We are pleased to present Bradley’s annual review of significant False Claims Act (FCA) cases, developments, and trends. From a relatively short article several years ago, the Review has grown to a significant publication that provides readers with a thorough yet succinct guide to FCA-related issues from the past year. The Review’s growth reflects the growth of FCA enforcement, as result of both the Department of Justice’s priorities and the plaintiffs’ whistleblower bar’s aggressiveness.
The Review is organized by key FCA areas, beginning with an overview of the judgments and settlements obtained in 2016.
Thereafter, FCA practitioners will find discussion on familiar topics such as materiality, falsity, the knowingly standard, false certification, public disclosure, and Rule 9(b) pleading. We also give detailed coverage to the significant U.S. Supreme Court decision in Escobar and a roundup of early cases applying Escobar’s principles. While the focus is on appellate decisions, the Review also includes notable lower court activity, including a summary of a rare FCA trial (and government setback) in the AseraCare litigation.
From an industry focus, business leaders will find continued focus on the healthcare industry, including cases involving the Anti-kickback Statute and Stark law, off-label promotion, and Medicare overpayment liability. Similar cases from the banking and mortgage, government contracting, and defense sectors are covered, as well issues of general business import, including successor FCA liability, awarding of fees, and calculation of damages.
Finally, readers will find synopses of the changes in the FCA’s civil monetary penalties and a discussion of cases involving venue transfer, retaliation, reasonable interpretation of law, and personhood. We conclude with trends and developments to watch for in 2017, including continued implementation of the Yates Memorandum involving individual liability and—potentially—the first appellate decision to address statistical extrapolation to prove FCA liability.
IntroductionContinuing the trend from the last several years, the Department of Justice (DOJ) obtained significant False Claims Act (FCA) recoveries in 2016. According to DOJ statistics, in fiscal year 2016, it obtained more than $4.7 billion in settlements and judgments in FCA cases, the third highest annual total ever. As in years past, several industries accounted for the lion’s share of recoveries. The healthcare industry led the way with $2.6 billion (over 53 percent) of the total, followed by the banking and mortgage industry with $1.6 billion in recoveries. Other industries commonly subject to FCA enforcement, including government contracting, defense, and environmental sectors, also had substantial recoveries.
The year 2016 was significant for the FCA beyond just settlements and judgments. The U.S. Supreme Court issued the most important FCA opinion in some time in Escobar, which upheld the so-called implied false certification theory in certain circumstances. In addition, following the Yates Memorandum issued in September 2015, DOJ in 2016 took an increased focus on individuals for FCA liability. The FCA also underwent a significant change in its per-violation penalties, which nearly doubled from a range of $5,500 to $11,000 per claim to a range of $10,781 to $21,563.
All told, 2016 marked another year of aggressive FCA enforcement by DOJ and whistleblowers. While 2017 will not likely present a watershed case like Escobar, FCA practitioners and their clients will be watching how the new presidential Administration affects FCA enforcement and several key issues, including the first review by a court of appeals on the use of statistical extrapolation to determine liability in an FCA case. As we look forward to the developments in 2017, we look back at an eventful 2016.
FCA Per-Claim Civil Penalties IncreaseThis year, the DOJ issued an interim final rule, causing FCA per-violation penalties to nearly double. 81 Fed. Reg. 42491 (June 30, 2016). The increase became effective for penalties assessed after August 1, 2016 for violations occurring after November 2, 2015. Minimum per-claim penalties increased to $10,781, up from $5,500, and maximum per-claim penalties increased to $21,563, up from $11,000. The DOJ cited adjustment for inflation as the cause for the increases.
Increased penalties may mean higher settlement rates given the increased risk of loss for defendants to take cases to trial. These increases may, however, also result in a larger number of constitutional challenges based on excessive fines in violation of the Eighth Amendment in cases with a large number of claims.
Supreme Court DecisionsUniversal Health Services, Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (U.S. June 16, 2016)
In June, the U.S. Supreme Court unanimously validated the controversial “implied certification” theory of FCA liability. According to that theory, when a defendant submits a claim for payment to the government, it impliedly certifies compliance with various regulatory, statutory, and contractual requirements that otherwise apply to it. The theory holds that noncompliance with one of those separate requirements renders the claim “false” even if the defendant actually provided the government the good or service and made no explicit false statement.
Although the Court upheld the implied certification theory, it limited it. The decision states that implied certification may be viable “at least where two conditions are satisfied”—(1) a claim makes specific representations about a good or service (as opposed to merely requesting payment) and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory or contractual requirements makes those specific representations “misleading half-truths.” Since the Escobar ruling, lower courts have disagreed on whether these two conditions are necessary or merely sufficient for implied certification liability. The government has argued that the Supreme Court’s language “at least where two conditions are satisfied” indicates that implied certification may also be applicable in other situations. Defendants have argued that the two conditions are required for liability to attach.
The Supreme Court also emphasized the “demanding” nature of the FCA’s materiality standard. It described the materiality standard as turning on the “likely or actual behavior of the recipient of the alleged misrepresentation” and noted that the government’s past practices in paying such claims are relevant to the determination. The Court further stated that the government’s designation of a requirement as a “condition of payment” is relevant but not dispositive. It remains uncertain how the Court’s description of a “demanding” materiality standard turning on “likely or actual behavior” reconciles with the statutory definition of materiality as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” Since the Escobar ruling, lower courts have increasingly grappled with materiality, including being seemingly more willing to dismiss cases at the pleading stage for insufficiently alleging materiality. For a brief description of several such cases, see the “Post Escobar materiality roundup” in the Materiality section below.
In State Farm, the Supreme Court examined the appropriate sanctions for a violation of the FCA’s “seal” requirement, under which a relator’s complaint must be filed and remain until the district court orders the relator to serve the complaint on the defendant. State Farm had moved to dismiss the relators’ complaint after relators’ counsel had violated the seal in disclosures to journalists, a public relations firm, and others. But State Farm “did not request any sanction other than dismissal.” The district court denied the motion, and the Fifth Circuit affirmed, after which State Farm sought review by the Supreme Court.
The Supreme Court affirmed the denial of State Farm’s motion to dismiss. First, the Court held that a violation of the FCA’s seal requirement does not necessarily mandate dismissal of a relator’s complaint. The Court based that holding on its interpretation of the relevant statutory provision and the FCA’s overall structure.
Second, the Court discussed the standard that should govern a district court’s decision whether to dismiss a relator’s complaint based on a seal violation. While the Court held that “the question whether dismissal is appropriate should be left to the sound discretion of the district court,” it stopped short of announcing any specific standard to guide that discretion, saying only that “[t]hese standards can be discussed in the course of later cases.” The Court did, however, discuss the range of potential sanctions that an FCA defendant can seek based on a seal violation. According to the Court, dismissal “remains a possible form of relief,” and lesser “[r]emedial tools like monetary penalties or attorney discipline remain available to punish and deter seal violations even when dismissal is not appropriate.”
Materiality (Pre-Escobar)In Thomas, the Tenth Circuit affirmed the district court’s grant of summary judgment in favor of Black & Veatch Special Projects Corp (B&V), holding that, even if the qui tam relators could demonstrate B&V violated its contract with the United States Agency for International Development (USAID), they could not prove the violation was material to USAID’s decision to pay B&V pursuant to the contract.
The contract, which involved construction services performed in Afghanistan, required B&V to obtain visas and work permits from the Afghan...
