First published in Litigation News, Winter 2010
By Craig D. Margolis, John M. Faust, and Yousri H. Omar
| Read more articles from Litigation News, Winter 2010 here. |
Since its substantial overhaul in 1986, the False Claims Act (FCA)1 has been the government’s most powerful weapon to combat fraud against the United States.
The FCA empowers the United States, and private plaintiffs (called “relators”) suing on its behalf, to bring lawsuits against individuals and companies suspected of defrauding the government. These complaints are filed under seal and remain so, sometimes for years, while the Department of Justice (DOJ) investigates. In a case brought by a relator, a so-called qui tam action, the U.S. must decide whether to “intervene” and take over the case or to decline the case and let the relator proceed with the action on his own. That intervention decision may determine, in large part, whether there ultimately will be a recovery in the case.
The recovery can be substantial. The FCA authorizes the government to recover three times the actual damages suffered, imposes penalties of $5,500 to $11,000 per violation, and permits a successful relator to recover his attorneys’ fees and costs from the defendants. The FCA has been wielded against government contractors and other recipients of federal funds in diverse areas such as healthcare, pharmaceuticals, defense, and energy — to great effect, with billions in recoveries since 1986 and a recent, single-case recovery of over $2 billion.2
The recent dramatic increase in federal spending (with billions of dollars in Stimulus funds) has been accompanied by amendments to the FCA that increase the government’s investigatory powers, ease the burdens on relators, and generally enhance the prospects of substantial government recoveries. On May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009 (FERA),3 which contains the first set of significant amendments to the FCA since 1986. As a result of these amendments, virtually any person or company receiving funds under any federal program, grant, contract, or subcontract is potentially subject to the FCA.
This article summarizes the most important 2009 amendments, noting where there may be some ambiguity as to how the changes will be interpreted (there is little case law to date). Also, with one significant exception, the amendments are not retroactive. That is, they will apply only to conduct that occurs after the enactment date, May 20, 2009. The exception — the provision reversing the Supreme Court’s decision in Allison Engine4 — is discussed in detail below.
1. Expanded Liability for False Claims
Before the 2009 amendments in FERA, a false claim was generally actionable under the FCA only where a false statement, bill, invoice, or other claim was actually presented to a government official for payment directly out of U.S. funds.5 Previously, it was difficult to establish liability under the FCA when an entity did not falsely bill the government directly for goods or services. Post-FERA, liability is no longer premised on the “presentment” of a false claim directly to a government official. Liability now attaches to a false claim presented to a “contractor, grantee, or other recipient, if the money or property [sought by the claim] is to be spent or used on the government’s behalf or to advance a government program or interest,”6 and the government has either provided the funds to the contractor, grantee, or other recipient, or will reimburse that recipient for the funds expended to pay the claim. As a result, almost any recipient of funds relating to a federal program, directly or indirectly, is potentially subject to FCA liability.
2. Expanded Liability for False Statements Material to Payment of False Claims
Before FERA, in cases involving the affirmative submission of false claims, the FCA reached only those false statements made with the intent “to get” those claims paid by the government.7 The Supreme Court in Allison Engine interpreted the FCA’s false statements provision last year, holding that the party making a false statement actually had to intend to induce the government to pay a false claim by virtue of that statement. In that case, a lower-tier subcontractor that had lied to a prime government contractor to get an invoice paid was held not liable because there was no evidence the subcontractor was attempting to defraud the government, but rather only the prime contractor. In other words, without evidence that a false statement was made for the purpose of getting the government to pay a claim, there was no false statements liability under the FCA.
The 2009 amendments were intended specifically to reverse Allison Engine (indeed, it is the only provision made retroactive – to June 7, 2008, two days before the date of the Court’s opinion) and dispense with this intent requirement. Any false statement material to the government’s decision whether to pay a false claim is now actionable under the FCA. For example, if a contractor employee falsifies a progress report on some government work, not to induce the government to pay a claim but rather to hide a performance issue from his or her manager, such a false statement could be actionable if material to the government’s decision to pay a claim. All that is required is that the statement have “a natural tendency to influence, or be capable of influencing” the payment of the false claim.8
Consistent with FERA’s general expansion of FCA liability, the amendments also dispense with any requirement that the false statement be made to a federal official. Rather, a false statement made to anyone is sufficient to trigger liability if it was material to the payment of a false claim with federal funds.
Whether, and to what extent, courts will find that this part of FERA is retroactive has yet to be determined. For example, a number of courts have reasoned in a recent opinion that this provision only applies to claims submitted to the government for payment on or after June 7, 2008, and not to FCA lawsuits pending on that date.9 If that reasoning prevails, it should substantially limit the retroactivity of this change.
To whatever extent this part of FERA is construed to be retroactive, however, the question remains whether such retroactivity violates the Ex Post Facto Clause of the U.S. Constitution, which applies to criminal statutes and arguably to civil statutes, like the FCA, that have been held to have punitive aspects. The Southern District of Ohio recently held that retroactive application of the FERA false statements provision is unconstitutional for this reason, because it makes some acts punishable under the FCA only after they were committed.10 The same issue is pending before several other courts.
3. Expanded Conspiracy Liability
Before FERA, FCA conspiracy liability was limited to agreements to get a false claim paid, but did not apply to other theories of FCA liability. For example, knowingly paying the government less money than is owed or using false statements to decrease an obligation to the government (a so-called “reverse” false claim) was actionable under the FCA, but conspiring to do so was not.11 That is, not until FERA, which has extended conspiracy liability to any agreement to violate any FCA provision, including such “reverse” false claims. It is also no longer necessary to prove, for conspiracy liability, that the government actually paid or approved a false claim – proof of the illegal conspiracy is enough.12
4. Expanded Definition of “Obligation” in “Reverse” False Claims Cases
In addition, before FERA, so-called “reverse” false claims liability required a showing of a defendant’s specific “obligation” under a law, regulation, or contract to pay money or property to the government that the defendant fraudulently attempted to avoid.13 FERA significantly broadened the definition of “obligation” to now include “an established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment.”14 This last term warrants special attention, as a defendant’s mere retention of an overpayment from the government may now trigger liability, without any false claim or statement having ever been made. Knowingly retaining an overpayment, without more, could lead not only to the obligation to return the property, but potentially also to treble damages and penalties.
5. Liability for Retaliation
FERA also broadened the whistleblower protection provisions of the FCA. Retaliation against a whistleblower for any act done to investigate or prevent a violation of the FCA is actionable, regardless of whether the whistleblower has filed or is acting in furtherance of a qui tam case. While the FCA’s previous whistleblower protections ran only to a defendant’s own employees, they now also safeguard any contractor or agent of the defendant from retaliation for investigating or preventing a potential false claim.15
6. Streamlined Civil Investigative Demand Authority
The 2009 amendments also eliminate some procedural hurdles to the government’s investigation of a potential FCA violation. While an agency working with the DOJ could issue administrative subpoenas (e.g., Inspector General subpoenas issued by the Department of Defense or Department of Health and Human Services), the DOJ could not itself issue a Civil Investigative Demand (CID) without the personal approval of the Attorney General.16 This authority now can be delegated, which means that a line DOJ lawyer will have the ability to compel the production of both documents and testimony in support of a FCA investigation without a case having even been filed.17 Moreover, DOJ attorneys may now share information and documents with qui tam relators more freely than before.18
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At a time when the U.S. government has vastly expanded the breadth and scope of federal programs, dramatically increasing the quantity and reach of funding, it also has expanded its power to pursue fraud against the government. As a result, recipients of federal dollars can expect increased scrutiny and the prospect of qui tam cases and government investigations. Now more than ever before, any recipient of federal money or participant in any federally funded program must not only ensure that all federal monies are appropriately used and distributed, but they should take proactive steps to familiarize themselves with the FCA, including its recent amendments, to avoid the newly created potential liability pitfalls.
For more information, please contact Vinson & Elkins lawyers Craig Margolis, John Faust, or Yousri Omar. Visit our website to learn more about V&E's False Claims/Qui Tam Litigation practice. Get a .pdf of this issue of Litigation News, Winter 2010 here.
1 31 U.S.C. § 3279 et seq.
2 Recently, Pfizer settled a case related to the marketing of its drug Bextra for $2.3 billion, with $1.3 billion in criminal fines and $1 billion to settle FCA claims. Press Release, Department of Justice, Justice Department Announces Largest Health Care Fraud Settlement in Its History (Sept. 2, 2009) available at: http://www.justice.gov/opa/pr/2009/September/09-civ-900.html
3 Pub. L. No. 111-21, 123 Stat. 1620; 31 U.S.C. §§ 3729-3733.
4 Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008).
5 Former 31 U.S.C. § 3729(a)(1); United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2005).
6 31 U.S.C. § 3729(b)(2).
7 Former 31 U.S.C. § 3729(a)(2); Allison Engine, 128 S. Ct. 2123.
8 31 U.S.C. § 3729(b)(2).
9 Hopper v. Solvay Pharm., Inc., No. 08-15810, 2009 WL 4429519, at *11 n.3, 2009 U.S. App. LEXIS 26381, at *18-19 n.3 (11th Cir. Dec. 4, 2009); United States v. Science Applications Int. Corp., No.
04-1543, 2009 WL 2929250, 2009 U.S. Dist. LEXIS 84021 (D.D.C. Sept. 14, 2009); see also United States ex rel. Sanders v. Allison Engine Co., Inc., No. 1:95-cv-970, 2009 WL 3626773, at *3-4, 2008 U.S. Dist. LEXIS 111772, at *9-12 (S.D. Ohio Oct. 27, 2009) (holding that a “plain reading of the retroactivity language reveals that the relevant change is applicable to claims and not to cases”) (internal quotations omitted).
10 Sanders, No. 1:95-cv-970, 2009 WL 3626773, at *4-10, 2008 U.S. Dist. LEXIS 111772, at *12-28.
11 31 U.S.C. § 3729(a)(7) (current version at 31 U.S.C. § 3729(a)(1)(G)); see e.g. United States ex rel. Atkinson v. Pennsylvania Shipbuilding Co., 255 F. Supp. 2d 351, 413 (E.D. Pa. 2002) (dismissing a FCA conspiracy claim based on underpayment to the government).
12 31 U.S.C. § 3279(a)(1)(C).
13 See, e.g., United States v. Pemco Aeroplex, Inc., 195 F.3d 1234 (11th Cir. 1999) (defendant had contractual obligation to submit inventory of government property, and submission of false inventory was actionable under section (a)(7)).
14 31 U.S.C. § 3729(b)(3).
15 FCA retaliation claims are subject to arbitration under alternative dispute resolution clauses that many companies have in their agreements with employees and contractors. See, e.g., United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370 (4th Cir. 2008).
16 See 31 U.S.C. § 3733.
17 In contrast, an Inspector General subpoena could compel the production of documents but not testimony.
18 The previous provision allowing for CIDs barred the government from disclosing the information obtained with any other person, except for members of Congress and employees of any government agency who will use the material in exercising their statutory responsibilities. See 31 U.S.C. § 3733(i)(2)(c) (2008). The amendments now allow the Attorney General or a designee to share information obtained through a CID “with any qui tam relator if the Attorney General or designee determine it is necessary as part of any False Claims Act investigation.” 31 U.S.C. § 3733(a)(1).
Prior results do not guarantee a similar outcome.