January 8, 2014

$3.8 Billion—That is the approximate amount recovered by the federal government last year alone in settlements and judgments under the False Claims Act, 31 U.S.C. §§ 3729-33 (the “FCA” or the “Act”).[1]   This amount marks the second largest haul in history and the fourth consecutive fiscal year in which the government recovered more than $3 billion.  All in, 2013 brings total recoveries under the FCA during the last five years up to $17 billion—the largest five-year total ever.[2]

In this last year, there were more than 846 new cases filed under the FCA, with 752 (or 89%) of those filed by qui tam “whistleblowers”—individuals who sue on the government’s behalf looking for up to 30% of monies recovered.[3]   Indeed, 2013 saw over 100 more qui tam lawsuits filed than in 2012, and whistleblowers (called “relators”) earned more than $387 million in share awards.[4]  There were more whistleblower lawsuits filed last year than in any year of the FCA’s history.

Not surprisingly, as the number of FCA lawsuits rise, and as recoveries climb, both the Department of Justice (“DOJ”) and whistleblower counsel dedicate more resources, time, and effort to FCA cases.  One need only search “whistleblower lawyer” on the Internet to see how many attorneys dedicate their practice to this area.

Lending to these increased recoveries has been courts’ expansion of the scope of the FCA, making virtually any violation of any rule or regulation that is a condition of government payment in any government program potentially actionable under the statute.  Indeed, the FCA now covers conduct in almost every industry in which the government provides funding, often disrupting and threatening businesses in health care, education, defense contracting, financial services, and the like.

Behind the $3.8 billion in recoveries lie significant settlements and judgments, including one settlement by a household pharmaceutical company with the government for $2.2 billion ($1.7 billion of which was attributed to civil damages and penalties).  Many cases went to trial in 2013—a rare occurrence given that the consequence of any adverse verdict includes (almost automatically) treble damages, forfeiture of up to $11,000 per false claim, and attorneys’ fees.  And perhaps most troubling for some, an adverse verdict may also result in suspension or debarment from government programs.  Indeed, a survey of FCA cases reveals that they are often “bet the company” cases.  On the case law front, there were hundreds of decisions issued last year, many of which departed from historical precedent.  Further, the Supreme Court expressed interest in reviewing at least two of these cases.  Finally, states—like the federal government—continue to legislate and pursue their own false claims laws with great vigor.  In response, for the first time in recent history, businesses and potential FCA defendants have joined together to advocate for amendments to the FCA.

$3.8 billion—a sign alone that 2013 was a dynamic year; and as discussed further below, 2014 begins poised to be just the same.

In this year-end update, as in years past, we first summarize the enforcement activity that has occurred under the FCA during the fiscal year ending September 30, 2013—in terms of total recoveries, the increasing percentage of lawsuits brought as qui tam lawsuits, settlements and judgments in the last six months, descriptions of significant trials, and industry breakdowns of FCA activity.  Next, we discuss important judicial decisions and trends occurring during the second half of the year.  And finally, we discuss legislative activity relating to the Act in the last six months.  The first half of 2013 was discussed in our 2013 Mid-Year False Claims Act Update.  A collection of Gibson Dunn’s recent publications on the FCA, including more in-depth discussions of the FCA’s framework and operation along with practical guidance to help companies avoid or limit liability under the FCA, may be found on our Website.

I.                   FCA Enforcement Activity

A.                Total Recovery Amounts:  The DOJ Aggressively Enforces the FCA with $3.8 Billion in Civil Recoveries

As mentioned above, in the 2013 fiscal year, the federal government secured nearly $3.8 billion in civil settlements and judgments under the FCA.[5]  This year’s recovery is the second largest annual recovery in history, surpassed only by last year’s nearly $5 billion in recoveries—a difference explained entirely by last year’s record settlement with GlaxoSmithKline[6]— and marks the fourth year in a row where the DOJ has recovered more than $3 billion from defendants.[7]  Since January 2009, the DOJ has recovered $17 billion under the FCA—nearly half of all recoveries since 1986, when the Act was substantially amended.[8]

Fiscal year 2014 shows no signs of letting up.  The DOJ has already announced nine FCA settlements for the first quarter of fiscal year 2014 (October through December 2013), while intervening in at least another two FCA suits (against a background investigation service[9] and a national hospitalist physician group[10]), in addition to bringing its own suit against a construction company and its owner.[11]

B.                 Qui Tam Activity

Keeping with recent history, whistleblowers were a key driver of 2013 FCA recoveries.  Of the $3.8 billion in fiscal year 2013 recoveries, three-quarters—$2.9 billion—was recovered through lawsuits originally filed by whistleblowers.[12]  Whistleblowers also played a large role in the filing of new FCA cases in general, with 752 of the 846 new FCA matters opened in the 2013 fiscal year initiated under the FCA’s qui tam provisions by whistleblowers.[13]  This stands in stark contrast to fiscal year 1987, when relators initiated only 8% of new matters—30 of 373—and the government initiated the remainder.[14]

In total, since 1986, whistleblower qui tam cases have led to more than $27.2 billion in government recoveries, with nearly half ($11.5 billion) of that amount recovered in the last four years.[15]  Further, for the 9,200 suits filed by whistleblowers since 1986, whistleblowers have been awarded $4.3 billion, with $387 million in awards in fiscal year 2013 alone.[16]  And overall, nearly 70% of all FCA recoveries since 1986 can be attributed to qui tam matters.[17]

The chart below demonstrates both the increase in overall FCA litigation activity since 1986 and the distinct shift from largely government-driven investigations and enforcement to qui tam-initiated lawsuits.

Number of FCA New Matters, Including Qui Tam Actions

Source: DOJ “Fraud Statistics – Overview” (December 23, 2013)

The FCA authorizes the government not only to file its own lawsuit, but also to intervene in and take control over any qui tam whistleblower action.  However, in practice, for every ten cases filed by relators, the government ultimately intervenes in only about 20% of these cases.[18]  But when the government appears, it matters.  Indeed, the government’s decision whether to intervene in a qui tam matter remains the single biggest factor correlated with any subsequent recovery, with cases involving government intervention responsible for the lion’s share of FCA recoveries.  Of the $27.2 billion in total recoveries between fiscal years 1987 and 2013, qui tam actions in which the government declined to intervene recovered only $991 million—a paltry 4%.[19]

With the number of qui tam suits climbing to new heights this year, companies can expect to see increased investigation by the government, resulting in more subpoenas—including subpoenas issued under FIRREA (the Financial Institutions Reform, Recovery, and Enforcement Act), Civil Investigative Demands, and other investigative action by the DOJ and other government agencies.  The data below confirms our constant refrain:  companies facing whistleblower claims should not underestimate the importance of working proactively to persuade the government not to intervene.

Settlement or Judgments in Cases where the Government Declined Intervention as a Percentage of Total FCA Recoveries

Source: DOJ “Fraud Statistics – Overview” (Dec. 23, 2013)

C.                Noteworthy Settlements Announced During the Second Half of 2013

In our 2013 Mid-Year False Claims Act Update we discussed a number of notable settlements and judgments announced during the first half of 2013, including a $500 million settlement—$350 million of which arose from alleged civil wrongdoing—with a pharmaceutical company accused of making false statements to the Food and Drug Administration (“FDA”) regarding the quality of its drugs;[20] and a judgment against a provider of high-tech products and services to the global aerospace and building systems industries for over $473 million, of which $364 million constituted damages and penalties under the FCA, representing the biggest recovery obtained by the government in a case tried under the FCA.[21]   The second half of 2013 saw one very large settlement and a variety of other settlement activity.  The following are significant settlements announced during the second half of the year (some of which are included in the government’s 2014 fiscal year):

• On November 4, 2013, a pharmaceutical company agreed to pay a total of $2.2 billion (including $1.72 billion in civil damages and penalties) to resolve claims that it engaged in off-label marketing and paid kickbacks to boost sales of two pharmaceutical products.  The subsidiary of the company allegedly marketed schizophrenia medication as being safe and effective for non-schizophrenic patients that included children, the elderly, and individuals with mental disabilities.  The government also alleged that the company paid kickbacks to nursing homes to encourage the use of the pharmaceutical product on the elderly.  As a part of the settlement, the company agreed to a Corporate Integrity Agreement with the Department of Health and Human Services (“HHS”) Office of Inspector General (“OIG”) that requires additional transparency and changes to the company’s executive compensation program.  The qui tam whistleblowers who assisted the government will receive a total of $167.7 million as their relators’ share.[22]
• On July 2, 2013, the DOJ announced that 55 hospitals, located in 21 states, agreed to pay more than $34 million to settle allegations that the hospitals submitted false claims to Medicare for kyphoplasty procedures.  Kyphoplasty is a procedure used to treat certain spinal fractures.  The settlement resolved allegations that the settling hospitals billed Medicare for kyphoplasty procedures on an inpatient basis, rather than outpatient basis, to increase Medicare billing.  This represents the latest group of settlements in a years-long investigation of kyphoplasty procedures that has yielded approximately $75 million in settlements with over 100 hospitals, in addition to a separate $75 million settlement with the manufacturer of the device used in the procedures.[23]
• On July 3, 2013, a medical device manufacturer agreed to a settlement with the U.S. government in which it will pay $6 million to resolve allegations that it caused health care providers to submit false claims to Medicare and other federal care programs for minimally-invasive spine surgeries.  The U.S. government alleged that the defendant knowingly caused health care providers to submit claims with incorrect diagnoses or procedure codes.  The whistleblower who brought the lawsuit will receive $1.02 million of the settlement.[24]
• On July 3, 2013, a medical firm agreed to pay $14.5 million to settle allegations that it overbilled Medicare and other federal health care programs.  The government alleged that the firm, which provides physicians to hospitals and other medical facilities, submitted inflated claims to federal health benefits programs on behalf of its physicians for higher and more expensive levels of service than were documented.  The whistleblower who brought the lawsuit, a former employee of the medical firm, will receive $2.7 million of the settlement.[25]
• On July 3, 2013, the DOJ announced that a scientific, engineering, and technical services company agreed to pay $5.75 million to settle claims, without admitting or denying liability, that it allegedly submitted claims under a contract with the General Services Administration (“GSA”) in violation of federal procurement regulations.  The government alleged that the company provided inaccurate information to the GSA to induce contracting officials to award it a contract for the provision of professional engineering and consulting services.  The company denied all liability.[26]
• On July 10, 2013, a hospital and cardiology practice agreed to pay $4 million to settle a lawsuit alleging medically unnecessary cardiology procedures were performed on patients and billed to Medicare and Medicaid.  The civil suit was brought by a whistleblower who worked as a cardiologist.[27]
• On July 12, 2013, a global design and construction company agreed to pay $3.5 million to settle allegations that it submitted false claims in connection with the U.S. Agency for International Development (“USAID”) contracts for the construction of water and wastewater infrastructure projects in Egypt in the 1990s.  The government alleged that the company wrongfully entered into joint venture partnerships in order to secure USAID-funded contracts for which they were ineligible.[28]
• On July 15, 2013, the DOJ announced a settlement with a polling and market research firm, in which the firm agreed to pay $10.5 million to settle allegations that it violated the FCA and the Procurement Integrity Act for conduct involving several of its federal government contracts and subcontracts.  The government alleged that the firm knowingly overstated its true estimated labor hours in proposals to the U.S. Mint and State Department for contracts and task orders that were to be awarded without competition.  The whistleblower in this case, a former director of client services for the firm, received over $1.9 million as his share of the government’s recovery.[29]
• On July 26, 2013, a health care system and hospital paid $8 million to settle allegations that they submitted false claims to Medicare.  The DOJ announced that the settlement resolved allegations that between 2003 and 2009 the health care system and hospital knowingly kept patients hospitalized beyond the time considered medically necessary to increase their Medicare reimbursements and to maintain the hospital’s classification as a long-term acute care facility.[30]
• On July 30, 2013, a pharmaceutical company agreed to pay $490 million to resolve criminal and civil liability arising from allegations that it marketed a prescription drug for uses not approved as safe and effective by the FDA.  The government alleged that the company violated the FCA, from 1998 through 2009, by promoting a drug for unapproved uses, some of which were not covered by Medicare, Medicaid, or other federal health care programs.  The government contended that this conduct resulted in the submission of false claims to government health care programs for the drug.  Of the settlement amount to resolve the civil claims, the company agreed to pay $230,112,596 to the federal government and $27,287,404 to the respective states.  The resolution also included a criminal fine and forfeiture totaling $233.5 million.[31]
• On July 30, 2013, the DOJ announced that the U.S. District Court for the District of Columbia had entered judgment for more than $17 million against a health care provider and two related companies.  The provider and companies were accused of submitting false claims to federal and state health care programs, including double-billing for certain medical tests, billing under codes that did not apply, and billing for services that were not provided.[32]
• On July 30, 2013, a private university agreed to pay $2.93 million to settle claims that a former university researcher engaged in cancer research grant fraud.  The case alleged that the researcher submitted false claims under research grants from the National Institute of Health.  The former employee of the university who filed the lawsuit will receive $498,100 in settlement proceeds.[33]
• On August 6, 2013, a Texas businessman agreed to pay $400,000 to settle allegations that he defrauded the Federal Communications Commission’s E-rate program, which subsidizes eligible equipment and services to make Internet access and internal networking more affordable for public schools and libraries.  The DOJ contended that the businessman, through a bidding company for which he functioned as CEO and managing partner, allegedly provided gifts and loans to employees of a local school district in violation of E-rate’s competitive bidding requirements.  The DOJ also argued that the businessman helped devise a scheme in which the school district outsourced some of its employees to his company, which allowed these employees to continue working for the district while passing the cost on to the E-rate program.  The DOJ noted this settlement “is part of a broader investigation by the United States of E-rate funding requests submitted by” other Texas school districts.[34]
• On August 19, 2013, the DOJ announced that a group of health care providers agreed to settle a qui tam lawsuit for $26 million.  Six of the group’s health care facilities were accused of submitting false claims to Medicare, Medicaid, and other federal health care programs for inpatient procedures that should have been billed as outpatient services.  The settlement provided that over $25 million will go to Medicare and other federal health care payors, while the State of Florida will receive just over $800,000.[35]
• On August 22, 2013, a group of career training schools operating across a number of southern and western states agreed to pay $3.7 million to settle allegations that the schools submitted false claims for federal student financial aid.  In particular, the government alleged the group falsely certified compliance with federal student aid programs’ eligibility requirements by misrepresenting its job placement statistics, submitted claims for ineligible students, and fraudulently induced students to enroll and maintain enrollment in its schools.  The settlement stemmed from qui tam whistleblower actions filed in Texas in 2009 and in Florida in 2011.[36]
• On August 27, 2013, a medical imaging company and its former owners and chief radiologist agreed to pay $3.57 million to resolve allegations that they submitted fraudulent claims to federal health care programs and entered into prohibited kickback agreements.  Federal regulations require that a qualified physician supervise the administration of certain medical diagnostic procedures, and the government contended the company submitted claims for procedures performed without the direct supervision of a qualified physician.  The government also alleged the former owners and chief radiologist submitted claims for services referred to them by physicians with whom they had improper financial relationships.  The settlement involved a qui tam lawsuit filed by a local radiologist, who will receive over $500,000 as his relator’s share.[37]
• On August 28, 2013, a construction product manufacturing and marketing company and one of its subsidiaries paid over $60 million to settle allegations that the subsidiary filed false claims in connection with two supply and services contracts with the General Services Administration (“GSA”).  The subsidiary allegedly failed to provide the GSA price discounts it provided to non-federal government customers, and also allegedly marketed expensive materials to government purchasers without disclosing the availability of the same materials at lower cost that were manufactured and sold by the company.  This settlement resolves a qui tam suit filed by the subsidiary’s former vice president, who will receive more than $10 million as his relator’s share.  Several actions brought under state false claims statutes are pending.[38]
• On September 13, 2013, a group of radiation oncology providers agreed to pay $3.5 million to the U.S. government and the State of Florida to resolve allegations that they billed Medicare, Medicaid and other federal health programs for medical services which were unsupervised and ineligible for government reimbursement.  Three of the oncology providers also agreed to be subject to “enhanced accountability and monitoring activities to be conducted by both internal and independent external reviewers” to deter wrongful conduct in the future.[39]
• On September 25, 2013, a California-based medical diagnostics company agreed to pay $17.5 million to settle allegations that it paid kickbacks for referrals of services subsequently billed to Medicare and Medi-Cal.  The DOJ alleged the company charged nursing facilities in California discounted rates for inpatient services paid by Medicare in exchange for the facilities’ referral of outpatient business.  The two qui tam whistleblowers who filed the lawsuit will receive over $3.75 million as their combined relators’ share.[40]
• On October 28, 2013, a software provider agreed to pay $6.2 million to settle allegations that it provided the GSA with defective pricing information that allowed it to sell software licenses and services to the government at inflated prices.  Under the Multiple Award Schedule program, vendors can gain access to many government purchasers by agreeing to disclose their commercial pricing policies, including any discounts.  The software provider’s predecessor allegedly knowingly provided the government with inaccurate pricing information that inflated prices and caused overpayment. The qui tam whistleblower who initiated this lawsuit will receive $1,178,000 from the settlement.[41]
• On November 5, 2013, a Florida-based hospice resolved allegations that it submitted false Medicare claims for services provided to ineligible patients by agreeing to pay $3 million.  The hospice allegedly directed its staff to admit patients without regard to Medicare eligibility, falsified records to make the patients appear eligible, and delayed discharging patients that became ineligible.  In addition to the $3 million payment, the hospice agreed to enter into a Corporate Integrity Agreement with the HHS OIG, and the former CEO of the hospice also agreed to 3-year exclusion from federal health care programs.[42]
• On November 18, 2013, the DOJ announced that a San Antonio-based health care provider has paid $3,675,000 to settle allegations that it filed false Medicare claims for reimbursement.  The provider allegedly failed to disclose that a patient receiving treatment had another insurance policy that covered the care.  The qui tam plaintiff who filed the case will receive $661,500 from the settlement.[43]
• On November 19, 2013, a California-based operator of nursing homes agreed to pay $48 million to resolve allegations that it knowingly submitted false Medicare claims for medically unnecessary rehabilitation therapies.  According to the government, the operator provided physical, occupational, and speech therapy to patients whose conditions did not require such treatment.  The operator also allegedly improperly incentivized employees by setting reimbursement targets that were detached from the medical needs of their patients.  As a part of the settlement, the operator agreed that each of its facilities would be bound by the terms of a Corporate Integrity Agreement entered into with the HHS OIG.  The dollar amount to be awarded to the two qui tam relators has not yet been determined.[44]
• On December 2, 2013, one of the largest pharmacy benefit management companies in the country agreed to pay the government and five states a total of $4.25 million.  The resolution settled allegations that the company knowingly failed to reimburse Medicaid for prescription drug costs paid on behalf of Medicaid beneficiaries who were eligible for drug benefits under private health plans administered by the company.  The allegations arose from a lawsuit filed by a former quality assurance representative of the company who, as a whistleblower, will receive approximately $505,680 from the federal government’s share of the settlement, as well as additional amounts from the settling states.[45]
• On December 2, 2013, a network of lymphatic disease clinics paid $4.3 million to settle allegations that the clinics submitted fraudulent bills to Medicare for unauthorized treatments over a six year period.  The clinical network was targeted in a wide-ranging September 2011 suit brought by a physician and professor at the University of Texas Medical School at Houston who allegedly learned through her patients who were Medicare beneficiaries that the clinics were submitting claims for physical therapy sessions performed by unlicensed massage therapists.  In addition to the settlement payment, the DOJ announced that the clinical network adopted a Corporate Integrity Agreement, enforced by the HHS OIG.[46]

In addition to federal recoveries under the FCA, several states also made significant recoveries under their own state false claims statutes.  A few examples from 2013 include:

• On February 13, 2013, it was announced that two pharmaceutical companies agreed to pay the State of Texas $10.9 million to resolve allegations that the companies fraudulently reported inflated drug prices to the state’s Medicaid program.[47]
• On May 7, 2013, the Iowa Attorney General brought suit against the owners of two heath care facilities alleging money laundering and the submission of false or fraudulent Medicaid claims.  The State of Iowa is seeking more than $17 million for these alleged violations.  According to the Iowa Department of Inspections and Appeals, this suit is “a landmark for the State of Iowa,” and “is the first case brought against defendants under the provisions of Iowa’s False Claims Act.”[48]
• On June 3, 2013, the Connecticut Attorney General announced a $9.9 million settlement with a former dentist and six of his management and consulting companies.  The suit stemmed from a Connecticut Department of Social Services investigation alleging violations of the Connecticut False Claims Act and the Connecticut Unfair Trade Practices Act.  The suit alleged that the individual continued to manage a number of dental practices after being permanently excluded from participation in Medicare and state health care programs.  The suit also alleged that the individual double-billed for certain dental services or billed for services that were not rendered.  In addition to paying the state $9.9 million, the agreement also bars the individual and the named companies from participating in any health care-related business in Connecticut.[49]
• On September 4, 2013, a pharmaceutical company reportedly agreed to pay the State of Texas $5 million to resolve civil fraud claims arising from the company’s alleged misreporting the price of generic drugs to the Texas Vendor Drug Program, which processes prescription drug claims for Medicaid reimbursement.  The whistleblower lawsuit arose under the Texas Medicaid Fraud Prevention Act.  The relator, a pharmacy named Ven-A-Care, “has made a name for itself—along with a small fortune—by blowing the whistle on drug companies.”  For example, in 2011 alone, Ven-A-Care “took home $88.4 million for its role as relator” in a suit against two other pharmaceutical companies.[50]
• On September 25, 2013, it was announced that a California-based diagnostic services provider agreed to pay $17.5 million to settle allegations that it paid prohibited kickbacks in exchange for referrals of services it billed to Medicare and Medi-Cal.  The whistleblower suit was brought by two former company executives who collectively stand to receive approximately $3.8 million.  While the federal government declined to intervene in the suit, the State of California intervened in the action.  The company said in a statement that the alleged wrongdoing occurred under prior ownership and that it believes it could have prevailed before a jury, but “[g]iven the cost and time required to take any case to trial . . . we are pleased to have reached a timely and definitive resolution of this issue.”[51]
• On October 18, 2013, the Commonwealth of Virginia announced that a pharmaceutical product distributor had agreed, one month before trial, to pay $37 million to resolve allegations that it had caused false claims to be submitted to the state’s Medicaid program by artificially inflating the average wholesale price (“AWP”) of its products.  The settlement comes after Virginia opted out of a 29-state settlement in 2012 for $151 million to resolve the same allegations, as part of a long-running string of AWP cases.  Virginia’s Attorney General stated that not joining that settlement “shows that Virginia will go its own way to show we will not tolerate Medicaid fraud.”[52]

D.                Trials

In addition to the settlements and judgments discussed above, 2013 saw a number of FCA cases brought to trial—a historically rare occurrence.  Indeed, because the FCA contains what is effectively an automatic punitive damages provision—resulting in trebling of damages in most cases, doling civil penalties of up to $11,000 for each false claim allegedly submitted (which can order on the thousands), and awarding attorneys’ fees and costs to victorious plaintiffs—many defendants find that—even when they believe the allegations are completely unfounded—it is too risky to take a case to trial.  Coupled with that is the fact that an adverse verdict against a defendant in an FCA case may result in suspension or debarment from government programs.  The results of a number of FCA cases that were tried in 2013 are listed below.

• On April 8, 2013, in what the whistleblowers’ counsel is calling a “test case,” a federal jury found that an insurance company had defrauded the federal government’s flood insurance program into paying $250,000 for a claim arising out of Hurricane Katrina, in violation of the FCA.[53]  The whistleblowers argued that the insurance company had inflated flood damage claims, which were reimbursable under the federal program, in order to pay for wind damage, which the insurer was required to pay for itself.[54]  The jury’s finding was limited to one house; however, the whistleblowers have claimed that the insurance company made similar false claims for more than 6,000 homes.[55]  The District Court is currently considering the whistleblowers’ request for additional civil penalties and an award of attorneys’ fees for the single claim decided by the jury, as well as their request to open discovery on the more than 6,000 other claims.[56]  The whistleblowers’ interest in expanding the judgment to the more than 6,000 additional claims is self-evident, as a separate civil penalty of up to $11,000 per claim could theoretically be assessed, in addition to monetary damages subject to trebling.
• On July 1, 2013, following a bench trial, a federal district court judge for the Southern District of Ohio imposed a $664,364,996 judgment against a Connecticut-based aerospace company for allegedly defrauding the U.S. Air Force.[57]   The government alleged that, between 1985 and 1990, the company misrepresented the amount it would cost to build engines for F-15 and F-16 fighter planes.  These faulty estimates, according to the government, caused the Air Force to pay hundreds of millions of dollars more for the engines than it otherwise would have.[58]  After a trial, the court found that the company had violated the FCA, and awarded the government $364 million in FCA damages and penalties, as well as $300 million in common law damages and interest.[59]  Of note, this $364 million judgment is the highest recovery obtained by the government in a case tried under the FCA.[60]
• On September 30, 2013, following a jury trial, a federal district court judge for the District of South Carolina entered a $237,454,195 judgment against a South Carolina hospital, after the jury found the hospital violated the FCA by defrauding Medicare.[61]   At trial, the government argued that the hospital entered into illegal compensation arrangements with physicians in violation of the federal Stark Law.  The government further argued that the hospital violated the FCA by presenting claims from these unauthorized referrals to Medicare.[62]  In May of 2013, the jury found that the hospital had violated the FCA, and awarded the government more than $39 million in damages.[63]  Per the FCA, the court trebled this damages award and imposed an additional $5,500 in civil penalties for each of the 21,730 false claims allegedly submitted, yielding a total of $237 million in damages and penalties.[64]
• On November 14, 2013, a federal jury in California found a pipe manufacturer liable for allegedly making false claims about PVC water pipe it sold to states and municipalities.  Three states and a number of municipalities and water districts intervened in the action; the federal government, however, did not.  The relator, a former engineer for the manufacturing company, stands to receive 15% to 30% of the ultimate award.  In a press release, the manufacturer revealed it plans to file an appeal “as immediately as possible.”[65]

E.                 Industry Breakdown

As the above discussion of settlement and trials indicates, the FCA covers fraud in all government programs, and therefore any industry that interacts with the government can become a potential FCA target.  Given the outsized role of the federal government in the health care/life sciences and defense/procurement industries, however, these industries continue to attract significant DOJ attention and serve as the chief source of recovered funds, as indicated by the chart below.

Annual FCA Recoveries by Industry (2000–2013)

1.                  Health Care/Life Sciences Industries

As in years past, most recoveries in 2013 came from individuals and entities operating within the health care industry.[66]  These settlements and judgments generally involve fraud allegedly committed against federal health care programs, including Medicare, Medicaid, and TRICARE, which provides health care to members of the armed services and their dependents.  Since January 2009, the DOJ has recovered $12.1 billion for health care fraud under the FCA.[67]  In fiscal year 2013, the DOJ obtained $2.6 billion in health care fraud recoveries, making this the fourth straight year that the department has recovered more than $2 billion in cases involving health care fraud.[68]  Some of the largest settlements involved fraud and false claims in the pharmaceutical and medical device industries, which accounted for $1.8 billion of the total $2.6 billion recovered in the health care industry.[69]  In its Spring 2013 Semiannual Report to Congress, the HHS OIG reported having commenced 240 civil actions in the first half of the 2013 fiscal year, which includes false claims actions.[70]  The HHS OIG also reported expected recoveries of approximately $3.8 billion, including about $3.28 billion in “investigative receivables.”[71]

The Obama Administration has instigated many important changes in the fight against health care fraud over the past several years.  Among other things, the Administration created a public-private partnership among federal and state governments, several private health insurance organizations, and other health care anti-fraud groups in an effort to “share information and best practices in order to improve detection and prevent payment of fraudulent health care billings.”[72]  The partnership operates alongside the existing Heath Care Fraud Prevention and Enforcement Action Team (“HEAT”), which was formed in 2009.[73]  These changes have created a system that allows for the DOJ to consistently secure substantial recoveries in the area of health care fraud, as evidenced by the substantial recoveries seen in the past four years.

Among the manifold recoveries from the health care industry this year, several themes have emerged.  First, many judgments and settlements have involved the alleged use of unnecessary medical procedures.  For example, one medical center settled allegations that it performed certain cardiac procedures on Medicare patients that were not required given the patients’ particular symptoms.[74]  Other examples include alleged unnecessary therapy,[75] unnecessary ambulance care,[76] and the use of hospice care for patients who did not require that level of care or did not have a qualifying condition.[77]

Other FCA settlements and judgments in the health care industry arose from physicians allegedly taking prohibited kickbacks.  The Obama Administration has made eliminating improper kickbacks a priority in the fight against health care fraud.  “Kickback schemes subvert the health care marketplace and undermine the integrity of public health care programs,” said Assistant Attorney General Stuart Delery.  “We will continue to hold accountable those who we allege are providing illegal incentives to influence the decision making of health care providers in federal health care programs.”[78]  A number of different types of prohibited kickbacks have been alleged by the DOJ.  For example, several cases leading to civil recoveries arose from doctors allegedly receiving improper compensation for referring patients to certain medical facilities, companies, labs, or hospitals.[79]  In one case, the DOJ alleged that a company offered referring physicians’ spouses sham marketing positions with the company in order to induce the physicians to refer Medicare patients.[80]  Other allegations involved rewarding doctors for using certain products or for prescribing certain medications.[81]

A number of settlements and judgments also involved allegations that pharmaceutical and medical device manufacturers caused the submission of false claims for reimbursement of drugs for unapproved uses.  This means that pharmaceutical manufacturers allegedly promoted their drugs for uses not approved by the FDA—commonly known as “off-label marketing”—with the knowledge that such uses may not have been reimbursable by federal health programs.[82]  Although off-label promotion is most directly regulated under the misbranding provisions of the Federal Food, Drug, and Cosmetic Act (“FDCA”), the Administration has stressed using the False Claims Act to help combat this conduct.  Indeed, Acting Assistant Attorney General Stuart Delery stated in a press release that “[t]he improper promotion of pharmaceuticals undermines the FDA’s important role in protecting the American public by determining whether a drug is safe and effective for a particular use before it is marketed.”  He went on to state that “[s]uch improper conduct by pharmaceutical companies also causes the government to pay significant amounts for products for which it would not otherwise pay.”[83]  That the government continues to reap FCA recoveries based on allegations of off-label promotion is particularly notable in the wake of the Second Circuit’s December 2012 decision in United States v. Caronia, 703 F.3d 149 (2d Cir. 2012), in which the court held that pharmaceutical manufacturers and their employees cannot be criminally prosecuted under the FDCA for speech promoting the lawful, off-label use of an FDA-approved drug.  With the continued settlements of cases involving allegations of off-label promotion leading to false claims, the potential application of Caronia to FCA cases remains unclear.

A number of other settlements and judgments in the health care industry in the last year involved allegations of improper billing for certain reimbursable procedures, either by inflating billings for services or by fabricating medical procedures.[84]  The Administration continues to actively pursue this type of fraud as well.  “Physicians who participate in government health care programs must bill for their services accurately and honestly,” said Acting Assistant Attorney General Delery.[85]

Finally, fiscal year 2013 also included a $26.1 million settlement against a Florida dermatologist who had allegedly been accepting illegal kickbacks from a pathology laboratory and been billing Medicare for unnecessary procedures.[86]  This settlement marks one of the largest ever with an individual under the FCA.  In May, the HEAT Medicare Fraud Strike Force further announced a nationwide takedown that resulted in charges against 89 individuals for their alleged participation in Medicare fraud schemes involving approximately $223 million in false billing, indicating that the government is willing to invest significant resources in pursuit of anyone receiving government funds, including individual offenders and small practices or businesses as well as large companies.[87]

2.                  Defense/Procurement

The government procurement industry remained a ripe target for FCA enforcement activity as well.  Overall in fiscal year 2013, the government secured $887 million in settlement and judgments from alleged procurement fraud, primarily related to defense contracts.[88]  This amount makes clear, as Assistant Attorney General Delery recently explained, that the “department will do everything it can to ensure that contractors comply with critical contract requirements and that contractors who don’t comply aren’t permitted to profit at the expense of our men and women in uniform and the taxpayers at home who support them.”[89]

Most notably, and as discussed above, the DOJ scored a victory at trial this year with a $473 million award against a global aerospace and building company for allegedly inflating prices on aircraft engines sold to the Air Force.[90]  The District Court later added prejudgment interest to the award, increasing the overall judgment to over $664 million.[91]  While the company has appealed the judgment, if the appellate court affirms it, it will be the largest procurement recovery in history.[92]  As the Assistant Attorney General reiterated in his announcement of the award, “It is vital that companies who do business with the government provide full and accurate information, and if they do not, they will pay the consequences.”[93]

While large defense contractors are always prime targets, any business that serves the Department of Defense is at risk.  For example, a food distributor agreed to pay $4.2 million to settle allegations that it overcharged the Department of Defense for fresh fruit and vegetables.[94]  Even contracts within the secretive realm of the intelligence agencies are not immune, with three CIA contractors agreeing to pay $3 million to settle FCA and kickback allegations in the last year.[95]

The DOJ also settled allegations of false claims with companies in connection with their contracts with the GSA to market their products through the Multiple Award Schedule (“MAS”) program.  To be awarded a MAS contract, and thereby gain access to a large part of the broad government marketplace, contractors must provide GSA with complete, accurate, and current information about their commercial sales practices, including discounts afforded to their commercial customers.  Over the last year, the government secured several settlements resulting from companies allegedly failing to disclose discounts given to their commercial customers, including: (1) a $60.9 million settlement from a construction products manufacturer;[96] (2) a $70 million settlement from a national hardware distributor;[97] and (3) a $5.65 million settlement with a large ceramic and glass manufacturer.[98]  The United States Attorney for the District of Columbia gave a stern caution to those in the procurement industry: “Companies that want to take advantage of federal contracts are obligated to deal openly and fairly with their government customers” and “[w]hen contractors fail to meet their obligations, we will hold them accountable and seek to make the taxpayer whole.”[99]

3.                  Financial

In 2013, the Obama Administration also continued to make the pursuit of financial fraud schemes a priority.  In 2009, President Obama established a Financial Fraud Enforcement Task Force to hold accountable the individuals who caused the financial crisis as well as those who would attempt to take advantage of the efforts at economic recovery.[100]  This year there was change in the leadership of the Financial Fraud Enforcement Task Force, as Executive Director Michael Bresnick stepped down on August 1, 2013.[101]  Bresnick had served as the Executive Director since October 2011 and under his direction, the Task Force’s Residential Mortgage-Backed Securities Working Group was established in 2012.[102]

Despite the change in leadership, the DOJ continued to make the fight against fraud in financial and lending markets a priority.  For example, in the last year, a Pittsburgh-based bank paid $7.1 million to settle claims under the FCA that it allegedly failed to engage in prudent underwriting practices in connection with the issuance of loans guaranteed by the Small Business Administration (“SBA”).[103]  When announcing the settlement, the Administration stressed the importance of preventing fraud in lending with SBA preferred lenders. “Banks that are SBA preferred lenders have a duty to prudently guard the public funds they commit to borrowers,” said Assistant Attorney General Stuart Delery. “The government will pursue vigorously lenders that fail to adequately safeguard public funds due to deficient lending standards.”[104]

II.                FCA Case Law Developments

2013 also brought with it many developments of FCA case law.  There were hundreds of decisions issued in FCA matters over the last year, and potential Supreme Court arguments and decisions are on the horizon.  We highlight the key case law developments below.

A.                Key Developments in FCA Pleading Requirements, Including Potential Supreme Court Involvement

Federal Rule of Civil Procedure 9(b), which requires plaintiffs to plead allegations of fraud with particularity, has long been applied to cases filed under the FCA.  This has proven to be an especially important requirement for defendants in cases in which the government has declined to intervene, as all too often whistleblowers on their own cannot identify any particular false claims connected to the alleged fraudulent conduct.  In our 2013 Mid-Year False Claims Act Update, we reported on the Fourth Circuit’s holding, in United States ex rel. Nathan v. Takeda Pharms. N. Am., Inc., 707 F.3d 451, 457 (4th Cir. 2013) [hereinafter Nathan], that Rule 9(b) requires relators to allege such specific false claims “when a defendant’s actions . . . could have led, but need not necessarily have led, to the submissions of false claims.”  The Fourth Circuit upheld the dismissal of Nathan’s complaint for failing to meet that standard.  Id. at 454.

After the dismissal of his case, Nathan filed a Petition for Writ of Certiorari to place squarely before the Supreme Court the question of whether Rule 9(b) requires FCA complainants to allege with particularity that specific false claims were presented to the government.  Petition for Writ of Certiorari, Nathan, petition for cert. filed, 82 U.S.L.W. 3178 (U.S. May 10, 2013) (No. 12-1349).  Nathan’s Petition argues that the Fourth, Sixth, Eighth, and Eleventh Circuits have articulated such a requirement, while the First, Fifth, Seventh, and Ninth Circuits have used a lesser standard requiring simply that relators allege the “particular details” of the scheme to submit false claims, together with “sufficient indicia” that false claims were submitted.  See id. at 15.  Perhaps in recognition of this circuit split, in October 2013, the Supreme Court requested that the Solicitor General file a brief expressing the views of the United States on this question, indicating that it may indeed take up Nathan’s case.  See Nathan, petition for cert. filed 82 U.S.L.W. 3178 (U.S. Oct. 7, 2013) (No. 12-1349).

Two recent cases out of the First and Eighth Circuits appellate courts show the complexity of this issue and bring into further relief the need for a single clear standard and Supreme Court intervention.  In December 2013, the First Circuit opted for the stricter approach to Rule 9(b), in United States ex rel. Ge v. Takeda Pharmaceutical Co. Ltd., 737 F.3d 116 (1st Cir. 2013).  In Ge, the relator alleged that Takeda had violated the FCA by underreporting adverse events for four of its drugs, and thereby caused false claims for reimbursement of those drugs to be submitted to the government.  Id.  Declining to rule on whether the relator’s “fraud-on-the-FDA” theory was a proper basis for FCA liability, the First Circuit affirmed the District Court’s dismissal of the relator’s complaint on Rule 9(b) grounds based on her failure to identify any specific false claims that resulted from the misreporting of adverse events.  Id.  The court explained that the relator’s reference to expenditure data for one of the drugs did not meet Rule 9(b) standards, as she made “no effort to identify specific entities who submitted claims or government program payers, much less times, amounts, and circumstances.”  Id.  Notably, when the relator attempted to raise several new theories of liability on appeal that were deemed waived, the court also favorably cited the Fourth Circuit’s opinion in Nathan in expressing doubts that any of those theories could survive Rule 9(b).  Id.

Conversely, the Eighth Circuit—which had previously applied the stricter standard of pleading false claims in FCA complaints—recently refused to require plaintiffs alleging a “fraud-in-the-inducement” theory to identify specific false claims.  In United States ex rel. Simpson v. Bayer Healthcare, 732 F.3d 869, 872 (8th Cir. 2013), the relator alleged that Bayer downplayed the risk of serious side effects of its cholesterol-lowering drug Baycol, misrepresented the drug’s efficacy, and induced physicians to prescribe the drug using illegal kickbacks.  This allegedly led to  improper government payments for Baycol in two different ways:  (1) Medicare and Medicaid reimbursement for prescriptions to third party health care providers that would not have been made or reimbursed had the company presented the information about the drug; and (2) payment by the Department of Defense (“DoD”) pursuant to two purchasing contracts with Bayer that were allegedly fraudulently induced by the company’s misrepresentation of the safety risks of Baycol as compared to competitor drugs.  Id. at 872-74.  The relator did not provide any examples of any specific false claims connected to either of these theories, and for this reason the District Court dismissed her complaint in its entirety.  Id. at 874.

As to the relator’s federal health insurance program claims, the Eighth Circuit affirmed the dismissal, applying its own precedent that FCA relators must identify specific false claims to survive Rule 9(b) review.  Id. at 878-79.  But on the DoD contract claims, the court reversed the dismissal, and signaled a potential expansion of the FCA “fraud-in-the-inducement” theory.  Id. at 877.  The court reasoned that “when a relator alleges liability under a theory of fraud-in-the-inducement, claims for payment subsequently submitted under a contract initially induced by fraud do not have to be false or fraudulent in and of themselves in order to state a cause of action under the FCA.”  Id. at 876 (emphasis added).  As a result, the court did not require that the relator show any specific claims for payment of Baycol were false or fraudulent—for example, by showing that the drug was defective or overpriced, or caused actual patient harm in any specific case—because it reasoned that all claims resulting from the Bayer contract were made false by the initial contracting “taint.”  Id.

The reasoning in Simpson has potentially huge implications, as whistleblowers and the government will argue that it suggests government contractors are liable for every claim submitted pursuant to a contract that was obtained on faulty premises, even without any defect in the price or quality of the products or services provided.  Unfortunately, as the dissenting judge observed, while the Simpson majority was correct that other cases have held all claims can be “tainted” by a fraudulent contracting process, it overlooked that that need not necessarily be the case.  Id. at 881 (Loken, J., concurring in part and dissenting in part).  The cases cited by the Simpson majority, one might argue, involved fraudulent schemes that necessarily caused demonstrable harm to the government with each claim resulting from the contract.  The Eighth Circuit’s failure to require such a showing of actual or potential harm resounding from the initial contract represents a troubling expansion of this line of cases for government contractors.

The Supreme Court now has a welcome opportunity to clarify whether FCA relators must identify specific false claims when they file qui tam suits and bring courts nationwide under the same standard.  With the holding in Ge, defendants have a strong argument that, at least with respect to federal program reimbursement, a consensus is developing around a requirement that specific false claims must be pled to satisfy Rule 9(b).  Government contractors, however, must be aware that this standard may be looser for plaintiffs alleging that a contract was fraudulently induced at the outset.  The court’s opinion in Simpson is an important reminder that, as always, companies seeking government contracts must exercise great care with the information they provide to obtain that business, or else they risk exposure to potentially massive FCA liability.

B.                 What Violations Can Lead to an FCA Claim?

For years, defendants have battled with the government and whistleblowers over which kinds of legal violations can render “false or fraudulent” any associated claims for payment under the FCA.  Though all circuits have not clearly adopted it, a number of courts have found that a claim can be “legally false” under the FCA based on a defendant’s “implied certification” of compliance with a statutory, regulatory, or contractual provision that is a precondition to government payment.  But this necessarily begs the question: which particular alleged violations meet this standard?  The Fifth and Eighth Circuits recently answered this question by examining whether the provisions underlying alleged false claims were demonstrably and objectively legal conditions of payment.

First, in United States ex rel. Steury v. Cardinal Health, Inc., 735 F.3d 202, 204 (5th Cir. 2013), the Fifth Circuit was presented with a relator’s second appeal of the District Court’s repeated dismissal of her claim that defendant Cardinal Health had sold defective Signature intravenous fluid pumps to VA hospitals, in alleged violation of the FCA.  By selling the purportedly defective IV pumps, the relator alleged—without textual evidence—that Cardinal had violated an implied “warranty of merchantability” in its contract with the government.  Id. at 206.  The Fifth Circuit refused to blindly follow the relator’s assertion that this warranty existed, instead requiring that she “reveal[] how the Signature pumps deviated from the government’s specifications[,]” such as by reference to an express statute or regulation.  Id.  Since the relator had not shown by such evidence that “the Government conditioned payment for the Signature pumps on a certification that the Signature pumps complied with the warranty of merchantability,” the court held that the relator had not stated a viable FCA claim.  Id. at 206-07 (internal citations and quotation marks omitted).

Similarly, in United States ex rel. Ketroser v. Mayo Found., 729 F.3d 825, 826-27 (8th Cir. 2013), the Eighth Circuit affirmed the dismissal of a relator’s claims that the defendant Mayo Foundation failed to prepare a written report with each tissue sample analysis that was billed under Medicare codes for surgical pathology services.  After engaging in a careful analysis of the Medicare reimbursement guidelines and the American Medical Association’s Codebook, the court found that the relator had failed to state an FCA claim because there was no “clear requirement that a written report must underlie or support each claim for surgical pathology services[.]”  Id. at 830.  That the preparation of such reports was standard industry practice was not enough, according to the Ketroser court, because the industry standard was “not evidence that Medicare expects written reports” for each analyzed sample.  Id. (emphasis added).

Although Steury and Ketroser did not break new ground on the question of what alleged violations may support FCA falsity, they represent useful examples showing that courts will look for objective evidence of an alleged violation’s connection to payment, rather than just take the plaintiff’s claim of falsity at face value.  This may be cold comfort, given the huge universe of requirements potentially bearing on government payment.  As always, any company receiving government funds would be well served reviewing such provisions as part of their compliance efforts.

C.                What are the Limits on FCA Penalties in the Absence of Proof of Damages?

In addition to its treble damages provision discussed above, the FCA provides for the imposition of a civil monetary penalty in the amount of $5,500 to $11,000 for each statutory violation—which courts generally have interpreted in most cases to mean a penalty is imposed for each submitted false claim.  As the scope and complexity of government spending programs have widened, so too have the number of claims for payment, sometimes amounting to thousands of separate claims on a single contract.  That exposes modern businesses receiving government funds to potentially enormous FCA liability for systemic false or fraudulent conduct.  At times, though, the Excessive Fines Clause of the Eighth Amendment has been applied to limit the amount of civil penalties where they were found to be “grossly disproportionate” to the demonstrated harm stemming from the submission of false claims.

But the Fourth Circuit recently indicated that the Eighth Amendment may not be the fail-safe against huge FCA awards that some had thought.  In United States ex rel. Bunk v. Gosselin Word Wide Moving, N.V., 2013 U.S. App. LEXIS 25225, at *4 (4th Cir. Dec. 19, 2013), the Fourth Circuit reversed a District Court’s finding that FCA penalties could not be constitutionally imposed after a jury had found over 9,000 false claims, but the relators had not sought any damages.  The Bunk case involved allegations of several schemes by defendant Gossselin World Wide Moving and its peer companies to fix prices and rig bids for contracts with the U.S. government to move military household goods to and from European bases.  Id. at *5-*8.  After trial, the government and relator sought $24 million in penalties, despite the fact that the FCA authorized an award of more than $50 million based on the number of adjudicated false claims.  Id. at *20-*22.  However, the District Court found that the FCA did not allow it discretion to award less than the minimum authorized amount of penalties, and the $50 million amount was grossly disproportionate to Gosselin’s alleged price fixing, which resulted in little, if any, demonstrated economic harm.  Id.  Accordingly, taking an “all or nothing” approach, the District Court declined to award any FCA penalties.  Id. at *22.

On appeal, the Fourth Circuit first joined the Fifth and Tenth Circuits in holding that relators like Bunk have standing to sue for FCA penalties only.  Id. at *30-*31.  Notably, the court observed that civil monetary penalties, much like the FCA’s treble damages provision, were instituted to ensure that the government is made whole from the defendant’s fraud.  Id. at *29.  Preventing relators from bringing cases for civil penalties alone would frustrate that purpose and disrupt the government’s choice to forego intervention in a qui tam suit.  Id.  The Fourth Circuit went on to find that relators’ standing to sue on the government’s behalf does not violate the Appointments and Take Care clauses of the Constitution.  Id. at *32.

Having found that relators have standing to bring cases for FCA civil penalties, the Fourth Circuit reversed the District Court’s Excessive Fines ruling and ordered the entry of judgment for relators and the government in the amount of $24 million.  The court first observed that the FCA affords the government and relators substantial discretion in how to craft and direct their case, including the “virtually unbounded” ability to willingly accept a lesser recovery to avoid constitutional questions.  Id. at *38.  It then concluded that the requested $24 million in civil penalties was consistent with the Excessive Fines Clause.  Id. at *47.  The court explained that although the relators had not sought damages at trial, and the “economic harm” was apparent but debatable, this amount was sufficiently proportionate to the intangible harm of the public’s shaken faith in its government as well as the potential deterrence to other government contractors.  Id. at *45-*56.

Unfortunately, the Fourth Circuit failed to draw a clear standard on when the imposition of FCA penalties will or will not cross constitutional limits.  But its willingness to levy $24 million in penalties in the absence of any proven FCA damages is an eye opening reminder that contractors submitting large numbers of invoices to the government must be especially vigilant due to the potentially huge exposure to false claims liability.

D.                Developments in the Public Disclosure Doctrine

The FCA’s “public disclosure” provision, 31 U.S.C. § 3730(e)(4), seeks to find a middle ground between encouraging whistleblowers and curbing parasitic litigation by barring qui tam relators from bringing suit based upon allegations or transactions that have been publicly disclosed in certain forums, unless they were an “original source” of the information.  One of the statutory sources that can trigger the public disclosure bar is a prior civil or administrative hearing in which the government is a party.  But the question remains, what level of disclosure in such prior litigation will bar subsequent relators from bringing actions “based on” or “substantially similar to” those cases?

The Third and Seventh Circuits recently came to opposite answers.  In United States ex rel. Zizic v. Q2Adminstrators, LLC, 728 F.3d 228, 233 (3d Cir. 2013), the Third Circuit was presented with a relator who was a former CEO of a durable medical equipment company that submitted claims for Medicare reimbursement of its device.  After consistent claim denials by Q2A and RTS, the contractor responsible for reviewing certain Medicare claims, relator’s company went into bankruptcy.  Id.  The bankruptcy trustee sued HHS to reverse the claims denials, and relator allegedly learned in discovery during the bankruptcy proceedings that the review contractors denied the claims without any meaningful review due to understaffing.  Id.  The relator then filed his FCA action against the two contractors for allegedly submitting claims to HHS for payment of review services it did not render.  Id. at 234.

Despite the fact that the relator was allegedly directly affected by the purported wrongdoing and he allegedly suspected fraud prior to his company’s bankruptcy, the Third Circuit affirmed the District Court’s dismissal of his FCA claims on public disclosure grounds.  Id. at 243.  The Court found that the problematic conduct forming the basis of his FCA claims was discovered entirely from the bankruptcy proceedings.  Id. at 238.  Moreover, that the flaws in defendants’ review process were identified through the relator’s own work in those proceedings did not make him an “original source” of the information supporting his FCA claims, in the Third Circuit’s view.  Id. at 242.

Conversely, in Leveski v. ITT Educ. Servs., Inc., 719 F.3d 818, 819 (7th Cir. 2013), the Seventh Circuit found that the public disclosure doctrine did not bar claims based on information obtained from prior legal actions.  The relator in Leveski alleged that the defendant, a for-profit education service provider, had pegged recruiter compensation to the number of students enrolled by each recruiter, making it ineligible to receive financial assistance funds from the government.  Id. at 821.  The relator was inspired to bring this suit by a lawyer who had hired an investigator to contact former ITT employees like herself who might be willing to file suit against her former employer.  Id. at 824-25.  The District Court dismissed her complaint, observing that prior to filing she had researched several prior FCA suits brought against ITT alleging violations of the same incentive compensation regulations that formed the basis of her complaint and that she was not an original source as she had been spoon fed the information for her lawsuit by her lawyer.  Id. at 827.

The Seventh Circuit reversed.  Id. at 819.  While the court recognized that one of the prior cases at issue was also brought by a former ITT employee with the same job title as Leveski and alleging violations of the same incentive compensation regulations, it found that dismissal on these grounds approached the public disclosure inquiry at “too high a level of generality.”  Id. at 832.  The court engaged in a detailed comparison of the relator’s complaint against the prior complaint, finding several purported factual distinctions that resulted in its conclusion that the public disclosure bar did not apply because the relator had pled different details about how the incentive compensation regulations were violated.  Id. at 829-35.

Many have wondered when the public disclosure bar would ever apply if it did not apply in Leveski, where the relator had actually reviewed a prior lawsuit by a nearly identically situated relator against the same defendant and on the same legal theory.  But while the Seventh Circuit’s opinion is undoubtedly concerning for defendants seeking to stave off parasitic relators, its comparison with Zizic suggests that the public disclosure bar will continue to require a very fact-intensive and careful analysis in each case.

E.                 Limitations on FCA Whistleblowers

Long-time observers of FCA actions know that qui tam relators filing suit against their current or former employers can come from all corners of a company.  But one place they cannot originate, according to the Second Circuit, is the legal counsel’s office.  In United States  v. Quest Diagnostics Inc., 734 F.3d 154, 161 (2d Cir. 2013), several relators filed a qui tam action against defendants Quest Diagnostics and Unilab Corporation alleging violations of the federal Anti-Kickback Statute and FCA.  The Second Circuit upheld the District Court’s sua sponte dismissal of the suit on the grounds that one of the relators, who formerly served as in-house counsel for Unilab, had violated state legal ethics rules by disclosing protected client information when he made his mandatory FCA disclosures to the government, among other disclosures.  Id. at 159.  The Quest relators had argued that the federal interests of the FCA effectively preempted application of the state rules at issue, but the Second Circuit emphasized that “[n]othing in the False Claims Act evinces a clear legislative intent to preempt statutes and rules that regulate an attorney’s disclosure of client confidences.”  Id. at 163.  Applying New York state ethics rules, the Second Circuit found that the former counsel’s disclosures were not necessary to prevent his former company from committing a crime, and thus were improper.  Id. at 165.

Although a general counsel as relator is surely a rare occurrence, the Quest decision is an indicator of the limits of deference courts will give to the framework of the FCA.  Without question, the FCA’s qui tam provisions are designed to encourage insiders to come forward with information about potential fraud against the government.  That said, the FCA does not go so far as to trump a putative relator’s separate ethical duties to his or her client.  As the plaintiffs discovered in Quest, relators that try to push these boundaries risk having their entire case thrown out.

F.                 The Continued Debate Around “Wartime” Tolling of the Statute of Limitations

In our Mid-Year Update, we reported on the Fourth Circuit’s application of the Wartime Suspension of Limitations Act (“WSLA”), 18 U.S.C. § 3729, to the FCA in United States ex rel. Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013) (hereinafter Carter).  The WSLA, a provision of the criminal code, tolls the ordinary six-year statute of limitations for prosecuting charges relating to fraud against the United States while at war.  In Carter, the Fourth Circuit found that (1) the WSLA applied to FCA claims because the United States was “at war” during the time of the claims, and a formal declaration of war was not required; (2) the WSLA applies to civil cases like those under the FCA; and (3) the WSLA applies even in actions brought by a relator.  Id. at 178-81.  Defendant Kellogg Brown & Root (“KBR”) filed a Petition for Writ of Certiorari from that decision, asking the Supreme Court to review whether the WSLA “applies to claims of civil fraud brought by private relators, and is triggered without a formal declaration of war, in a manner that leads to indefinite tolling.”  Brief for Petitioner at I, Carter, 82 U.S.L.W. 3178 (June 24, 2013) (No. 12-1497).  In October 2013, the Court asked the Solicitor General to file a brief with the United States’ views on these issues, thus indicating that it may grant KBR’s petition.  See Carter, petition for cert. filed, 82 U.S.L.W. 3178 (Oct. 7, 2013) (No. 12-1497).

Supreme Court review of Carter would provide much needed clarity on how expansively the WSLA may be applied in FCA cases.  As we observed in our Mid-Year Update, Carter raised important questions about whether the WSLA tolls the limitations period in perpetuity given the United States’ ongoing military engagements, and whether it extends to government spending unrelated to those engagements.  Indeed, several courts have already extended the WSLA beyond defense procurement fraud claims.  In United States v. BNP Paribas SA, 884 F. Supp. 2d 589, 593 (S.D. Tex. 2012), the United States alleged that defendant BNP Paribas (“BNPP”) submitted fraudulent claims for payment on Commodity Credit Corporation (“CCC”) guarantees that were assigned to the company from a group of exporters that were not eligible for the CCC guarantees.  The claims at issue fell just outside of the FCA’s usual six-year limitations period, and they had no alleged connection to any military activities.  Id. at 598.  Nevertheless, the court denied BNPP’s motion to dismiss, finding that the United States was “at war” when the 2005 claims were submitted, and that the WSLA applied to the civil FCA.  Id. at 601-08.  The court offered no reasoning, however, as to why the WSLA should apply to claims unrelated to the execution of the “war” that triggers the suspension of the limitations period.

More recently, the government again successfully argued for the extension of the WSLA to cases involving alleged financial fraud.  In United States v. Wells Fargo Bank, N.A., No. 12 Civ. 7527, 2013 WL 5312564 (S.D.N.Y. Sept. 24, 2013), the government filed a complaint in 2012 alleging that, between 2001 and 2005, the defendant recklessly underwrote Federal Housing Administration-insured loans that were not eligible for such federal insurance, in violation of the FCA, FIRREA, and other laws.  The court denied the defendant’s motion to dismiss the government’s FCA claims on statute of limitations grounds, finding in relevant part that the WSLA, as amended in 2008, tolled the FCA’s statute of limitations as to claims going back to 2001.  The court reasoned that there has been no presidential or congressional declaration suspending hostilities since the 2001 and 2002 authorizations for use of military force, and the WSLA therefore applies even in FCA cases of “fraud having nothing to do directly with the prosecution of war or the military.”  Id. at *14.

The BNPP and Wells Fargo courts’ willingness to extend the WSLA to financial fraud cases is troubling.  While this question is not directly before the Supreme Court in Carter, its review of that case would shed important light on the limits of the WSLA and whether it really can be applied to non-defense cases such as those involving other industries.

III.             LEGISLATIVE ACTIVITY

In terms of legislative activity relating to the FCA, most of the activity in 2013 occurred at the state level.  However, there have been some interesting proposals, both at the federal level and by the U.S. Chamber Institute for Legal Reform.  These are all discussed below.

A.                Federal Activity

An issue discussed in our prior alerts has been CMS’s proposed rules regarding the Medicare Incentive Reward Program and Medicare and Medicaid overpayments.  There were no updates on these matters by the end of 2013.  However, a recent bill introduced in the House raised interest and would represent a significant victory for FCA defendants if eventually passed:

• Fairness in Health Care Claims, Guidance, and Investigations Act – Introduced on August 1, 2013 by Representative Howard Coble (R-NC) and co-sponsored by Representatives David Scott (D-GA) and Bennie Thompson (D-MS), H.R. 2931, the Fairness in Health Care Claims, Guidance, and Investigations Act, seeks to ensure that unintentional billing disputes in federal health care programs are not penalized as fraud.  Specifically, the law would require the Attorney General to certify three things prior to requesting any information from a health care provider in response to potential allegations or claims regarding misconduct:  (1) each agency responsible for promulgating relevant regulations, guidelines, and billing instructions relevant to any allegations of fraud has examined the relevant regulations, all communications concerning the alleged fraud, and each of the allegedly false claims; (2) the allegations are viewed as viable based on unambiguous regulations; and (3) if proven true, the allegations will be pursued under the FCA.[105]  Even more importantly, the law would raise the standard of proof in civil FCA claims (with respect to health care programs) to clear and convincing evidence, as well as prohibit an FCA action if: (1) the damages sustained by the government are not a material amount; (2) the allegedly false claim is submitted in good faith; or (3) the allegedly false claim is submitted in “substantial compliance” with a compliance model issued by HHS.[106]

On September 13, H.R. 2931 was referred by the House Judiciary Committee to the Subcommittee on the Constitution and Civil Justice.  This may be an important piece of legislation to keep an eye on, and many of the limitations and modifications proposed are echoed in the U.S. Chamber report discussed further below.  If adopted, this legislation would provide a much-needed curb on unnecessary subpoenas and other investigative activity disrupting the affected businesses.

B.                 State Activity

As discussed in prior alerts, the 2005 Federal Deficit Reduction Act (“DRA”), 42 U.S.C. § 1396h, included a financial incentive designed to prompt states to adopt false claims acts “at least as effective” as the federal FCA in combating false or fraudulent Medicaid claims.  States that enact qualifying laws, as adjudged by HHS OIG (in consultation with DOJ), may collect an additional 10% of any recovery of federal Medicaid funds recovered through a state action.  A two-year grace period was also offered to states whose FCA laws previously complied with the DRA requirements, but whose laws were determined to no longer comply with the requirements after the amendments contained in the Fraud Enforcement and Recovery Act of 2009, the Patient Protection and Affordable Care Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act.  That grace period has now elapsed for all states.

In the 2013 Mid-Year False Claims Act Update, we noted that several states had passed new false claims laws.  Since that time, several other states have passed new laws and HHS OIG has made determinations about the DRA compliance of many state false claims laws. These states are listed below:

• Colorado:  In May 2013, Colorado passed amendments to the Colorado Medicaid False Claims Act (“CMFCA”), which became effective in August.[107]  Changes include matching the statute of limitations set by the FCA and providing a more expansive basis for liability.  In November 2013, HHS OIG determined the amended CMFCA is in compliance with the DRA requirements.[108]
• Massachusetts:  As noted in the 2012 Year-End Update, Massachusetts recently amended its false claims act to mirror recent changes to the federal FCA.  In July 2013, the HHS OIG determined the amended Massachusetts FCA is in compliance with the DRA requirements.[109]
• Minnesota:  In April 2013, the governor of Minnesota signed into law an amendment to the Minnesota False Claims Act.[110]  The bill, among other things, expanded the definition of a “claim,” made mandatory an award of costs and fees for prevailing plaintiff’s counsel, and established a three-year statute of limitation for retaliation claims.  In November 2013, the HHS OIG determined the amended Minnesota FCA is compliant with the DRA requirements.[111]
• Montana:  In May 2013, Montana amended its false claims act to bring it into compliance with the DRA requirements.[112]  Among other things, the amendments expanded the bases of liability, raised the amount per claim a court may impose on defendants, and brought the statute of limitations into line with federal law.  In October 2013, the HHS OIG determined the Montana FCA is in compliance with the DRA requirements.[113]
• Nevada:  In May 2013, Nevada amended its state false claims act.[114]  The revision expanded the bases for liability under the state FCA, made changes to the law’s qui tam provisions, and brought the statute of limitations with regard to retaliation claims in line with the federal FCA.  HHS OIG has not yet assessed whether Nevada’s amended FCA is in compliance with the DRA requirements.
• New York:  In March 2013, the governor of New York signed into law a bill that, among other things, revised the New York False Claims Act.[115]  The amendments to the state FCA addressed issues previously cited by HHS OIG as not complying with the DRA requirements, including the scope of liability for state FCA claims and changes to the qui tam provisions of the law.  HHS OIG has not yet assessed whether New York’s amended FCA is in compliance with the DRA requirements.  The New York FCA is particularly notable, however, for the multiple ways it is more expansive than the federal FCA.  For example, unlike the federal FCA, the New York FCA expressly provides for liability for tax fraud, and it has a longer statute of limitations and more narrow public disclosure bar than the federal FCA.  Further, on October 23, 2013, New York Attorney General Eric Schneiderman announced proposed changes to the procedural regulations implementing the New York False Claims Act.  The key proposals include:
  • prohibiting a plaintiff from proceeding pro se after the state or local government declines to intervene in a qui tam action;
  • barring the state from seeking the dismissal of certain qui tam actions under the public disclosure bar;
  • providing for the trebling or doubling of damages before subtracting compensatory payments received by the government;
  • broadening the statutory definition of “obligation” to include obligations of alternative parties; and
  • providing for attorneys’ fees.[116]
• Rhode Island:  In July 2013, Rhode Island signed into law an amendment to its false claims act that, among other things, raised the liability levels for FCA claims, brought state FCA definitions closer to the federal FCA, and extended the statute of limitations.[117]  In October 2013, the HHS OIG determined the amended state FCA is in compliance with the DRA requirements.[118]
• Tennessee:  In April 2013, Tennessee amended the Tennessee Medicaid False Claims Act (“TMFCA”) to increase the scope of liability.[119]  In July 2013, HHS OIG determined the amended TMFCA is in compliance with the DRA requirements.[120]
• Texas:  As noted in our Mid-Year Update, in June 2013 Texas enacted amendments to the Texas Medicaid Fraud Prevention Act (“TMFPA”).  Among other things, the amendments broadened the scope of liability and strengthened the law’s qui tam provisions.  In September 2013, the HHS OIG determined that the amended TMFPA is in compliance with the DRA requirements.[121]
• Wyoming:  In July 2013, Wyoming enacted a new law entitled the Wyoming Medicaid False Claims Act (“WMFCA”).[122]  The HHS OIG has not yet determined whether the WMFCA complies with the DRA requirements.

Various other bills to enact or amend existing false claims laws continue to proceed through state houses across the country.  States with pending legislation include: Alabama (S.B. 183), Maryland (H.B. 509), Michigan (H.B. 4010), Mississippi (H.B. 1436), New Mexico (S.B. 133), Pennsylvania (H.B. 1493), and South Carolina (S.B. 73, H.B. 3945).  In addition, North Dakota has adopted a concurrent resolution to study the use of qui tam actions in other states and to determine whether that approach is “feasible and desirable.”[123]  We expect to see continued interest in state FCA enactment and enforcement.

C.                Proposed Reforms – U.S. Chamber Institute for Legal Reform

In a highly-publicized and well-received campaign, the U.S. Chamber Institute for Legal Reform (“ILR”) announced at its 14th annual Legal Reform Summit in October 2013 its intention to launch a “full-fledged” campaign to reform the FCA.  ILR stated that this campaign would follow the model it used to campaign for FCPA reform since 2010, a campaign ILR credits with spurring the November 2012 release of the DOJ and SEC’s joint Resource Guide to the U.S. Foreign Corrupt Practices Act (analyzed in depth in Gibson Dunn’s Decoding FCPA Enforcement: The U.S. Government Issues Comprehensive Guidance on the Foreign Corrupt Practices Act).[124]  In conjunction with the summit, ILR released a white paper entitled Fixing the False Claims Act: The Case for Compliance-Focused Reforms, outlining its proposed reforms.[125]   The “lynchpin” of the plan, according to its authors, is to deputize businesses to serve as the first line of defense against fraudulent claims.[126]

This white paper outlines four specific FCA reforms that would only apply to companies that voluntarily participate in industry-specific “gold standard” compliance programs:

1. Re-calibration of the damages multiplier, so that a defendant would be liable for treble damages only if it acted with specific intent to defraud; double damages if it acted with knowledge, reckless disregard, or deliberate ignorance; and 1.5 times damages if it made a qualifying self-disclosure to the government of the conduct.
2. With limited exceptions, there would be a bar on qui tam actions against a company if the company had previously disclosed substantially the same allegations to an appropriate government agency Inspector General or other federal investigative office.
3. To create incentives for employees to report alleged misconduct internally, an employee who failed to report internally at least 180 days before filing a qui tam action would face dismissal of the action.
4. A change to the government’s exclusion and debarment regulations to provide that a company and, absent personal involvement in fraud, its executives would not be subject to mandatory or permissive exclusion or debarment.[127]

Next, the white paper proposes eight reforms aimed at addressing current inefficiencies in the way the FCA is enforced.  These changes would apply to all individuals and entities subject to the FCA, not just “gold standard” companies:

1. A reduction to the relator’s share of the government recovery to provide substantial but not excessive incentives for bringing fraud to light.  In cases in which the government intervenes, relators would receive 15 to 25 percent of the first $50 million recovered; plus 5 to 15 percent of the next $50 million recovered; plus 1 to 3 percent of amounts recovered above $100 million.  In non-intervened cases, relators would receive 25 to 30 percent of the first $50 million recovered; plus 20 to 25 percent of the next $50 million recovered; plus 10 to 20 percent of amounts recovered above $100 million.
2. A bar on qui tam actions brought by former or present government employees arising out of such person’s employment by the government to prevent government employees from cashing in on their government service.
3. A definition of the phrase “false or fraudulent claim” to exclude the judicially-created concept of “implied false certification” liability, so that liability is imposed when a claim is “materially false or fraudulent on its face,” or when a claim is presented or made “when the claimant has knowingly violated a requirement that is expressly stated by contract, regulation, or statute to be a condition of payment of the claim.”
4. A requirement that all essential elements of liability under the FCA must be proven by “clear and convincing evidence.”
5. An amendment to the FCA damages provision to better measure the government’s actual loss.  The government would recover its “net actual damage” before application of any damage multiplier, which is defined to mean “out-of-pocket monetary losses, less the value of benefits received by the government, and does not include indirect or consequential damages.”
6. A change to the current penalty structure of the FCA, so that statutory penalties are assessed only where no damages are awarded and are capped at an “amount equal to the sum sought in the claim in addition to all costs to the government attributable to reviewing the claim.”
7. An amendment to the WSLA to clarify that it applies only to criminal actions, not to the civil FCA.
8. A requirement that once the DOJ has received a qui tam complaint, or initiates a false claims investigation, it must notify all relevant government agencies and employees of their obligation to preserve the documents.[128]

As its third general reform, the white paper proposes that the DOJ adopt internal policy guidelines to ensure that Civil Investigative Demands (“CIDs”) are issued only when necessary to a fraud investigation and when less burdensome alternatives are unavailable.[129]

At the October 24 Legal Reform Summit, two of the proposal’s authors—David W. Ogden and Peter B. Hutt II—appeared on a panel to explain the reasoning behind the suggested reforms.  In response to concerns that the proposed 180-day internal reporting rule could reduce relators’ incentives to report fraudulent behavior, Hutt cited studies indicating that a vast majority of qui tam relators had reported internally prior to filing the qui tam complaint, while Ogden reiterated that this rule would only be in place for companies independently accredited according to compliance standards established in cooperation with federal agencies such as HHS.[130]  On December 6, 2013, Ogden appeared on a panel hosted by the George Mason University School of Law’s Congressional Civil Justice Caucus Academy with Stephen M. Kohn, the executive director of the National Whistleblowers Center.  While Kohn pointed to the $4.9 billion in FCA recoveries in 2012 as evidence of the law’s success in detecting fraud, Ogden pointed to the disparity between $4.9 billion and the estimated $72 billion the United States loses to fraud annually in arguing that the law is “profoundly flawed in several respects.”[131]  Although the United States has yet to officially comment on ILR’s proposal, we will continue to closely monitor this reform effort.

IV.             Conclusion

2013 confirmed the real dangers associated with the combination of increased government spending and the expanding breadth of the FCA.  In response, it is more important than ever that companies be mindful of the FCA, have compliance programs in place to prevent violations of the FCA, and appropriately respond and react to internal or external inquiries alleging possible FCA violations.  FCA claims can be extremely disruptive and expensive, even if they never reach litigation.  Furthermore, as discussed above, studies show that most whistleblowers first report their concerns internally.  Companies must therefore take seriously employee complaints and should consider further educating the workforce about the FCA, perhaps even beyond what some agencies already require, and establishing standard procedures for raising complaints and responding to them.  Every well-designed response plan also should include a discussion with qualified outside counsel about the potential benefits and risks of self-disclosure to the government.[132]  It is important to be thoughtful and strategic about this decision and whether to avail oneself of the various voluntary self-disclosure regimes that now exist (e.g., HHS OIG).  The factors leading to a determination about self-disclosure are complex and nuanced, and must be handled carefully and appropriately.

In conclusion, based on the ever-increasing and well-publicized FCA bounties, the staggering figures of fraud and abuse in government programs, and the intense demand for oversight and accountability on both sides of cases discussed in this and in our prior FCA updates, Gibson Dunn predicts that 2014 will be another dynamic and interesting year for FCA activity.  As always, we will keep you posted.