of Moratoria

As we've described in past updates, the Patient Protection and Affordable Care Act authorizes CMS to impose moratoria on certain regions to prevent new provider enrollments in certain geographic areas identified as fraud "hot spots." The moratoria are imposed after consultation with DOJ and HHS OIG and reviewed for continued necessity every six months. The moratoria, which block any new provider enrollments for Medicare Part B non-emergency ground ambulance providers and Medicare home health agencies in Florida, Illinois, Michigan, Texas, Pennsylvania, and New Jersey, were reviewed and extended again for a six-month period on January 29, 2018.[81]

C. OCR and HIPAA Enforcement

1. HIPAA Enforcement Actions

HHS's Office of Civil Rights ("OCR") reported that as of June 30, 2018, it had reviewed and resolved over 184,614 Health Information Portability and Accountability Act ("HIPAA") complaints since HIPAA privacy rules went into effect in April 2003.[82] OCR has resolved 96% of these cases (177,194).[83] Since January, OCR has reported only two settlements and one decision from an HHS Administrative Law Judge ("ALJ"), amounting to approximately $7.9 million in fines.[84] If OCR's enforcement continues at this pace, 2018 will see a dramatic decline in HIPAA enforcement actions. In the 2017 calendar year, OCR announced ten settlements amounting to approximately $19.4 million in fines, and in 2016, OCR reported thirteen settlements totaling approximately $23.5 million.[85] It remains to be seen whether the downtick in enforcement during the first half of 2018 signals a change in priorities, or whether we will see an acceleration of HIPAA settlements in the second half of the year. On February 1, 2018, OCR announced the first HIPAA settlement of the year, with Fresenius Medical Care North America ("FMCNA"), a nationwide dialysis provider that also runs labs, urgent care centers, and post-acute practices. FMCNA agreed to pay $3.5 million and adopt a comprehensive corrective action plan in order to settle potential HIPAA violations in connection with five data breaches that occurred at separate FMCNA-owned entities over a five-month period in 2012, which impacted 521 individuals.[86] Following an investigation, OCR found that FMCNA "failed to conduct an accurate and thorough risk analysis of potential risks and vulnerabilities to the confidentiality, integrity, and availability of all its [electronic protected health information (PHI)]."[87] OCR Director Roger Severino commented, "[t]he number of breaches, involving a variety of locations and vulnerabilities, highlights why there is no substitute for an enterprise-wide risk analysis for a covered entity."[88] A corrective action plan requires the company to complete a risk analysis and risk management plan, revise policies and procedures, develop an encryption report, and provide employee education on policies and procedures.[89] Less than two weeks later, OCR announced a $100,000 settlement with Filefax, Inc. ("Filefax"), a company that stored and delivered medical records. The case came to the attention of the authorities in February 2015 when OCR received an anonymous complaint alleging that an individual took paper files out of an unlocked dumpster outside of a Filefax office in Illinois and brought it to a nearby paper shredding shop, hoping to receive payment for providing recyclable material. The complaint led to an OCR investigation. Filefax dissolved during the course of the investigation, which ultimately concluded that "Filefax impermissibly disclosed the PHI of 2,150 individuals by leaving the PHI in an unlocked truck in the Filefax parking lot, or by granting permission to an unauthorized person to remove the PHI from Filefax, and leaving the PHI unsecured outside the Filefax facility."[90] This settlement cautions against the careless handling of PHI and demonstrates that companies cannot escape obligations under the law for HIPAA violations even after closing for business. The receiver appointed to liquidate the assets of Filefax, has agreed to pay the $100,000 and properly store and dispose the remaining medical records in a HIPAA-compliant manner.[91] On June 18, 2018, an HHS ALJ granted summary judgment against the University of Texas MD Anderson Cancer Center ("MD Anderson"), requiring the provider to pay $4.3 million in civil monetary penalties for HIPAA violations.[92] This is the fourth largest amount awarded to OCR by an ALJ or secured in a settlement for HIPAA violations; it is also the second summary judgment victory in OCR's history of HIPAA enforcement.[93] The litigation arose out of three data breaches from 2012 and 2013 involving the theft of an unencrypted laptop from an MD Anderson employee and the loss of two unencrypted USB thumb drives containing the information of 33,500 individuals. MD Anderson "failed to adopt an effective mechanism" to protect patient data.[94] The ALJ rejected the argument that stolen information is only disclosed when it is viewed by a third party, holding, "The plain language of the regulation doesn't suggest that. Moreover, to interpret the regulation so narrowly as Respondent suggests would render its prohibitions against unauthorized disclosure to be meaningless."[95] In a statement regarding the decision, Director Severino underscored that "OCR is serious about protecting health information privacy and will pursue litigation, if necessary, to hold entities responsible for HIPAA violations."[96]

2. Cybersecurity

Protection of patients' confidential information, and electronically stored information in particular, continues to be a high priority for HHS enforcement, just as cybersecurity and data privacy issues explode in complexity and public attention. As discussed in past updates,[97] OCR continues to issue monthly "Cybersecurity Newsletters" in order to provide guidance on what specific security measures providers can take to decrease exposure to various security threats and vulnerabilities that exist in the health care sector, and how to reduce breaches of electronic-protected health information ("ePHI").[98] HHS has not said that following the measures outlined in these newsletters creates any kind of safe harbor; rather, the newsletters are designed to "assist" the regulated community to become more knowledgeable about risk areas. Providers would do well to adhere to this guidance to avoid being caught in the crosshairs of OCR.[99] Brief summaries of the newsletters that have been issued so far this year are below.

• The January newsletter discusses the issue of cyber extortion, which may include stealing sensitive data such as ePHI, and explains what organizations can do to prevent falling victim to attackers, including implementing an organization-wide risk analysis and risk management program, training employees, patching systems, and encrypting sensitive data. Organizations are encouraged to remain vigilant for new and emerging cyber threats.[100]
• OCR's February newsletter warns against the dangers of "phishing," a type of cyberattack used to trick individuals to disclose sensitive information electronically by impersonating a trustworthy source, and provides tips on avoiding phishing attacks.[101]
• The purpose of the April newsletter is to provide a concise explanation of the differences between a "risk analysis" required by the HIPAA Security Rule's regulatory requirement and a "gap analysis." In short, a risk analysis is a comprehensive, enterprise-wide evaluation to identify the ePHI and the risks and vulnerabilities to the ePHI; the results of a risk analysis may be used to make enterprise-wide modifications to ePHI systems. By contrast, a gap analysis is a narrower examination of an enterprise to assess whether certain controls or safeguards required by the Security Rule have been implemented and to spot "gaps."[102]
• The May newsletter reminds organizations about the importance of the physical security of workstations to safeguard access to ePHI, which OCR notes is often overlooked. OCR warns that "[f]ailure to take reasonable steps regarding physical security may have serious consequences," citing investigations that have resulted in hefty fines for violations of HIPAA's Security Rule.[103]
• Finally, the June newsletter provides guidance on software vulnerabilities and the necessity of patching software bugs to close security vulnerabilities and prevent hackers from gaining unauthorized access to a user's computer or an organization's network. OCR sets forth the responsibilities of HIPAA-covered entities and business associates to conduct a risk analysis of the potential vulnerabilities to the confidentiality of the ePHI they hold; this includes identifying and mitigating risks and vulnerabilities that unpatched software poses to an organization's ePHI.[104]

III. Anti-Kickback Statute

During the first six months of 2018, the AKS has remained one of the most prominent theories of liability in health care enforcement actions. That is perhaps unsurprising, since the government typically takes the position that the damages resulting from AKS liability are the full amount of the claims supposedly "tainted" by the alleged kickbacks. But given the interplay between the AKS and the FCA, the numerous resulting elements of proof for an AKS case, and the complexities of the AKS's many safe harbors, AKS theories also continue to be actively debated in the health law field and in the courts. Below, we summarize the guidance and case law developments that explore the scope of that potential liability.

A. Notable HHS OIG Advisory Opinions

HHS OIG issued a number of advisory opinions discussing the AKS in the first half of 2018. Notably, the Office gave its imprimatur to each arrangement on which companies requested its input, from sharing savings generated from cost-reduction measures with health care providers to providing support resources to caregivers of patients with chronic conditions. On January 5, HHS OIG considered an arrangement under which neurosurgeons implementing cost-reduction measures with respect to spinal fusion surgeries split the savings from these measures with the medical center in which they operate.[105] These cost-reduction measures included a shift to using certain products only on an as-needed basis and standardizing the selection of certain devices and supplies based on price.[106] In concluding that this arrangement presented a low risk of AKS violations, HHS OIG noted approvingly safeguards designed to reduce neurosurgeons' incentive to increase referrals to the medical center. These safeguards included distributing the incentive payments on a per-surgeon, rather than per-patient, basis; reviewing patient data to confirm a historically consistent selection of patients; reserving a portion of the savings for administrative expenses that would otherwise be distributed to the neurosurgeons; and tying incentive payments to verifiable cost savings attributable to each recommendation implemented in a procedure.[107] On May 31, HHS OIG opined that an arrangement under which a not-for-profit health center would use state Department of Health grant funds to give a county clinic a computer, videoconferencing software, and other telemedicine items to enable the county clinic to provide health care consultation services remotely would present a low risk of AKS violations.[108] The agency noted that this donation of equipment could conceivably induce the county clinic to refer patients to the health center, but found that the risk of such referrals was low given the clinic would not recommend the health center, or any other specific health care provider, to patients, and that the health center was located 80 miles from the county clinic.[109] On June 14, HHS OIG analyzed the use of a preferred hospital network as part of Medicare Supplemental Health Insurance ("Medigap") policies, whereby insurance companies would contract with hospitals for discounts on Medicare inpatient deductibles for their policyholders and then provide a $100 credit to policyholders who utilized an in-network hospital for their inpatient stay.[110] HHS OIG first concluded that the arrangement did not meet the requirements for protection under either the safe harbor for waivers of beneficiary coinsurance and deductible amounts or the safe harbor for reduced premium amounts offered by health care plans.[111] The safe harbor for coinsurance and deductible waivers specifically excludes such waivers when they are part of an agreement with insurers, and the safe harbor for reduced premium amounts requires that all enrollees be offered the same cost‑sharing or reduced premium amounts.[112] HHS OIG then concluded that, notwithstanding the absence of safe harbor protection, the arrangement presented a low risk of AKS violations because neither the discounts nor the premium credits would increase per-service Medicare payments, the arrangement would have little impact on patient utilization, and physicians would receive no remuneration as a result of the arrangement.[113] On June 18, HHS OIG issued an opinion regarding whether a non-profit medical center may provide support resources and services to family members and other caregivers who care for patients with chronic conditions.[114] The provider proposed to give those caregivers, among other things, educational sessions, support groups, rental iPods, and low-fee stress reduction workshops.[115] HHS OIG noted that certain services the provider made available to the caregivers alleviated the caregivers' financial burdens in providing care and could influence the caregivers to refer patients to the provider, and HHS OIG determined that no exception to the Beneficiary Inducements CMP or AKS applied.[116] However, HHS OIG determined that it would not impose sanctions on the provider, because (1) the services mostly benefitted caregivers, and posed a low risk of influencing them to select the provider for any particular federally reimbursable services; (2) all caregivers could access the services; (3) the provider did not "actively market" the services; and (4) the provider's practices posed little risk of increasing costs incurred by the federal health care programs. For these reasons, HHS OIG concluded that the provider's conduct would not subject it to sanctions under the AKS.[117]

B. Notable Case Law Involving the AKS

While the first half of 2018 was relatively quiet with respect to AKS case law, there were a couple of notable opinions. In particular, the Third Circuit rejected a "but for" causation standard for establishing FCA liability predicated on alleged AKS violations, while an Illinois district court rejected an AKS theory as too speculative. We discuss both below. In January, the Third Circuit affirmed a U.S. District Court for the District of New Jersey ruling granting summary judgment to a pharmaceutical company accused of FCA and AKS violations in United States ex rel. Greenfield v. Medco Health Solutions, Inc.[118] The relator alleged that a pharmacy (Accredo Health Group), which provided home care for patients with hemophilia, violated the AKS, and in turn the FCA, when it made donations to two charities that then recommended the company to hemophilia patients.[119] The District Court denied the relator's motion for summary judgment and granted the company's, on the ground that the relator was unable to show that the charities' referral of several federally insured patients resulted from the pharmacy's charitable contributions.[120] On appeal, the relator argued that the District Court erred in requiring a "direct link" between the contributions and the referrals.[121] The government filed an amicus brief contending that the Court erred "to the extent that it required relator to prove a causal connection between the kickbacks and the claims."[122] In other words, "the district court incorrectly appeared to believe it was necessary for relator to show that the kickbacks in fact corrupted the charities' decision to refer patients to" the pharmacy, and that "those referrals and recommendations in fact corrupted the patients' decisions to use" the company's services.[123] Instead, the government urged the Court to hold that "relator is not required to prove that the kickbacks caused the charities to make the referrals and recommendations or that the referrals and recommendations caused the patients to use" the pharmacy's services.[124] The Third Circuit affirmed the District Court's grant of summary judgment in favor of the company, holding that a relator must, at minimum, show that at least one of the patients for whom the company provided services and submitted reimbursement claims was "exposed to" a referral from one of the charities to which the company donated.[125] Addressing the parties' respective arguments about what suffices as FCA proof in the AKS context, the Third Circuit explained that "[i]t is not enough . . . to show temporal proximity between [the company's] alleged kickback plot and the submission of claims for reimbursement. Likewise, it is too exacting to follow [the company's] approach, which requires a relator to prove that federal beneficiaries would not have used the relevant services absent the alleged kickback scheme."[126] The Third Circuit therefore largely adopted the government's view that a "but for" causation standard would be unworkable in this context, holding instead that relators must present "some record evidence that shows a link between the alleged kickbacks and the medical care received by at least one of" the company's federally insured patients.[127] In United States v. United Healthcare Ins. Co., the U.S. District Court for the Northern District of Illinois granted a health care insurer's motion to dismiss a relator's complaint alleging FCA violations predicated on alleged AKS violations.[128] The defendant was a Medicare Advantage plan that offered, among other services, in-home physical examinations to its patients and $25 Walmart gift cards to patients who accepted offers to join the in-home program.[129] The relator, a patient of the company who participated in the in-home program, alleged that the program violated the FCA because the in-home visits were not medically necessary and led to the procurement of risk adjustment data that could lead to a patient receiving a higher risk designation by CMS, thereby increasing the per-month payment the company would receive from the government for that patient.[130] The Court rejected the relator's theory as too speculative. The Court noted that the company "ha[d] neither received a kickback for its remunerations nor has Medicare been injured through increased reimbursements."[131] Rather, the company "paid for the in-home examinations itself, and then provided services to its plan participants free of charge. This does not violate the purpose of the Anti-Kickback Statute—'to prevent kickbacks from influencing the provision of services that are charged to Medicare.'"[132]

IV. Stark Law

The federal physician self-referral law, commonly known as the Stark Law, provides for strict liability for any physician who refers to an entity with which it has a "financial relationship," which is broadly defined, and even more broadly interpreted by DOJ and HHS OIG. The Stark Law has been a frequent target of proposed reforms for many years (as discussed in our previous alerts ), reflecting industry and regulator recognition that the Stark Law sometimes creates unintentional and unnecessary restrictions on innovative and efficient health care arrangements. But in the main, those reform efforts have stalled and died before offering meaningful relief. During the first half of 2018, however, there were several notable developments relating to the Stark Law that may finally result in actual reform.

A. Regulatory and Legislative Updates

In January 2018, CMS Administrator Seema Verma announced that CMS, DOJ, and HHS OIG would undertake an inter-agency review of the Stark Law.[133] The review was spurred by feedback from providers as part of CMS's "Patients Over Paperwork" Initiative,[134] which sought industry feedback about how to reduce burdensome regulations. According to Administrator Verma, the Stark Law was one of the most commonly identified of the "burdensome regulations and burdensome issues."[135] Administrator Verma noted that the Stark Law was "developed a long time ago" and that there is a "need to bring along some of those regulations" to account for modern developments in payment models and health delivery systems.[136] Although Administrator Verma acknowledged that the solution may require "Congressional intervention," she confirmed that CMS is committed to "working through it."[137] In June, CMS requested feedback on possible regulatory changes to the Stark Law, suggesting a willingness to act, separate from any Congressional action.[138] The agency stated that lowering Stark Law hurdles would support coordinated care.[139] Eric Hargan, Deputy Secretary at HHS, further stated that "[r]emoving unnecessary government obstacles to care coordination is a key priority for this Administration."[140] CMS explained that it is interested in addressing "real or perceived" obstacles to coordinated care that are caused by the Stark Law.[141] Beyond simply clarifying or simplifying the current law, the agency asked commenters whether the existing exceptions to the Stark law are useful and whether the agency should create new exceptions.[142] It also requested that commenters share ideas for defining important concepts such as "commercial reasonableness" and "fair market value" within exceptions to the Stark Law.[143] CMS also asked whether increased transparency could address problems, suggesting that transparency measures could include disclosures about pricing or a physician's financial relationships. Among other related items, CMS is seeking suggestions regarding:

• Existing or potential arrangements that involve designated health service ("DHS") entities and referring physicians that participate in "alternative payment models or other novel financial arrangements," regardless of whether such models and financial arrangements are sponsored by CMS;
• Exceptions to the Stark Law that would protect financial arrangements between DHS entities and referring physicians who participate in the same alternative payment model;
• Exceptions to the Stark Law that would protect financial arrangements that involve "integrating and coordinating care outside of an alternative payment model"; and
• Addressing the application of the Stark Law to financial arrangements among providers in "alternative payment models and other novel financial arrangements."[144]

B. Notable Stark Law Enforcement

There were also two notable Stark Law enforcement actions in the first half of 2018. In January, two California urologists agreed to pay more than $1 million to settle allegations that they had violated the Stark Law and the AKS.[145] The doctors, who own and operate both a urology practice and a radiation oncology center, allegedly submitted and caused the submission of false claims to Medicare for image-guided radiation therapy by billing for their own image-guided radiation therapy referrals to their oncology center. The two practices were separate entities, even though both owned by the urologists, and the financial arrangements did not comply with any exceptions to the Stark Law.[146] This case is a warning for providers who own businesses that provide complementary services. In March, University of Pittsburgh Medical Center Hamot ("Hamot"), a Pennsylvania hospital, and Medicor Associates Inc. ("Medicor"), a cardiology group, agreed to pay $20.75 million to settle allegations that they violated a number of statutes, including the AKS and the Stark Law.[147] DOJ alleged that they orchestrated a kickback scheme for patient referrals when Hamot paid Medicor up to $2 million per year under twelve physician and administrative services arrangements that had been created to secure patient referrals from the cardiology group. Hamot allegedly had no legitimate need for the contracted services, and in some instances the services were duplicative or not performed at all.[148] Notably, the claims were brought by a whistleblower, and the federal government initially declined to intervene. The whistleblower proceeded on his own and won summary judgment on his claims that some of the arrangements violated the Stark Law, which in turn caused false claims to be knowingly submitted to federal health programs in violation of the FCA.[149] The whistleblower received over $6 million as part of the settlement.[150] The whistleblower's post-declination success may encourage other whistleblowers to proceed on their own, even in complicated Stark Law cases such as this one.

V. CONCLUSION

As these issues and others important to the health care provider community continue to develop, we will track them and report back in our 2018 Year-End Update.

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The following Gibson Dunn lawyers assisted in the preparation of this client update:  Steve Payne, Jonathan Phillips, John Partridge, Julie Schenker, Reid Rector, Stevie Pearl, Susanna Schuemann, Naomi Takagi, Michael Dziuban, Jacob Rierson, and Emily Riff.

Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the firm's FDA and Health Care practice group: Washington, D.C. Stephen C. Payne, Chair, FDA and Health Care Practice Group (+1 202-887-3693, spayne@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Marian J. Lee (+1 202-887-3732, mjlee@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Los Angeles Debra Wong Yang (+1 213-229-7472, dwongyang@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) New York Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) John D. W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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Six months ago, we remarked in these pages on the largely unchanged and unrelenting pace of False Claims Act ("FCA") enforcement under the Trump Administration.  Now, with another half-year behind us, the Administration has started to put its stamp on FCA enforcement and to signal openness to less draconian FCA enforcement, at least on the margins.  In a series of internal guidance memoranda and public speeches, high-ranking Department of Justice ("DOJ") officials have indicated their recognition of the very real costs of overly aggressive and unchecked FCA enforcement by qui tam whistle-blowers and DOJ itself, and laid out some steps they plan to take.  It is still too early to tell what effect, if any, these announcements will have in practice.  But the next six months and beyond are likely to provide telling indications of whether DOJ matches its shift in tone with a real shift in tactics.

For now, however, broader FCA trends appear unaffected by these recent developments.  DOJ announced a typically robust, albeit slightly reduced, set of eight- and nine-figure settlements and judgments, including at least two that topped $100 million apiece, over the course of the last six months.  Meanwhile the courts continued to explore the important intricacies and nuances of FCA jurisprudence, with nearly a dozen notable circuit court cases released in just the last half-year.  The Supreme Court also indicated that it might engage again with the FCA by inviting the views of the Solicitor General on important issues arising from the Court's last seminal decision in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).  And there were also a handful of regulatory and state-law changes that could affect the scope of FCA enforcement going forward. We address all of these and other developments in greater depth below.  We discuss enforcement activity at the federal and state levels first, turn to activity on the legislative front, and then conclude with an analysis of significant court decisions from the past six months.  As always, Gibson Dunn's recent publications on the FCA may be found on our website, including in-depth discussions of the FCA's framework and operation, industry-specific presentations, and practical guidance to help companies avoid or limit liability under the FCA.  And, of course, we would be happy to discuss these developments—and their implications for your business—with you.

I.    NOTEWORTHY DOJ ENFORCEMENT ACTIVITY DURING THE FIRST HALF OF 2018

The first half of 2018 saw several notable developments in DOJ enforcement activities, including both positive and not-so-positive developments for companies facing FCA exposure.  On the one hand, several internal DOJ guidance documents suggested that the current leadership at DOJ is considering a less aggressive approach to FCA enforcement than we have seen develop increasingly over the last 10 years.  But on the other hand, DOJ also continued to announce significant settlements and stringent enforcement programs, aimed at a wide variety of industries, under a wide variety of theories.  We explore these developments below.

A.    DOJ Releases Important Guidance on FCA Enforcement and Signals More Changes to Come

Though many have advocated for FCA reform as the number of qui tam cases and enforcement efforts have exploded in recent years, those efforts have not proven too fruitful.  But the new Administration may be a more receptive audience, as recent guidance from DOJ signals the first significant policy changes in recent memory that recognize the burden of FCA exposure.  As we reported in our client alerts on these topics (available here and here), there were three major announcements during the last six months that introduced current, and forthcoming, changes from DOJ. First, on January 10, 2018, Michael Granston, the Director of the Fraud Section of DOJ's Civil Division, issued a memorandum (the "Granston Memo") directing government lawyers evaluating a recommendation to decline intervention in a qui tam FCA action to "consider whether the government's interests are served . . . by [also] seeking dismissal [of the underlying qui tam] pursuant to 31 U.S.C. § 3730(c)(2)(A)."[1]  The memorandum notes that DOJ "has seen record increases in qui tam actions" filed under the FCA, and while the "number of filings has increased substantially over time," DOJ's "rate of intervention has remained relatively static."  Emphasizing that DOJ "plays an important gatekeeper role in protecting the False Claims Act," the memorandum identifies dismissal of non-intervened cases as "an important tool to advance the government's interests, preserve limited resources, and avoid adverse precedent."  The memo then sets forth seven factors that prosecutors should consider when evaluating whether seeking dismissal of a declined qui tam action is appropriate.  Although those factors all stem from existing precedent in cases where DOJ has previously moved for dismissal, the fact that DOJ issued the Granston Memo indicates that DOJ may be more willing to go beyond merely declining unmeritorious cases.  By taking additional steps to dismiss such cases, DOJ may mitigate the extreme burden caused by unbridled qui tam plaintiffs.. Second, on January 25, 2018, then-Associate Attorney General Rachel Brand, the Department's third-ranking official, issued a memorandum (the "Brand Memo") that prohibits DOJ from using noncompliance with other agencies' "guidance documents as a basis for proving violations of applicable law in" affirmative civil enforcement cases and from using "its enforcement authority to effectively convert agency guidance documents into binding rules."[2]  Agencies commonly issue guidance documents interpreting legislation and regulations, and the government has sometimes employed evidence that a defendant violated such guidance to prove a violation of the underlying statute or regulation—which, in turn, may support a showing that a defendant's claims or statements were "false" under the FCA.  The memorandum explicitly prohibits DOJ attorneys from engaging in this practice, although it is careful to note that prosecutors can continue to use such guidance as evidence that a defendant knew of its obligations under the law.  The Brand Memo builds on an earlier memo from Attorney General Jeff Sessions, from November 2017, that prohibited DOJ from issuing "guidance documents that purport to create rights or obligations binding on persons or entities outside the Executive Branch" without adhering to rulemaking processes as required by the Administrative Procedure Act (the "Sessions Memo").[3]  Together, the Brand Memo and Sessions Memo reflect the Administration's efforts to reign in administrative and regulatory requirements, with the Brand Memo signaling the Administration's determination to extend that broader policy agenda in the FCA space. Third, DOJ has continued to reinforce its interest in taking measures to promote a more fair and consistent application of the FCA.  In a June 14 speech, Acting Associate Attorney General Jesse Panuccio described five policy initiatives being undertaken by DOJ to reform FCA enforcement, including the Brand and Granston memos highlighted above, as well as three additional areas: (i) cooperation credit; (ii) compliance program credit; and (iii) preventing "piling on."  As to the latter three, Panuccio noted that DOJ is working on formalizing its practices with regard to cooperation credit and suggested that formal cooperation credit might be expanded to cover situations outside of those in which the defendant makes a self-disclosure.  Cooperation credits in FCA cases have traditionally been less well spelled-out than in some other contexts (e.g., under the Foreign Corrupt Practices Act), and Panuccio's speech is a step towards formalizing those processes.  He also explained that DOJ will "reward companies that invest in strong compliance measures," and that to prevent piling on, DOJ attorneys will promote coordination within the agency and with other regulatory bodies to ensure that defendants are subject to fair punishment and receive the benefit of finality that should accompany a settlement. DOJ's continued focus on these efforts, led by officials at the highest levels within DOJ, suggests that FCA enforcement reform is a priority for the Department.

B.    Opioid Enforcement Efforts Continue

In our 2017 Year-End FDA and Health Care Compliance and Enforcement Update – Drugs and Devices, we noted the surge in enforcement activities surrounding the opioid epidemic.  From public pronouncements to criminal indictments, the current Administration has demonstrated widespread commitment to enforcement efforts around opioid issues.  The focus is unlikely to let up soon. For the time being, many of the enforcement efforts with regard to opioids have been on the criminal side and not directly related to the FCA.  But given DOJ's close coordination between its criminal and civil divisions, widespread criminal enforcement efforts against an industry are often correlated with current, or imminent, FCA enforcement. The intense focus on the criminal side can hardly be overstated.  In June, the chief executive officer of a health care company and four physicians were charged in a superseding indictment with numerous crimes, including conspiracy to commit wire fraud and money laundering, as part of an ongoing investigation into the defendants' alleged $200 million fraudulent health care scheme involving Michigan- and Ohio-based pain clinics, laboratories, and other providers.[4]  This was followed later in June by a DOJ announcement regarding the "National Health Care Fraud and Opioid Takedown."[5]  Attorney General Sessions announced that DOJ was "charging 601 people, including 76 doctors, 23 pharmacists, 19 nurses, and other medical personnel with more than $2 billion in medical fraud."[6]  DOJ also announced it has a "new data analytics program that focuses specifically on opioid-related health care fraud."[7]  DOJ has also made forays into civil litigation by filing a statement of interest in a high-stakes multi-district action against opioid manufacturers and distributors that is premised on allegedly false, deceptive, or unfair marketing practices for prescription opioid drugs.[8] FCA enforcement is not far behind.  On May 15, 2018, for example, an unsealed complaint revealed that the United States had intervened in five lawsuits accusing an Arizona-based opioid manufacturer of paying kickbacks to induce physicians and nurses to prescribe the company's opioid painkiller for their patients.  The lawsuits allege that these kickbacks took the form of payments for sham speaking engagements, jobs for the prescribers' friends and relatives, and extravagant meals and other entertainment.  The lawsuits likewise allege that the manufacturer improperly encouraged physicians to prescribe its opioids to patients who did not have cancer—the approved use of the drug—and that company employees also lied to insurers in order to obtain reimbursement under Medicare and TRICARE.[9]

C.    Notable Settlements

All told, DOJ has announced more than approximately $600 million in settlements this year.  This amount represents a decrease from previous years at the same point, largely because there have been comparatively fewer blockbuster settlements during the last six months.  Still, the cadence of enforcement activity has continued to be steady.

1.    Health Care and Life Sciences Industries

• On January 10, a dental management company and more than 130 of its affiliated dental clinics agreed to pay $23.9 million, plus interest, to settle allegations that the companies knowingly submitted false claims to state Medicaid programs for unnecessary services on Medicaid-insured youth.  DOJ alleged that the companies incentivized and disciplined dentists to meet goals on procedures performed, ignoring when dentists complained about overutilization.  DOJ alleged that the companies submitted false Medicaid claims in 17 states, and also submitted false claims to an additional program, the Texas Medicaid Program for First Dental Home.  The federal government will receive approximately $14.2 million, plus interest, and states will receive approximately $9.7 million, plus interest.  This investigation was initiated by five whistle-blower lawsuits.  Three of the whistle-blowers, former employees of the dental clinics, will receive a total of more than $2.4 million from the federal portion of the settlement.[10]
• On March 7, a Pennsylvania hospital and cardiology group agreed to pay approximately $20.8 million combined to resolve claims that the two engaged in improper financial relationships to secure physician referrals.  Specifically, the government alleged that the hospital paid the cardiology group up to $2 million per year under physician and administrative service arrangements for services that were duplicative, not performed, or not needed.  The whistle-blower, a doctor in the cardiology group, received approximately $6 million of the recovered amount.[11]
• On March 23, a medical device manufacturer and its domestic subsidiary agreed to pay approximately $33.2 million to resolve claims that the subsidiary caused hospitals to submit false claims to government health care programs by knowingly selling materially unreliable point-of-care diagnostic testing devices.  The government claimed that the subsidiary received customer complaints that put it on notice that devices it sold produced erroneous results and failed to take corrective action until FDA inspections prompted a nationwide product recall.  The whistle-blower, a former senior quality control analyst at the subsidiary, will receive approximately $5.6 million of the recovered amount.[12]
• On March 28, a Virginia ambulance services provider agreed to pay $9 million to settle allegations that it submitted false or fraudulent claims to Medicare, Medicaid, and TRICARE for ambulance transports that were not medically necessary, that did not qualify as Specialty Care Transports, and that should have been billed to other payers.  As part of the settlement, the company entered into a five-year corporate integrity agreement with HHS OIG.[13]
• On March 29, a Texas company operating radiation therapy centers nationwide, along with its acquirer, agreed to pay up to $11.5 million to settle allegations that the Texas company paid kickbacks to physicians for referring patients to its cancer treatment centers.  The companies also agreed to enter into a five-year corporate integrity agreement with HHS OIG, which includes internal and external monitoring of relationships between the companies and referring physicians.  The Texas company allegedly distributed a share of the profits through a series of leasing companies in which referring physicians were permitted to invest.  The whistle-blower will receive up to $1.7 million as part of the settlement.[14]
• On April 12, a Florida respiratory equipment supplier agreed to pay approximately $9.7 million to settle allegations that it knowingly submitted false claims for portable oxygen contents to Medicare between January 2009 and March 2012.  Specifically, the government alleged that the company billed Medicare without verifying that beneficiaries used or needed the oxygen, and without obtaining the requisite proof of delivery.  The whistle-blower will receive approximately $1.6 million as part of the settlement.[15]
• On April 12, an Arizona company that owns acute-care hospitals agreed to pay over $18 million to resolve allegations that 12 of its hospitals knowingly overcharged Medicare patients for short-stay, inpatient procedures that should have been billed on a less costly outpatient basis.  The settlement also resolved claims that the company inflated the number of hours for which patients received outpatient observation in its reports to Medicare.  As part of the settlement, the company entered into a five-year corporate integrity agreement with HHS OIG, which includes the requirement to retain an independent review organization to review the accuracy of claims submitted to federal health care programs.  The whistle-blower, a former employee of the company, will receive approximately $3.3 million of the recovered amount.[16]
• On April 19, a California diagnostics laboratory agreed to pay $2 million to settle claims that it submitted and caused the submission of false claims to Medicare for Breast Cancer Index tests that were not reasonable and necessary.  The government alleged the company promoted and performed the tests for patients who had not been in remission for five years and who had not been taking tamoxifen.  The government claimed performing tests under such circumstances is medically unnecessary based on published clinical trial data and clinical practice guidelines.[17]
• On May 10, a Cincinnati-based nonprofit company operating several health care facilities in Ohio and Kentucky agreed to pay $14.25 million to settle allegations that the company provided compensation to six referring physicians in excess of the fair market value for the physicians' services.  Per the government's announcement, these issues were self-reported by the nonprofit hospital system.[18]
• On May 24, a large pharmaceutical company agreed to pay $23.85 million to resolve claims that the company illegally paid the co-pays of Medicare patients taking three of the company's drugs.  The alleged scheme involved the use of a foundation as a conduit for the remuneration.[19]
• On May 31, two owners of a Philadelphia pharmacy agreed to pay $3.2 million to resolve claims that over the course of roughly seven years the pair fraudulently billed Medicare for prescription medications that their pharmacy did not actually dispense to its patients.[20]
• On June 8, a Kentucky-based health care company that owns and operates roughly 115 skilled nursing facilities in several states agreed to pay more than $30 million to resolve allegations that it knowingly submitted false claims to Medicare for medically unreasonable or unnecessary rehabilitation therapy services.  As part of the agreement, the State of Tennessee will receive a portion of the final settlement.  The two relators who initially brought the suit will also receive a yet undetermined portion of the eventual settlement.[21]
• On June 20, a national wound-care provider agreed to pay $22.5 million to settle allegations that it billed the government for unnecessary and unreasonable hyperbaric oxygen therapy, which is a therapy indicated for certain chronic wounds.  According to the government, the company billed for these unnecessary treatments for five years, between 2010 and 2015.  In addition to the monetary settlement, the company entered into a five-year corporate integrity agreement that subjects the company to independent reviews.[22]
• On June 25, a hospice chain agreed to pay $8.5 million to resolve allegations that it improperly billed the federal government for hospice services.  The government alleged that the company provided hospice care to patients who were not terminally ill (and therefore ineligible for the services), despite repeated warnings that ineligible patients were being admitted.[23]

2.    Government Contracting and Defense/Procurement

• On March 15, a Japanese fiber manufacturer and its American subsidiary agreed to pay approximately $66 million to resolve claims that they sold defective Zylon fiber used in bulletproof vests, which the United States purchased for law enforcement agencies.  The government alleged that between 2001 and 2005, the companies knew that Zylon degraded quickly in normal heat and humidity, rendering it unfit for use in bulletproof vests.  Yet, according to the government, the companies published misleading degradation data that understated the defect and engaged in a marketing campaign that advocated for the continued sale of Zylon-containing vests after a body armor manufacturer recalled such vests.  The whistle-blower will receive over $5.7 million as part of the settlement.[24]  The settlement resolves part of a long-running series of FCA cases related to allegedly defective bulletproof vests that goes back several decades and involved several companies.[25]
• On April 19, a former professional cyclist agreed to pay $5 million to resolve allegations that he submitted millions of dollars in false claims for sponsorship payments to the U.S. Postal Service ("USPS"), which sponsored his cycling team.  The government claimed that the cyclist violated the terms of his team's USPS sponsorship by using performance enhancing drugs ("PEDs"), as well as making numerous false statements—including statements under oath—denying his PED use to induce the USPS to renew and increase its sponsorship.  The whistle-blower, a former teammate, will receive $1.1 million as part of the settlement.[26]
• On May 29, a foreign-based federal contractor and several of its subsidiaries agreed to pay $20 million to resolve allegations that the companies knowingly overbilled the United States Navy under contracts to provide ship husbanding services in numerous ports around the world.  As part of the resolution, the whistle-blowers in the case, three former employees of the contractor, will receive approximately $4.4 million.[27]

3.    Financial Services

• On February 28, an audit firm agreed to pay $149.5 million to resolve potential FCA claims related to the firm's role as the independent outside auditor for a now-defunct originator of mortgage loans that were insured by the Federal Housing Administration ("FHA") under the Department of Housing and Urban Development ("HUD").  As part of a HUD program, the mortgage company was considered to be a Direct Endorsement Lender, and could submit claims to the United States to recover any losses that occurred as a result of a default on a loan insured by the FHA that the company had underwritten and endorsed.  To maintain Direct Endorsement Lender status, the mortgage company was required to submit annual audited financial statements in compliance with HUD requirements.  The audit firm issued audit reports on the mortgage company's annual financial statements for fiscal years 2002 through 2008.  The United States alleged that the mortgage company was engaged in a fraudulent scheme involving the alleged sale of "fictitious or double-pledged" loans, leading to financial statements that failed to accurately reflect that the company was in financial distress.  The United States also alleged that the audit firm did not identify the mortgage company's fraudulent conduct and alleged that by continuing to issue audit reports notwithstanding the mortgage company's misconduct, the company was able to continue originating the insured loans until the mortgage company declared bankruptcy in 2009.  A number of officials from the mortgage company were criminally convicted in connection with the conduct at issue as well. [28]

4.    Other

• On January 16, a home furnishings company agreed to pay $10.5 million to settle claims that it knowingly made false statements on customs declarations forms to avoid paying antidumping duties on imported bedroom furniture from China.  The company classified the furniture as non-bedroom furniture, which was not subject to the antidumping duties. In connection with the FCA settlement, a whistle-blower will receive approximately $1.9 million.[29]

D.    Notable Verdicts and Judgments

In addition to the settlements noted above, there were several notable verdicts and judgments in FCA cases during the last six months.

• On January 11, a federal district court in Florida reversed a $350 million FCA jury verdict.  The jury reached a verdict that a nursing home operator had submitted false claims by allegedly failing to maintain a comprehensive care plan that was "ostensibly required by Medicaid regulation," alongside other relatively minor infractions.  United States v. Salus Rehab., LLC, 304 F. Supp. 3d 1258, 1260 (M.D. Fla. 2018).  The court overturned the verdict, holding that "[t]he record fatally wants for evidence of materiality and scienter."  In so holding, the court took umbrage that "relator won judgments for almost $350 million based" only on the theory that "a handful of paperwork defects" and "failure to maintain care plans made" defendants' claims to Medicare and Medicaid false or fraudulent.  Id.  The court explained that "the relator offered no meaningful and competent proof that the federal or the state government, if either or both had known of the disputed practices (assuming that either or both did not know), would have regarded the disputed practices as material to each government's decision to pay the defendants and, consequently, that each government would have refused to pay the defendants."  Id.  It also disagreed that there was any evidence the defendants acted knowingly.  Id.  In so holding, the court affirmed the importance of the Supreme Court's Escobar decision and its role in enforcing the FCA's materiality standard.
• On May 29, the United States District Court in the District of South Carolina entered a judgment totaling approximately $114 million against three individuals found liable under the FCA of paying kickbacks to physicians in exchange for patient referrals.  The underlying claims were initially brought as part of three lawsuits filed by four whistle-blowers, alleging that the kickback scheme caused two blood testing laboratories in Virginia and California to bill federal health care programs for medically unnecessary tests.  The whistle-blowers' share of the judgment has not yet been determined.[30]

II.    LEGISLATIVE ACTIVITY

A.    Federal Legislation

As with the latter half of 2017, the first half of 2018 has seen little to no federal legislative activity affecting the FCA.  While President Trump's plan to repeal and replace the Affordable Care Act ("ACA") could have affected the ACA's amendments to the FCA—as discussed in our 2017 Mid-Year False Claims Act Update[31]—Congress has not shown any signs that it will pass such a bill in the near future, though some commentators have speculated that Senate Republicans may attempt such a feat in an effort to rally the base for the 2018 elections.[32]  Senator Lindsey Graham (R-S.C.) announced in May that he is working on a new repeal-and-replace bill, but no new bills have been introduced in Congress and Senator Graham's "effort appears to have little, if any, chance of passing this year."[33] In a February speech on the Senate floor, Senator Chuck Grassley laid out his views about problems arising from the Supreme Court's 2016 Escobar decision that are "getting some defendants, and judges, tied in knots."[34]  In particular, Senator Grassley criticized courts for applying the Supreme Court's instruction regarding so-called "government knowledge"—that continued government payment, in the face of government knowledge of non-compliance with regulatory or contractual requirements, may be strong evidence that the violation is not material.  According to Grassley, the Court "did not say that in every case, if the government pays a claim despite the fact that someone, somewhere in the bowels of the bureaucracy might have heard about allegations that the contractor may have done something wrong, the contractor is automatically off the hook."[35]  And he set forth his views of how courts should apply Escobar without "piling on bogus restrictions that are just not in the law."[36]  Notably, the issue of the interplay between government knowledge and materiality is back before the Supreme Court on a petition for certiorari in United States ex rel. Campie v. Gilead Sciences. Inc., 862 F.3d 890 (9th Cir. 2017), as discussed below.  If the Court takes that case, and rules in a way that bolsters its Escobar decision instead of the viewpoint espoused by Senator Grassley, we will be watching closely to see if the Court's interpretation prompts a Congressional response. Consistent with the Trump administration's agenda, Federal regulatory activity implicating the FCA has also remained stagnant.  As noted in our 2017 Year-End False Claims Act Update,[37] the FDA proposed a regulation in January 2017 that would amend and expand the agency's definition of "intended use" for drugs and devices codified in 21 C.F.R. § 201.128 and 21 C.F.R. § 801.4, but that rule's effective date was delayed until March 19, 2018 after opposition from industry.[38]  On March 16, the FDA delayed indefinitely the effective date of the portions of the rule relating to intended use "to allow further consideration of the substantive issues raised in the comments received regarding the amendments."[39] On March 23, 2018, President Trump signed an omnibus appropriations bill authorizing $1.3 trillion in spending, $654.6 billion of which was designated for the Department of Defense—a $60 billion increase from 2017 defense spending.[40]  The bill also includes a $21.2 billion appropriation for infrastructure spending.  This law does not amend the FCA or substantively alter enforcement, but the increase in spending may invite greater FCA enforcement scrutiny or relator actions for the defense and construction contractors who work with the federal government.

B.    State Legislation

In 2005, Congress created financial incentives for states to enact their own False Claims Acts and make them as effective as the federal FCA in facilitating qui tam lawsuits.  If a state meets this standard, it may be eligible to "receive a 10-percentage-point increase in [its] share of any amounts recovered under such laws."[41]  The Department of Health and Human Services Office of Inspector General ("HHS OIG") is tasked with assessing whether a state's law qualifies.  As reported in our last Mid-Year update,[42] HHS OIG notified 15 states at the end of 2016 that their laws required amendment to meet the federal standard, and it set a "grace period" through the end of 2018 to bring state law into compliance or risk losing the 10% financial incentive.[43]  Since our Year-End update:

• A Michigan bill that would amend the civil penalties in the Michigan Medicaid False Claims Act to mirror penalties allowed under the federal FCA has not progressed beyond its November 28, 2017 referral to the Senate Judiciary Committee.[44]
• A similar New York bill died in the Senate and was returned to the Assembly on January 3, 2018.[45]
• A similar North Carolina bill has not progressed since it was re-referred to the Committee on Rules and Operations of the Senate in April 2017.[46]
• Other notable state legislative developments include:
• A Florida bill to exempt information from disclosure under the state's public records law that is related to an "investigation of violation of Florida False Claims Act" was approved by the governor on March 21, 2018.[47]  As noted in our 2017 Year-End Update, this bill exempts the Florida FCA's under seal requirements from review and potential repeal under the Sunset Review Act.[48]
• There has been no action on a Michigan bill that would create a general Michigan False Claims Act since it was referred to the state's Senate Committee on the Judiciary in January 2017.[49]  The bill would expand Michigan's current Medicaid False Claims Act beyond the Medicaid context.
• No action has been taken on a Pennsylvania bill that would create a state False Claims Act; the bill has been in the House Judiciary Committee since March 2017.[50]

We expect to see additional state legislative activity in the second half of 2018, as the HHS OIG "grace period" draws to an end.  To date, HHS OIG has informed 12 states that their laws meet the federal standard (Colorado, Connecticut, Illinois, Indiana, Iowa, Massachusetts, Montana, Nevada, Oklahoma, Tennessee, Texas, and Vermont) and has informed 14 states that their laws do not meet the federal standard (California, Delaware, Florida, Georgia, Hawaii, Michigan, Minnesota, New Hampshire, New York, North Carolina, Rhode Island, Virginia, Washington, and Wisconsin).[51]  Three other states were informed prior to recent federal amendments that their state laws did not meet the old federal standard (Louisiana, New Jersey, and New Mexico).[52]

III.    NOTABLE CASE LAW DEVELOPMENTS

Thus far in 2018, courts have continued to advance the body of FCA case law.  The appellate courts have issued nearly a dozen notable cases in the first part of the year, including decisions that explored the meaning of the Supreme Court's decision in Universal Health Services, v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the FCA's statute of limitations, and the public disclosure bar.  These decisions clarified some areas of the law, yet deepened splits in others.  As always, we have closely monitored these developments and summarize the most notable decisions below.

A.    Post-Escobar Developments

Now two years since it was decided, courts continue to grapple with the Supreme Court's landmark decision in Escobar.  As we have previously discussed in depth (including here), in Escobar, the Supreme Court held that an implied false certification theory of liability under the FCA is actionable when: (1) a claim "does not merely request payment, but also makes specific representations about the goods or services provided" and (2) the defendant's failure to disclose noncompliance with some "material statutory, regulatory, or contractual requirement[] makes those representations misleading half-truths."  Id. at 2001.  The Escobar Court further instructed courts to apply a "rigorous" and "demanding" materiality standard, necessitating the plaintiff show something akin to that the government actually refused payment, or would have refused payment had it known of the alleged misrepresentations regarding compliance.  Id. at 2002–03. Since Escobar, lower courts have worked to determine the precise requirements for establishing materiality at the pleading stage.  The fact-intensive analysis involved with materiality has produced some useful guidance for FCA defendants.  For example, conclusory statements by a plaintiff that the government would not have paid had it known of the alleged false statement are insufficient to survive a pleadings challenge, United States ex rel. Mateski v. Raytheon Co., No. 2:06-cv-03614, 2017 WL 3326452, at *7 (C.D. Cal. Aug. 3, 2017), yet, pleading that the government has previously terminated eligibility for similar falsities may be sufficient, depending upon the other allegations asserted, see United States ex rel. Lacey v. Visiting Nurse Serv. of N.Y., No. 14-cv-5739, 2017 WL 5515860, at *10 (S.D.N.Y. Sept. 26, 2017). As in prior years, the appellate courts continued to grapple with the application of Escobar's "rigorous" and "demanding" materiality requirement in the first half of 2018.

1.    The Sixth Circuit Considers Government Payment Practices

In Escobar, the Supreme Court explained that "proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement."  Escobar, 136 S. Ct. at 2003.  The Sixth Circuit recently weighed in on the question of what is required to adequately allege materiality at the pleading stage in such cases. United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 892 F.3d 822 (6th Cir. 2018) involved alleged false claims for home health services.  Specifically, the relator alleged that the defendant home health provider failed to timely obtain provider physician certifications in violation of a regulation requiring such certifications to "be obtained at the time the plan of care is established or as soon thereafter as possible."  Id. at 825.  Despite concluding that compliance with the timing regulation was an express condition of payment, the district court had dismissed the claim for failure to adequately allege materiality under the standards articulated in Escobar.  Id. at 826, 832.  The district court reasoned that the complaint failed to identify any instance in which the government denied reimbursement for a similar violation in the entire 50-plus year history of the regulation, which suggested the government did not view violations of the certification regulation as material.  Id. at 834.  In addition, the relator cited materials suggesting the government's concern focused on ensuring the services were medically necessary, not that the certification was made at a particular time.  Id. 847–48 (J. McKeague, dissenting). By a 2 to 1 vote, the Sixth Circuit reversed.  Id. at 825.  The court faulted the lower court for drawing "a negative inference from the absence of any allegations about past government action."  Id. at 834.  The majority explained that a relator is "not required to make allegations regarding past government action," and so absent the government's actual knowledge of the alleged fraud being pled, its past payment practices were irrelevant to whether an FCA plaintiff has adequately pled materiality in their complaint.  Id.  The court went on to find that the relator adequately alleged materiality, including based on the fact that the timing requirement was an express condition of payment.  Id. at 836.  The majority also concluded that the relator had adequately alleged scienter.  Id. at 838. In contrast, a vigorous dissent took the majority to task for failing to faithfully apply Escobar and for not requiring materiality to be alleged with particularity under Federal Rule of Civil Procedure 9(b) despite the fact that "every [other] Circuit to address this question agrees that Rule 9(b) governs materiality allegations."  Id. at 845.  As the dissent pointed out, the relator failed to allege that the government routinely refuses to pay claims based on the alleged violations, or that it would have refused to pay particular claims under the circumstances, which ran afoul of Escobar's guidance that "[t]he government's payment habits are, by far, the best evidence of materiality."  Id.  Moreover, the dissent faulted the court for "equating negligence with fraud"; as the dissent pointed out, the complaint alleged facts that were, at best, "only consistent with recklessness" and therefore did not adequately allege scienter.  Id. at 852–53.

2.    The Eleventh Circuit Revives an Implied False Certification Claim 

The Eleventh Circuit similarly revived an FCA claim predicated on an implied false certification theory in Marsteller ex rel. United States v. Tilton, 880 F.3d 1302 (11th Cir. 2018).  Marsteller involved allegations that a defense contractor had certified compliance with code of business ethics and conduct requirements applicable to government contractors, but that the company did not comply with those requirements because it failed to disclose evidence of purportedly unethical acts of bribery, and that it provided the government with incomplete pricing data in violation of the Truth in Negotiations Act, 10 U.S.C. § 2306a.  Id.  In a pre-Escobar decision, the district court had dismissed the complaint, after declining the government's suggestion in a statement of interest "to limit the restrictive reading of the implied certification theory found in" prior precedent, and instead ruling that the theory only encompassed claims for payment made "despite a knowing failure to comply" with an express condition of payment.  Id. at 1309–10. On appeal, the Eleventh Circuit held that the line of cases relied upon by the district court was no longer good law in light of Escobar and remanded the case for the lower court to consider whether "in fairness to the relators, they should have an opportunity to replead their allegations in light of the Supreme Court's guidance" in Escobar.  Id. at 1312–14.  As the court emphasized, Escobar directs the materiality inquiry towards "whether [the] Government would have attached importance to the violation in determining whether to pay the claim" at issue.  Id. at 1313. In both Marsteller and Prather, the government filed a statement of interest regarding the district court's materiality analysis, despite having declined to intervene.  In Marsteller, although the Government took no position on the viability of the complaint itself, it nevertheless "respectfully urge[d]" the district court "not to adopt the atextual position that implied certification False Claims Act liability for non-compliance with a contract provision (including regulatory or statutory provisions incorporated therein) necessarily hinges on the presence of an express statement within that provision that payment is conditioned on its compliance."  880 F.3d at 1309 n.15.  Likewise in Prather, although the government took no position on the complaint at issue in the case, it argued that an express condition of payment is not required under Escobar, and further argued that Escobar does not require an FCA plaintiff to plead prior government denials of payments for similar violations.  United States' Statement of Interest Regarding Defendants' Motion To Dismiss Third Amended Complaint at 2–3, 6, Prather, 892 F.3d 822 (No. 17-5826).  If these cases are any indication, FCA defendants can expect to face the government's opposition in future cases that turn on allegations of materiality.

3.    The Supreme Court Invites the Government's Views on Gilead

In our 2017 Mid-Year False Claims Act Update, we addressed the Ninth Circuit's materiality analysis in United States ex rel. Campie v. Gilead Sciences. Inc., 862 F.3d 890 (9th Cir. 2017).  As a reminder, in Gilead, the Ninth Circuit reversed dismissal of an implied certification claim.  Id. at 895.  In doing so, the court rejected the argument that the alleged violation was immaterial because the FDA was aware of the falsity and yet did not withdraw product approval.  Id. at 906.  This decision was appealed and the petition for certiorari is currently pending.  See Petition for Writ of Certiorari, Gilead, 862 F.3d 890 (No. 17-936). In April, the Supreme Court invited the U.S. Solicitor General to file a brief expressing the government's views on the case.  This may signal the Court's interest in reviewing the matter to provide more guidance on the impact of government acquiescence.  Clarification here would be welcomed, as we have previously noted that a circuit split is developing in this area.  However, in recent years the Supreme Court has asked for the Solicitor General's views on key FCA issues only to go on to deny certiorari anyway.  See, e.g., United States ex rel. Nathan v. Takeda Pharm., 707 F.3d 451 (4th Cir. 2013), cert. denied 81 U.S.L.W. 3650 (U.S. Mar. 31, 2014) (No. 12-1349).

B.    The Eleventh Circuit Deepens a Circuit Split Regarding When the FCA's Extended Statute of Limitations Applies

For most FCA relators, the statute of limitations requires a suit be brought within six years of the underlying alleged violation.  31 U.S.C. § 3731(b)(1).  However, an extended limitations period of up to ten years applies in select cases.  31 U.S.C. § 3731(b)(2) (permitting actions for "3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed").  Circuits are split in determining whether this greater, up to ten-year period is only available when the government files or intervenes in the FCA suit, as opposed to being pursued only by the relator after the government declines intervention.  Currently, most courts only apply the extended statute of limitations to suits brought by the government itself, as well as qui tam actions in which the government chooses to intervene.  See United States ex rel. Sanders v. North American Bus Indus. Inc., 546 F.3d 288, 295 (4th Cir. 2008) (holding that "only a subset of civil actions may benefit from the extended limitations period in Section 3731(b)(2)—those in which the government is a party"); United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 725–26 (10th Cir. 2006) ("[W]e hold that § 3731(b)(2) was not intended to apply to private qui tam relators at all."); but see United States ex rel. Hyatt v. Northrop Corp., 91 F.3d 1211, 1214 (9th Cir. 1996) ("[T]here is nothing in the entire statute of limitations subsection which differentiates between private and government plaintiffs at all."). The Eleventh Circuit recently went the other way, however, in an opinion holding that relators can utilize the extended statute of limitations period even in qui tam cases where the government has declined to intervene.  In United States ex rel. Hunt v. Cochise Consultancy Inc., 887 F.3d 1081 (11th Cir. 2018), the court considered this issue as a matter of first impression in the circuit.  Id. at 1083.  First, the court emphasized that "nothing in § 3731(b)(2) says that its limitations period is unavailable to relators when the government declines to intervene."  Id. at 1089.  The court also found that "the legislative history provides no convincing support for [the defendant's] position" that the greater limitations period is only available where the government files suit or intervenes.  Id. at 1097.  The court recognized its decision "is at odds with the published decisions of two other circuits," but found those opinions unpersuasive because those cases "reflexively applied the general rule that a limitations period is triggered by the knowledge of a party" while failing to consider "the unique role that the United States plays even in a non-intervened qui tam case."  Id. at 1092. In reaching this decision, the Eleventh Circuit departs from the Fourth and Tenth circuits but largely aligns with the Ninth Circuit.  See Hyatt, 91 F.3d at 1214.  However, on the question of the knowledge required to trigger the limitations period, the Eleventh Circuit concluded, contrary to the Ninth Circuit, that "it is the knowledge of a government official, not the relator, that triggers the limitations period," further complicating the circuit split.  Hunt, 887 F.3d at 1096.

C.    The Third Circuit Examines the Public Disclosure Bar

The FCA's public disclosure bar instructs courts to dismiss a relator's FCA action if "substantially the same allegations or transactions" were previously publicly disclosed in certain enumerated sources.  31 U.S.C. § 3730(e)(4).  The "original source" exception to this rule, which allows relators to proceed on publicly disclosed allegations if they have "knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions," 31 U.S.C. § 3730(e)(4)(B), was the subject of a recent Third Circuit decision. In United States ex rel. Freedom Unlimited, Inc. v. City of Pittsburgh, No. 17-1987, 2018 WL 1517159 (3d Cir. Mar. 28, 2018), the district court had dismissed the case at the pleading stage under the public disclosure bar, concluding that the relator "filed a qui tam suit based on information that the city revealed" publicly.  Id. at *3.  The Third Circuit reversed, and in doing so, emphasized the sometimes factual nature of whether there "has been a public disclosure within the meaning of the FCA and whether a relator qualifies as an original source."  Id. (internal quotations omitted).  In particular, the court noted that the relator claimed to have "directly observed" the defendant's alleged conduct and had "independent knowledge" of the falsity.  Id.  While taking care to avoid suggesting that dismissal would never be appropriate at the pleading stage, the Third Circuit concluded the lower court "should have given the parties an opportunity to develop the facts in discovery inasmuch as appellants claim that they did not rely on public disclosures."  Id.  Additionally, because the district court's opinion pre-dated Escobar, the Third Circuit directed the district court to "rely on the factors set forth in Escobar in making a materiality decision," to the extent the complaint survived the public disclosure bar.  Id. at *4.

D.    Updates to the Causation Standard in Retaliation Claims

The FCA's anti-retaliation provision provides remedies to employees if "discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts" conducted in furtherance of an FCA claim.  31 U.S.C. § 3730(h)(1).  In a series of recent decisions, several courts have addressed the question of what an employee must show to demonstrate that an adverse action was "because of" the employee's activity protected under the FCA. In DiFiore v. CSL Behring, LLC, 879 F.3d 71 (3d Cir. 2018), the Third Circuit provided guidance on the causation standard.  There, the district court had required the plaintiff to show "protected activity was the 'but-for' cause of an adverse action."  Id. at 76.  On appeal, the plaintiff argued that the FCA only requires proof that "protected activity was a 'motivating factor' in the adverse action[]."  Id.  Rejecting this argument, the Third Circuit affirmed, relying on the Supreme Court's analysis in a pair of decisions regarding the causation standard in age discrimination and Title VII claims respectively.  Id. (citing Gross v. FBL Financial Services, Inc., 129 S.Ct 2343 (2009) and University of Texas Southwestern Medical Center v. Nassar, 133 S.Ct 2517 (2013)).  As the court noted, the FCA used the "same 'because of' language" found in both the Age Discrimination in Employment Act and Title VII that had "compelled the Supreme Court to require 'but-for' causation." Id. at 78.  As a result, in the Third Circuit, a plaintiff must show that he would not have faced the relevant adverse employment action "but for" his alleged protected activity. The Sixth and Seventh Circuits similarly recently indicated a willingness to adopt a "but-for" causation standard in FCA retaliation claims.  In Heath v. Indianapolis Fire Dept., 889 F.3d 872 (7th Cir. 2018), the Seventh Circuit affirmed the district court's grant of summary judgment for the defendant.  Id. at 874.  The opinion was more notable, however, because—even though the Seventh Circuit had previously adopted a "motivating factor" standard—the Heath court nevertheless raised the question of whether that is the proper standard.  Id.  The court discussed the Supreme Court's opinion in Nassar and hinted that the similarity between the statutory language in Title VII and the FCA compels the conclusion that a plaintiff must show the adverse employment action was the "but for" result of activity protected under the FCA.  Id. Meanwhile, in Smith v. LHC Group Inc., No. 17-5850, 2018 WL 1136072 (6th Cir. Mar. 2, 2018), the Sixth Circuit reversed dismissal of an FCA retaliation claim and concluded an employer's subjective intent need not be established to prevail on a theory of constructive discharge.  Id. at *2.  Although the panel's majority did not address causation, a concurring opinion expressed the view that causation requires a showing of "but-for" causation under Supreme Court's Nassar and Gross decisions.  Id. at *9 (citing DiFiore).

E.    The Third Circuit Explores the Link Between the FCA and the Anti-Kickback Statute

The AKS prohibits companies and individuals from offering, paying, soliciting, or receiving "remuneration" to induce or reward referrals of business that will be paid for by Medicare, Medicaid, or other federal health care programs.  42 U.S.C. § 1320a-7b(b).  By submitting a claim resulting from a violation of the AKS, an entity or individual also violates the FCA.  See 42 U.S.C. § 1320a-7b(g) ("[A] claim that includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim for purposes of [the FCA].") The Third Circuit recently addressed the evidentiary requirement to link FCA claims with violations of the Anti-Kickback Statute.  United States ex rel. Greenfield v. Medco Health Sol's, Inc., 880 F.3d 89 (3d Cir. 2018).  In Greenfield, a relator claimed a pharmacy (Accredo Health Group) illegally donated to specific charities in order to exclusively receive patient referrals in return.  Id. at 91.  The pharmacy then allegedly violated the FCA by falsely certifying that it complied with the Anti-Kickback statute when seeking reimbursement for the care provided to referred patients.  Id. at 92. The district court entered summary judgment for the defendant-pharmacy, finding the relator "failed to provide evidence of even a single federal claim for reimbursement . . . that was linked to the alleged kickback scheme."  Id. at 91.  In reaching its conclusion, the district court assumed that even if there was an Anti-Kickback Statute violation, there was an insufficient link to establish an FCA violation.  Id. at 93  Specifically, the district court stated the relator needed to establish a causal link between the pharmacy's donations and a patient's subsequent decision to patron the pharmacy.  Id. at 95. On appeal, the Third Circuit affirmed.  The panel first rejected the District Court's reasoning and concluded that a relator need not provide "proof that the underlying medical care would not have been provided but for a kickback."  Id. at 100.  Reviewing the legislative history of the FCA and Anti-Kickback Statute, the court concluded that "Congress intended both statutes to reach a broad swath of 'fraud and abuse' in the federal healthcare system" and "neither requires a plaintiff to show that a kickback directly influenced a patient's decision to use a particular medical provider."  Id. at 96–97. However, the court also rejected the notion that "the taint" of the alleged kickbacks automatically "renders every reimbursement claim false" and concluded that to prevail on summary judgment, it is not enough for a relator to show merely that the defendant "submitted federal claims while allegedly paying kickbacks."  Id. at 99–100.  In the court's view, "[a] kickback does not morph into a false claim unless a particular patient is exposed to an illegal recommendation or referral and a provider submits a claim for reimbursement pertaining to that patient."  Id. at 100.  Instead, the court held, a relator must therefore demonstrate at least one false claim, i.e., "at least one claim that covered a patient who was recommended or referred" in violation of the Anti-Kickback Statute.  Id.  Absent "evidence . . . link[ing the] alleged kickback scheme to any particular claim" in this manner, an FCA defendant is entitled to summary judgment.  Id.

IV.    CONCLUSION

The first half of 2018 saw developments that could portend important changes on the horizon.  We will monitor these developments, along with other FCA legislative activity, settlements, and jurisprudence throughout the year.  You can look forward to a comprehensive summary in our 2018 False Claims Act Year-End Update, which we will publish in January 2018.

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[1]      See Memo, U.S. Dep't of Justice, Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A) (Jan. 10, 2018), https://assets.documentcloud.org/documents/4358602/Memo-for-Evaluating-Dismissal-Pursuant-to-31-U-S.pdf (emphasis added). [2]      See Memo, U.S. Dep't of Justice, Limiting Use of Agency Guidance Documents In Affirmative Civil Enforcement Cases (Jan. 25, 2018), https://www.justice.gov/file/1028756/download. [3]      See Memo, U.S. Dep't of Justice, Prohibition on Improper Guidance Documents (Nov. 16, 2017), https://www.justice.gov/opa/press-release/file/1012271/download. [4]      See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Health Care CEO and Four Physicians Charged in Superseding Indictment in Connection with $200 Million Health Care Fraud Scheme Involving Unnecessary Prescription of Controlled Substances and Harmful Injections (June 6, 2018), https://www.justice.gov/opa/pr/health-care-ceo-and-four-physicians-charged-superseding-indictment-connection-200-million. [5]      See Speech, U.S. Dep't of Justice, Attorney General Sessions Delivers Remarks Announcing National Health Care Fraud and Opioid Takedown (June 28, 2018), https://www.justice.gov/opa/speech/attorney-general-sessions-delivers-remarks-announcing-national-health-care-fraud-and. [6]      Id. [7]      Id. [8]      See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Justice Department to File Statement of Interest in Opioid Case (Feb. 27, 2018), https://www.justice.gov/opa/pr/justice-department-file-statement-interest-opioid-case. [9]      See Press Release, Office of Pub. Affairs, United States Intervenes in False Claims Act Lawsuits Accusing Insys Therapeutics of Paying Kickbacks and Engaging in Other Unlawful Practices to Promote Subsys, A Powerful Opioid Painkiller (May 15, 2018), https://www.justice.gov/opa/pr/united-states-intervenes-false-claims-act-lawsuits-accusing-insys-therapeutics-paying. [10]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Dental Management Company Benevis and Its Affiliated Kool Smiles Dental Clinics to Pay $23.9 Million to Settle False Claims Act Allegations Relating to Medically Unnecessary Pediatric Dental Services (Jan. 10, 2018), https://www.justice.gov/opa/pr/dental-management-company-benevis-and-its-affiliated-kool-smiles-dental-clinics-pay-239. [11]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Pennsylvania Hospital and Cardiology Group Agree to Pay $20.75 Million to Settle Allegations of Kickbacks and Improper Financial Relationships (Mar. 7, 2018), https://www.justice.gov/opa/pr/pennsylvania-hospital-and-cardiology-group-agree-pay-2075-million-settle-allegations. [12]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Alere to Pay U.S. $33.2 Million to Settle False Claims Act Allegations Relating to Unreliable Diagnostic Testing Devices (Mar. 23, 2018), https://www.justice.gov/opa/pr/alere-pay-us-332-million-settle-false-claims-act-allegations-relating-unreliable-diagnostic. [13]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Ambulance Company to Pay $9 Million to Settle False Claims Act Allegations (Mar. 28, 2018), https://www.justice.gov/opa/pr/ambulance-company-pay-9-million-settle-false-claims-act-allegations. [14]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Radiation Therapy Company Agrees to Pay Up to $11.5 Million to Settle Allegations of False Claims and Kickbacks (Mar. 29, 2018), https://www.justice.gov/opa/pr/radiation-therapy-company-agrees-pay-115-million-settle-allegations-false-claims-and. [15]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Rotech Agrees to Pay $9.68 Million to Settle False Claims Act Liability Related to Improper Billing for Portable Oxygen (Apr. 12, 2018), https://www.justice.gov/opa/pr/rotech-agrees-pay-968-million-settle-false-claims-act-liability-related-improper-billing. [16]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Banner Health Agrees to Pay Over $18 Million to Settle False Claims Act Allegations (Apr. 12, 2018), https://www.justice.gov/opa/pr/banner-health-agrees-pay-over-18-million-settle-false-claims-act-allegations. [17]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, San Diego Laboratory Agrees to Pay $2 Million to Settle False Claims Act Allegations Related to Unnecessary Breast Cancer Testing (Apr. 19, 2018), https://www.justice.gov/opa/pr/san-diego-laboratory-agrees-pay-2-million-settle-false-claims-act-allegations-related. [18]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Ohio Hospital Operator Agrees to Pay United States $14.25 Million to Settle Alleged False Claims Act Violations Arising From Improper Payments to Physicians (May 10, 2018), https://www.justice.gov/opa/pr/ohio-hospital-operator-agrees-pay-united-states-1425-million-settle-alleged-false-claims-act. [19]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Drug Maker Pfizer Agrees to Pay $23.85 Million to Resolve False Claims Act Liability for Paying Kickbacks (May 24, 2018), https://www.justice.gov/opa/pr/drug-maker-pfizer-agrees-pay-2385-million-resolve-false-claims-act-liability-paying-kickbacks. [20]     See Press Release, U.S. Atty's Office for the Eastern Dist. of Pa., U.S. Dep't of Justice, Pharmacy owners agree to pay $3.2 million to resolve False Claims case (May 31, 2018), https://www.justice.gov/usao-edpa/pr/pharmacy-owners-agree-pay-32-million-resolve-false-claims-case. [21]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Signature HealthCARE to Pay More Than $30 Million to Resolve False Claims Act Allegations Related to Rehabilitation Therapy (June 8, 2018), https://www.justice.gov/opa/pr/signature-healthcare-pay-more-30-million-resolve-false-claims-act-allegations-related. [22]     See Press Release, U.S. Atty's Office for the Middle Dist. Of Fla., U.S. Dep't of Justice, Healogics Agrees To Pay Up To $22.51 Million To Settle False Claims Act Liability For Improper Billing Of Hyperbaric Oxygen Therapy (June 20, 2018), https://www.justice.gov/usao-mdfl/pr/healogics-agrees-pay-2251-million-settle-false-claims-act-liability-improper-billing. [23]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Caris Agrees to Pay $8.5 Million to Settle False Claims Act Lawsuit Alleging That it Billed for Ineligible Hospice Patients (June 25, 2018), https://www.justice.gov/opa/pr/caris-agrees-pay-85-million-settle-false-claims-act-lawsuit-alleging-it-billed-ineligible. [24]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Japanese Fiber Manufacturer to Pay $66 Million for Alleged False Claims Related to Defective Bullet Proof Vests (Mar. 15, 2018), https://www.justice.gov/opa/pr/japanese-fiber-manufacturer-pay-66-million-alleged-false-claims-related-defective-bullet. [25]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Point Blank Pays U.S. $1 Million for the Sale of Defective Zylon Bulletproof Vests (Nov. 7, 2011), https://www.justice.gov/opa/pr/point-blank-pays-us-1-million-sale-defective-zylon-bulletproof-vests; Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, U.S. Sues First Choice Armor & Equipment for Providing Defective Bullet-Proof Vests to Law Enforcement Agencies (Aug. 3, 2009), https://www.justice.gov/opa/pr/us-sues-first-choice-armor-equipment-providing-defective-bullet-proof-vests-law-enforcement. [26]   See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Lance Armstrong Agrees to Pay $5 Million to Settle False Claims Allegations Arising From Violation of Anti-Doping Provisions of U.S. Postal Service Sponsorship Agreement (Apr. 19, 2018), https://www.justice.gov/opa/pr/lance-armstrong-agrees-pay-5-million-settle-false-claims-allegations-arising-violation-anti. [27]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, United States Settles Lawsuit Alleging That Contractor Falsely Overcharged the U.S. Navy for Ship Husbanding Services (May 29, 2018), https://www.justice.gov/opa/pr/united-states-settles-lawsuit-alleging-contractor-falsely-overcharged-us-navy-ship-husbanding. [28]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Deloitte & Touche Agrees to Pay $149.5 Million to Settle Claims Arising From Its Audits of Failed Mortgage Lender Taylor, Bean & Whitaker (Feb. 28, 2018), https://www.justice.gov/opa/pr/deloitte-touche-agrees-pay-1495-million-settle-claims-arising-its-audits-failed-mortgage. [29]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, Bassett Mirror Company Agrees to Pay $10.5 Million to Settle False Claims Act Allegations Relating to Evaded Customs Duties (Jan. 16, 2018), https://www.justice.gov/opa/pr/bassett-mirror-company-agrees-pay-105-million-settle-false-claims-act-allegations-relating. [30]     See Press Release, Office of Pub. Affairs, U.S. Dep't of Justice, United States Obtains $114 Million Judgment Against Three Individuals for Paying Kickbacks for Laboratory Referrals and Causing Claims for Medically Unnecessary Tests (May 29, 2018), https://www.justice.gov/opa/pr/united-states-obtains-114-million-judgment-against-three-individuals-paying-kickbacks. [31]   2017 Mid-Year False Claims Act Update, Gibson Dunn (July 12, 2017), https://www.gibsondunn.com/2017-mid-year-false-claims-act-update/. [32]   See, e.g., Quin Hillyer, Obamacare Repeal May Be Closer Than You Think, Wash. Examiner (Apr. 26, 2018), https://www.washingtonexaminer.com/opinion/obamacare-repeal-may-be-closer-than-you-think. [33]   Peter Sullivan, Graham Working on New ObamaCare Repeal Bill, The Hill (May 16, 2018), http://thehill.com/policy/healthcare/388000-graham-working-on-new-obamacare-repeal-bill. [34]     Prepared Senate Floor Statement by Senator Chuck Grassley of Iowa, Interpreting the False Claims Act; S. Comm. on the Judiciary (Feb. 13, 2018), https://www.grassley.senate.gov/news/news-releases/interpreting-false-claims-act. [35]     Id. [36]     Id. [37]   2017 Year-End False Claims Act Update, Gibson Dunn (Jan. 5, 2018), https://www.gibsondunn.com/2017-year-end-false-claims-act-update/. [38]   Industry opponents worried that expanding the definition of "intended use" could "spawn[] a flurry of unwarranted FCA lawsuits."  Id. [39]   See Clarification of When Products Made or Derived From Tobacco Are Regulated as Drugs, Devices, or Combination Products; Amendments to Regulations Regarding "Intended Uses"; Partial Delay of Effective Date, U.S. Dep't of Health & Human Servs.—Food and Drug Admin. (Mar. 16, 2018), https://s3.amazonaws.com/public-inspection.federalregister.gov/2018-05347.pdf.  The portions of the rule relating to the regulation of tobacco products went into effect on March 19, 2018. [40]   Mark A. Rush, David I. Kelch & Isaac T. Smith, The False Claims Act in 2017: The Year in Review and What to Watch in 2018, BNA (Apr. 25, 2018), https://www.bna.com/false-claims-act-n57982091498/; see also Pub. L. No. 115-141 (2018) (final law). [41]   State False Claims Act Reviews, Dep't of Health & Human Servs.—Office of Inspector Gen., https://oig.hhs.gov/fraud/state-false-claims-act-reviews/index.asp. [42]   See supra note 37. [43]   See supra note 41 (collecting letters to states). [44]   S.B. 0669, 2017 Reg. Sess. (Mich. 2017), http://www.legislature.mi.gov/(S(y01pr1bmjos4hv4bgw5wcuid))/mileg.aspx?page=getobject&objectname=2017-SB-0669&query=on. [45]   A.B. A07989, 2017-2018 Leg. Sess. (N.Y. 2017), http://nyassembly.gov/leg/?default_fld=&leg_video=&bn=A07989&term=2017&Summary=Y&Actions=Y. [46]   S.B. 378, 2017-2018 Reg. Sess. (N.C. 2017), https://www2.ncleg.net/BillLookup/2017/s378. [47]   H.B. 7013, 2017 Reg. Sess. (Fla. 2017), https://www.flsenate.gov/Session/Bill/2018/7013. [48]   See supra note 37. [49]   S.B. 0065, 2017 Reg. Sess. (Mich. 2017), http://www.legislature.mi.gov/(S(2eethmzh3ynmq4revoals1xd))/mileg.aspx?page=GetObject&objectname=2017-SB-0065. [50]   H.B. 1027, 2017-2018 Reg. Sess. (Penn. 2017), http://www.legis.state.pa.us/cfdocs/billInfo/billInfo.cfm?sYear=2017&sInd=0&body=H&type=B&bn=1027. [51]     See supra note 41. [52]     See id.

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The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Stephen Payne, Robert Blume, Timothy Hatch, Alexander Southwell, Charles Stevens, Joseph West, Benjamin Wagner, Stuart Delery, Winston Chan, Andrew Tulumello, Karen Manos, Monica Loseman, Robert Walters, Reed Brodsky, John Partridge, James Zelenay, Jonathan Phillips, Ryan Bergsieker, Jeremy Ochsenbein, Sean Twomey, Reid Rector, Allison Chapin, Eva Michaels, Joshua Rosario, Jasper Hicks, and Trenton Van Oss.

Gibson Dunn's lawyers have handled hundreds of FCA investigations and have a long track record of litigation success.  Among other significant victories, Gibson Dunn successfully argued the landmark Allison Engine case in the Supreme Court, a unanimous decision that prompted Congressional action.  See Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008).  Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases.  The firm has more than 30 attorneys with substantive FCA expertise and more than 30 former Assistant U.S. Attorneys and DOJ attorneys.  For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the following attorneys. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Stephen C. Payne (+1 202-887-3693, spayne@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) James L. Zelenay Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)
Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Gibson Dunn and BDO provides an overview of significant trends and key issues in government enforcement actions and litigation involving allegations that services or items billed to government health programs were not medically necessary.

Topics Discussed:

• Enforcement trends and updates, including:
  • False Claims Act case law update, including the latest in the AseraCare line of cases
  • Application of DOJ’s Brand Memo to medical necessity theories
  • Expansion of medical necessity theories to actions involving pharmaceutical and medical device manufacturers
• An expert’s perspective:
  • Practical lessons from expert chart reviews in medical necessity cases
  • The role and evolution of payor reimbursement policies

View Slides [PDF] PANELISTS: Dr. Karen Meador is Managing Director and Senior Physician Executive of BDO. She is a board-certified pediatrician with 25 years of healthcare experience, and has served in numerous clinical and administrative leadership roles within healthcare systems and primary care organizations. Karen has extensive experience in leading collaborative multidisciplinary teams in creating and expanding innovative high-quality programs and services that transform and integrate clinical care, research and education and that engage physicians and patients in hospital and community settings. Sam Nazzaro is Global Forensics Managing Director of BDO. As top-level compliance counsel, former federal prosecutor and forensic advisor, Sam has more than 20 years of experience in regulatory and legal compliance, domestic and international advocacy, complex forensic investigations, and litigation. He assists global companies, healthcare providers and others in investigating fraud and corruption and managing/mitigating risk. He has successfully investigated, managed and led healthcare fraud/false claims matters, complex AML investigations and sensitive high-profile international governance projects. Stephen Payne is a partner in the Washington, D.C. office of Gibson Dunn. He is Chair of the firm’s FDA and Health Care practice group, and is a member of the Life Sciences practice group. His practice focuses on FDA and health care compliance, enforcement, and False Claims Act litigation for pharmaceutical and medical device clients. He has significant experience in the areas of fraud and abuse, product diversion and counterfeiting, good manufacturing practice regulations, product recalls and product promotion. Jonathan Phillips is a partner in the Washington, D.C. office of Gibson Dunn, and is a member of the firm’s Litigation Department. His practice focuses on FDA and health care compliance, enforcement, and litigation, as well as other white collar enforcement matters and related litigation. He has substantial experience representing pharmaceutical, medical device, and health care provider clients in investigations by the DOJ, FDA, and Department of Health and Human Services Office of Inspector General.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

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On June 14, 2018, Acting Associate Attorney General Jesse Panuccio gave remarks highlighting recent enforcement activity and policy initiatives by the Department of Justice ("DOJ").  The remarks, delivered at the American Bar Association's 12th National Institute on the Civil False Claims Act and Qui Tam Enforcement, included extensive commentary about DOJ's ongoing efforts to introduce reforms to promote a more fair and consistent application of the False Claims Act ("FCA").  While the impact of these policy initiatives remains to be seen, DOJ's continued focus on these efforts, led by officials at the highest levels within DOJ, suggests that FCA enforcement reform is a priority for the Department.

After giving an overview of several FCA settlements from the last eighteen months—apparently designed to demonstrate that this DOJ recognizes the importance of the FCA in a breadth of traditional enforcement areas—Mr. Panuccio discussed two particular priorities: the opioid epidemic and the nation's elderly population.  He emphasized that DOJ would "actively employ" the FCA against any entity in the opioid distribution chain that engages in fraudulent conduct.  He then highlighted the crucial role of the FCA in protecting the nation's elderly from fraud and abuse, citing examples of enforcement against a nursing home management company, hospices, and skilled rehabilitation facilities. The majority of Mr. Panuccio's remarks focused, however, on policy initiatives DOJ is undertaking to ensure that enforcement "is fair and consistent with the rule of law."  Mr. Panuccio alluded to general reform initiatives by the department, such as the ban on certain third-party payments in settlement agreements, before expanding on reforms specific to the FCA.  Mr. Panuccio highlighted that the recent FCA reform efforts have been spearheaded by Deputy Associate Attorney General Stephen Cox; Mr. Cox had delivered remarks at the Federal Bar Association Qui Tam Conference in February of this year that had provided insight into the positions articulated in the Brand and Granston memoranda.  In his speech, Mr. Panuccio described five policy initiatives being undertaken by DOJ to reform FCA enforcement: (i) qui tam dismissal criteria; (ii) the use of guidance in FCA cases; (iii) cooperation credit; (iv) compliance program credit; and (v) preventing "piling on."

Qui tam dismissals

Mr. Panuccio acknowledged the tremendous increase in the number qui tam cases that are filed each year, which includes cases that are not in the public interest.  Recognizing that DOJ expends significant resources to monitor cases even when it declines to intervene, Mr. Panuccio noted that DOJ attorneys have been instructed to consider whether moving to dismiss the action would be an appropriate use of prosecutorial discretion under the FCA.  While DOJ previously exercised this authority only rarely, consistent with the Granston memo, Mr. Panuccio suggested that, going forward, DOJ may use that authority more frequently in order to free up DOJ's resources for matters in the public interest. Although defendants generally may not yet be experiencing significant differences regarding the possibility of dismissal at the DOJ line level, the continued public discussion of the potential use of DOJ's dismissal authority by high-level officials suggests that DOJ appreciates the problems caused by frivolous qui tams and may ultimately be more receptive to dismissal of actions lacking merit.

Guidance

As stated in the Brand Memorandum, DOJ will no longer use noncompliance with agency guidance that expands upon statutory or regulatory requirements as the basis for an FCA violation.  Mr. Panuccio explained that, in an FCA case, evidence that a party received a guidance document would be relevant in proving that the party had knowledge of the law explained in that guidance.  However, DOJ attorneys have been instructed "not to use [DOJ's] enforcement authority to convert sub-regulatory guidance into rules that have the force or effect of law."

Cooperation

With respect to cooperation credit, Mr. Panuccio indicated that DOJ is working on formalizing its practices and that modifications to prior practices should be expected.  That notwithstanding, Mr. Panuccio provided assurances that DOJ will continue to "expect and recognize genuine cooperation" in both civil and criminal matters.  He also noted that the extent of the discount provided when negotiating a settlement would depend on the nature of the cooperation, how helpful it was, and whether it helped identify individual wrongdoers. Though DOJ's new policies on cooperation credit are still forthcoming, Mr. Panuccio's remarks suggest that formal cooperation credit might be expanded to cover situations outside of those in which the defendant makes a self-disclosure.

Compliance

In recognition of the challenges of running large organizations, DOJ will "reward companies that invest in strong compliance measures."  How this may differ, if at all, from current ad hoc considerations remains to be seen.

Piling On

Mr. Panuccio acknowledged that, when multiple regulatory bodies pursue a defendant for the same or substantially the same conduct, "unwarranted and disproportionate penalties" can result. In order to avoid this "piling on," DOJ attorneys will promote coordination within the agency and other regulatory bodies to ensure that defendants are subject to fair punishment and receive the benefit of finality that should accompany a settlement.  Moreover, Mr. Panuccio remarked that DOJ attorneys should not "invoke the threat of criminal prosecution solely to persuade a company to pay a larger settlement in a civil case," which really is simply a restatement of every attorney's existing ethical duty.  Whether DOJ leadership's interest here will result in significant practical developments is uncertain.  Such developments, though perhaps unlikely, could include eliminating the cross-designation of Assistant U.S. Attorneys as both Civil and Criminal; limiting the ability of Civil Division attorneys to invite Criminal Division lawyers to participate in meetings without the request or consent of defendants; or perhaps even somehow inhibiting the Civil Division from using the FCA, with its mandatory treble damages and per-claim penalties, following criminal fines and restitution. We will continue to monitor and report on these important developments.

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The following Gibson Dunn lawyers assisted in preparing this client update: Stephen Payne, Jonathan Phillips and Claudia Kraft. Gibson Dunn's lawyers have handled hundreds of FCA investigations and have a long track record of litigation success.  Among other significant victories, Gibson Dunn successfully argued the landmark Allison Engine case in the Supreme Court, a unanimous decision that prompted Congressional action.  See Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008).  Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases.  The firm has more than 30 attorneys with substantive FCA expertise and more than 30 former Assistant U.S. Attorneys and DOJ attorneys.  For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the following attorneys. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Stephen C. Payne (+1 202-887-3693, spayne@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) James L. Zelenay Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)
Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Click for PDF This is the latest update of significant developments relating to regulatory, administrative, and legal actions involving schools.  This quarter saw the reinstatement of the Accrediting Council for Independent Colleges and Schools (ACICS), as well as three for-profit law schools turning the tables on their schools' accreditor, the American Bar Association.  There were also significant developments on the political and regulatory fronts, not to mention a shifting landscape in federal enforcement.  Let's jump into it.

A.   ACICS Ruling and Reinstatement

On March 23, 2018, a federal district court ordered the Department of Education (ED) to reconsider its decision terminating recognition of ACICS.  ACICS had submitted a petition for continued recognition to ED in January 2016.  In December 2016, President Obama's ED Secretary terminated ACICS's recognition, and ACICS challenged the decision in court.  In an April 29, 2017 filing, the Trump Administration supported the previous Administration's termination decision. However, on March 23, the United States District Court for the District of Columbia found that ED failed to consider supplemental responses and additional evidence ACICS provided to ED in May 2016 at ED's request.  The court held that in doing so, ED violated the Higher Education Act and its implementing regulations' requirement that the ED Secretary consider all available relevant information, as well as the Administrative Procedure Act's requirement that an agency must examine all relevant data.  ACICS v. DeVos, No. 16-2448 (RBW), 2018 WL 1461958, at *13, 17 (D.D.C. Mar. 23, 2018).  The court concluded that ED acted arbitrarily and capriciously by failing to consider this information.  Id. at *17. On remand, ED must reconsider the recognition petition ACICS submitted in January 2016 and must consider in the first instance the supplemental materials ACICS submitted in May 2016.  In the interim, Secretary DeVos restored ACICS's status as a federally recognized accrediting agency effective December 12, 2016.  ACICS may file a written submission explaining the relevance of the May 2016 materials and include additional relevant evidence.  Secretary DeVos ordered that any written submission and exhibits should be filed with ED no later than May 30, 2018.  Because the court did not reach the merits of ACICS's case, it is hard to know how ACICS will fare under this new review.  But it is fair to say that just the opportunity for a new review shows a seismic shift in the landscape from one Administration to the next.

B.    Change in Enforcement Focus, Per the New York Times

Two recent New York Times articles further highlight the differences in approach between the current and previous Administrations when it comes to enforcement relating to the sector.  In an article dated May 9, 2018, the Times reports that Mick Mulvaney, the interim director of the Consumer Financial Protection Bureau (CFPB), will move the agency's student loan division into its consumer information unit.  A CFPB spokesman described the change as a "very modest organizational chart change," but some officials believe it may dampen the agency's zeal for an enforcement case it has been pursuing against the nation's largest student loan collector, Navient.  Further signaling its desire to move away from examining student-lending issues, the CFPB also removed the topic "student loan servicing" from its bi-annual long-term regulatory agenda. In the second article dated May 13, 2018, the Times reports that a unit within ED that was tasked with investigating for-profit colleges, which previously included a dozen or so lawyers and investigators at the end of the Obama Administration, is now made up of three employees.  Its mandate has also shrunk.  Whereas the unit used to investigate such issues as advertising, recruitment practices, and job placement claims, the three-person team now focuses on processing student loan forgiveness applications and smaller compliance cases.

C.    Litigation

Outside of the political arena, there was activity this past quarter in both federal and state courts.

1.    InfiLaw Scores a Win in Florida and Sets Its Sights on the ABA

InfiLaw was involved in a variety of litigation this past quarter, fighting back a False Claims Act case and filing multiple suits against the American Bar Association. First, on April 23, 2018, the United States District Court for the Middle District of Florida dismissed for a second time a False Claims Act lawsuit filed against InfiLaw Corp. and its now-closed law school, Charlotte School of Law.  U.S. ex rel. Bernier v. Infilaw Corp., No. 6:16-cv-970-Orl-37TBS, 2018 WL 1905342, at *8 (M.D. Fla. Apr. 23, 2018).  A former law professor turned qui tam relator, Barbara Bernier, "adopted the kitchen-sink approach" to pleading after the United States declined to intervene, according to the court.  She alleged the school had made improper "incentive payments to recruitment staff," "admitted academically unqualified students," "altered students grades," "juked its employment stats" and "failed to implement a written plan to combat misuse of copyrighted works," among other allegations.  Id. at *6, *8. The court held that the majority of these claims had been "publicly disclosed" online and elsewhere and therefore the relator could not proceed because she was not an "original source" of the allegations—i.e., she didn't voluntary disclose this information to the Government before the public disclosures or demonstrate knowledge that materially adds to the public disclosures.  Id. at *7-8.  On the remaining claims, the court held that the relator had not provided sufficient specificity; she provided "just vague allegations that these incidents occurred and Defendants were responsible."  Id. at *8. However, the court did give the relator leave to amend, and she filed an amended complaint on May 7, 2018.  We would not be surprised to see InfiLaw move to dismiss the complaint again. Second, Charlotte School of Law and its two sister schools, Florida Coastal School of Law and Arizona Summit Law School, turned to offense and filed three separate suits against their accreditor, the American Bar Association, alleging that the ABA's findings of noncompliance with its accreditation standards "were arbitrary, capricious, unreasonable, [and] an abuse of discretion."  In the accompanying press release for the Florida Coastal lawsuit, the school highlighted its diverse student body, and the president of Florida Coastal lamented that "[t]he ABA's decisions in regard to accreditation seem to be calculated efforts to win political points, without regard for due process, or how students will be adversely affected."  The ABA is yet to respond to these complaints.

2.    Two Lawsuits Relating to For-Profit Schools

Two additional lawsuits were unsealed or filed this past quarter relating to for-profit schools.  First, in the United States District Court for the District of Utah, an ex-employee of lead generator EduTrek filed a lawsuit under the False Claims Act against his former employer and a host of schools.  At its core, the lawsuit alleges that EduTrek and its clients violated ED's incentive compensation ban.  The United States declined to intervene on February 16, 2018. Second, two former students filed a purported class action lawsuit against Capella University in the United States District Court for the District of Minnesota, alleging the school "misled prospective and current students … about the time to completion and cost of their mostly student-loan financed doctoral degrees."  Compl. ¶ 2, Wright v. Capella Education Co., No. 18-cv-1062 (D. Min. April 20, 2018).  The school has until July 9, 2018 to respond to the allegations.

3.    Don't Forget About the Non-Profit Schools

As has been the case for a while, and particularly this past quarter, there were a number of prominent investigations opened and lawsuits filed against traditional non-profit schools.  The Department of Justice (DOJ) garnered national news coverage of its decision to investigate at least seven elite colleges—Amherst College, Grinnell College, Middlebury College, Pomona College, Wellesley College, Wesleyan University, and Williams College—for possible antitrust issues.  The investigation reportedly seems to center on whether the schools improperly shared information among them to enforce the terms of their early-admissions programs. There was also a notable False Claims Act settlement with the University of North Texas.  According to DOJ's press release, the school "agreed to pay the United States $13,073,000.00 to settle claims that it inaccurately measured, tracked and paid researchers for effort spent on certain NIH-sponsored research grants." On top of those announcements, DOJ also announced on March 2, 2018 that it had indicted six former employees of the Chicago campus of the Center for Employment Training, a non-profit school, for an alleged "scheme[] to enroll fake students in classes as part of a conspiracy to swindle federal financial aid programs out of millions of dollars." Twelve graduates of the landscape architecture program at Colorado State University have also sued their alma mater, alleging that the university should refund their tuition because the school failed to secure proper accreditation for the master's degree program. Finally, Howard University confirmed on March 29, 2018 that the school had conducted an internal investigation and discovered that several employees of the university's financial aid department awarded themselves grants, even though they had tuition remission, and thus received more money than "the total cost of attendance." As we have been saying for some time, traditional schools are just as susceptible to the claims that have been made, particularly by the prior Administration, against the for-profit education sector.  We are continuing to see that proven true.

4.    Federal Actions Against Individuals

The past quarter also saw two notable developments in cases brought by the federal government against individuals involved in the sector.  First, on April 16, 2018, DOJ announced that the owner of "a privately owned, non-accredited school" called Atius Technology Institute, which specialized "in information technology courses, pleaded guilty … to bribing a public official at the U.S. Department of Veterans Affairs (VA) in exchange for the public official's facilitation of over $2 million in payments that were supposed to be dedicated to providing vocational training for military veterans with service-connected disabilities." Second, the case brought by the Securities and Exchange Commission against two executives of ITT Educational Services, Inc., appears headed to trial.  On March 23, 2018, the United States District Court for the Southern District of Indiana largely denied the dueling summary judgment motions filed by the executives and the SEC.  The court set trial for July 9, 2018.

5.    State Level Litigation and Disputes

On the state level, there continue to be battles about the proper scope of state authority.  On March 12, 2018, Secretary DeVos set forth the Trump Administration's stance in an interpretive guidance, stating that the federal government has the exclusive power to regulate and oversee federal student loan servicers, and therefore any state regulations on the topic are preempted. Meanwhile, in Massachusetts, a superior court judge rejected a motion to dismiss filed by the Pennsylvania Higher Education Assistance Agency (PHEAA), one of the nation's largest student loan servicers, in a case brought by the Massachusetts Attorney General, on the grounds that PHEAA is not protected by sovereign immunity, even though formed under the Commonwealth of Pennsylvania.  In that same case, DOJ had filed a statement of interest arguing that the Massachusetts Attorney General is precluded from suing PHEAA on preemption grounds.  Although this argument was not addressed in the court's decision, the court stated during oral argument on the motion:  "[T]he preemption issue is not going to make the whole case go away."  This stands seemingly in contrast to the guidance from Secretary DeVos. In California, Corinthian College students have seemingly taken the baton previously held by state attorneys general and filed a class action lawsuit for declaratory and injunctive relief against Secretary DeVos and ED.  The students filed suit in the Northern District of California in December 2017 and filed a first amended complaint on March 17, 2018.  The students allege that after Corinthian closed, ED promised the students complete loan forgiveness but then in December 2017 announced a plan to award only partial relief of student loan debt to borrowers using a formula based on students' earnings.  The students argue that ED's use of an earnings formula is "arbitrary and capricious" rulemaking that violates the Administrative Procedure Act.  On May 25, 2018, a magistrate judge issued a preliminary injunction, blocking enforcement of ED's partial loan relief program, finding that by using records from the Social Security Administration to obtain students' earnings, ED violated the federal Privacy Act.  A hearing to consider next steps, including the process for loan forgiveness, is scheduled for June 4. Finally, Ashford University and its holding company, Bridgepoint Education, scored a victory in Iowa.  The state's approval agency had attempted to strike Ashford's eligibility to receive post-9/11 GI Bill benefits after Ashford closed its physical location in Iowa.  Ashford sued to block the loss of eligibility, and the state court dismissed Ashford's suit.  However, on April 26, 2018, the Iowa Supreme Court vacated the lower court's decision, holding that the lower court judge should have disclosed that she has family ties to the state office of the attorney general.  Ashford can now resume its legal challenge to Iowa's attempt to withdraw Ashford's GI Bill eligibility.

D.    Regulatory Activity

There has been a lot of activity on the regulatory front.  On May 9, 2018, ED published its Spring 2018 Agency Rule List, including the following in its list of topics in the "Prerule" and "Proposed Rule" stages:  state authorization of distance education providers, accreditation, borrower defense, gainful employment, and eligibility of faith-based entities and activities. Rules related to state authorization that had been published in December 2016 were scheduled to go into effect on July 1, 2018, but ED has published a notice of proposed rulemaking that proposes a two-year delay in the effective date.  The public has 15 days to comment on the proposed delay.  The regulations would have required institutions that offer distance education to students in states where the institution is not physically located to either meet those states' requirements for offering postsecondary education or to participate in a state authorization reciprocity agreement, and then document that there is a state process for review and action on student complaints. ED previously sent two other Obama-era consumer protection regulations to negotiated rulemaking sessions.  After three months of negotiations, the sessions regarding borrower defense to repayment concluded in February without consensus.  Sticking points included which evidentiary standard should be used and whether to include or how long a statute of limitations should be.  The sessions regarding gainful employment similarly ended without consensus in April after four days of negotiations.  Since no consensus was reached in either session, ED can draft its own language, presumably keeping in mind the information gathered during the negotiated rulemaking sessions.  ED will need to publish a Notice of Proposed Rulemaking for each rule, which will be followed by a period of public comment.  Final regulations will be published by November 1, 2018, to take effect on July 1, 2019.

E.    Corporate Activity

Finally, there were some notable developments in the trend of schools seeking nonprofit status, as well as a noteworthy sale.  First, the Higher Learning Commission approved Purdue University's acquisition of Kaplan University.  This was the final hurdle for the deal.  Second, Grand Canyon University also received good news from the Higher Learning Commission.  The accreditor approved its request to revert back to nonprofit status.  Third, Ashford University announced it is joining the trend, too, and is seeking to become a nonprofit.  It is expected to seek approval from its accreditor, the WASC Senior College and University Commission.  Finally, Laureate Education Inc. announced a deal to sell the University of St. Augustine for Health Sciences to a private equity firm, Altas Partners, for $400 million.

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As always, we will continue to monitor all of these developments, and you can look forward to updates in our next report.  

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