Healthcare Enforcement & Compliance

On January 12, 2021, the Eastern District of California entered into a civil settlement with a Paycheck Protection Program (“PPP”) borrower and its CEO to resolve allegations of fraud.  The settlement stemmed from a $350,000 PPP loan that SlideBelts Inc., an internet retail company, received even though it was a prohibited borrower as a debtor in bankruptcy.  This is the first civil settlement for PPP-related fraud and is a harbinger of what the New Year will bring for some of the five million PPP loan recipients to date. The Settlement According to the settlement agreement, SlideBelts submitted three applications for PPP loans to three different lenders on April 3, 8, and 14 of 2020.  The application forms (SBA Form 2483) provide that loans will not be approved for any applicant that provides an affirmative answer to the very first question on the form, which asks: 1.  Is the Applicant . .  . presently involved in any bankruptcy? Even though it was a debtor in a Chapter 11 bankruptcy at the time, SlideBelts answered “no” to this question in each of its three applications. The settlement agreement provides the first lender rejected SlideBelts’ application on April 10, 2020.  At that time, the first lender sent an email advising SlideBelts’ CEO, Brigham Taylor, that Question 1 had been answered incorrectly because the lender knew SlideBelts was presently in bankruptcy.  Taylor responded that the answer was an “oversight,” but asserted that the question regarding bankruptcy was “an overreach” by the Small Business Administration (“SBA”).  On April 14, 2020, Taylor wrote the first lender again and reiterated that the term “bankruptcy” should not be included in Question 1, and that the lender should approve the loan.  The lender rejected Taylor’s request and repeated that SlideBelts was not eligible for a PPP loan because it was in bankruptcy.  Three hours later, SlideBelts submitted the third application, signed by Taylor, to a different lender. Shortly thereafter, the second lender approved SlideBelts’ second application.  Taylor signed the loan note with the second lender and, according to the settlement agreement, again “stated falsely that SlideBelts was not in bankruptcy to influence [the second lender] to execute the note and disburse the [$350,000] loan proceeds to SlideBelts.”  As a result of the note and the false statements by Taylor and SlideBelts, the second lender not only disbursed the loan proceeds to SlideBelts on April 21, 2020, but also submitted a false claim to the SBA for $17,500 in loan processing fees, which the SBA paid. One day after the loan was disbursed, Taylor wrote an email to the second lender stating that SlideBelts “just realized that we may not have answered [Question 1] correctly since we filled out the application quickly and wanted to bring it to your attention.”  Instead of returning the loan, however, SlideBelts sought retroactive approval of the PPP loan from the bankruptcy court.  In doing so, SlideBelts did not disclose to the bankruptcy court that it had obtained the loan by making a false statement to the second lender regarding its status as a debtor in bankruptcy.  The SBA and the second lender opposed SlideBelts’ motion and requested that the bankruptcy court order SlideBelts to return the loan.  SlideBelts did not return the money voluntarily but instead asked the bankruptcy court to dismiss the case so that it could refile for bankruptcy later and apply for a PPP loan while the case was dismissed. On June 30, 2020, the bankruptcy court granted SlideBelts’ motion to dismiss the bankruptcy case.  After repeated demands from the SBA to return the proceeds, SlideBelts finally returned the $350,000 to the second lender on July 8, 2020. Based on these actions, the United States contends in the settlement agreement that SlideBelts and Taylor are liable to the government for damages and penalties totaling $4,196,992 for violations of the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”) and the False Claims Act (“FCA”).  Pursuant to the terms of the settlement agreement, SlideBelts and Taylor agree to pay $100,000 to resolve these claims, with nearly half to be paid within fourteen days and the remaining amount due over the course of five years.  Notably, the settlement amount “represents the amount the United States is willing to accept in compromise of its civil claims arising from the [alleged violations] due solely to the [Taylor and SlideBelts’] financial condition.”  SlideBelts also agreed that if it failed to make its required payment under the settlement agreement, SlideBelts would consent to the entry of judgment against it for $2,098,496 (representing its half of the $4,196,992 in total alleged damages and penalties). The Takeaway When Congress enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act to quickly authorize up to $349 billion in forgivable loans to small businesses on March 29, 2020, it was inevitable that fraud would follow.  Enforcement followed, too, with federal prosecutors pursuing dozens of criminal prosecutions for various PPP-related fraud throughout 2020.  Those criminal charges often represented the most blatant of crimes and the easiest of targets.  All the while civil lawsuits were quiet, or at least not yet public. But not anymore.  This first-of-its-kind civil settlement demonstrates that civil enforcement actions are alive and well and that the government is aggressively pursuing recoveries against companies and individuals, and even against insolvent borrowers.  (Indeed, even under pandemic circumstances, the DOJ reported recovering more than $2.2 billion in settlements and judgments from civil cases involving fraud and false claims against the government in fiscal year 2020.) Moreover, the settlement paves the way for private relators looking to take advantage of the qui tam provisions of the FCA to target PPP fraud.  In fact, relator-driven qui tam cases—many of which are likely currently pending but under seal while under investigation by the government—may in fact dominate the enforcement scene related to PPP fraud in the New Year.  Only time will tell, but at the least the SlideBelts settlement marks the beginning of a new chapter related to combatting pandemic-related fraud with civil enforcement actions and the FCA. To stay up-to-date on False Claims Act news, subscribe to Dorsey’s FCA Now Blog today.

On January 8, 2021, in the first appellate decision of the year addressing a False Claims Act case, the Fourth Circuit affirmed the summary judgment dismissal of relators’ claims that a manufacturer of allergenic extracts violated the FCA.  Skibo v. Greer Labs., 2021 U.S. App. LEXIS 508 (Jan. 8, 2021) (per curiam). Like most FCA cases that arrive in the United States Courts of Appeals, this one started many years ago.  In August 2013, two former employees filed a retaliation claim under the FCA against Greer Laboratories, Inc. (“Greer Labs”) for terminating them after they raised concerns that Greer Labs’ “custom mix” allergenic extracts did not comply with Federal Drug Administration (“FDA”) regulations.  In addition to their retaliation claim, the relators alleged a substantive FCA claim against Greer Labs for selling the custom mixes as licensed allergenic extracts to physicians, who then received reimbursement from the government for administering the custom mixes to patients.  Relators contended the physicians’ claims for reimbursement—allegedly caused by Greer Labs—were false because the custom mixes were not licensed allergens and Medicare and Medicaid would not provide reimbursement for unlicensed drugs. The custom mixes at issue in the case were mixes of individual allergen extracts for general use by a physician, rather than patient-specific mixes made pursuant to patient prescriptions.  To sell their products, manufacturers of allergenic extracts are required to obtain licenses from the FDA.  Greer Labs had a general license, but did not seek separate licenses for its custom mixes because it believed the mixes fell under its general license.  Before they were terminated in 2012, relators alleged they had complained to Greer Labs that the custom mixes were violating FDA regulations. The district court granted defendants’ motion for summary judgment and dismissed relators’ claims.  The district court held that relators could not prove that Greer Labs knew that a separate license was required for the custom mixes.  The district court further held that relators had not engaged in protected activity to support their retaliation claim. The Fourth Circuit affirmed, noting that the FDA did not issue formal guidance recognizing that custom mixes required separate licenses under existing regulations until 2015, and that the industry practice prior the guidance was to allow custom mixes without separate licenses.  Because Greer Labs openly acted in accordance with industry practice and the common understanding of the regulatory requirements, the Fourth Circuit agreed that the relators could not show that Greer Labs acted with the requisite scienter.  In addition, the Fourth Circuit held that the concerns relators raised about regulatory compliance—part of their job description—were insufficient to show that relators engaged in protected activity under the FCA because “[a]llegations of regulatory violations are not enough ‘in the absence of actual fraudulent conduct.’”  Skibo, 2021 U.S. App. LEXIS at 19 (emphasis in original) (quoting United States ex rel Rostholder v. Omnicare, Inc., 745 F.3d 694, 702 (4th Cir. 2014)).  The Court found that “[t]he fatal flaw in [relators’] claim is that they never allege that they raised an issue of false or fraudulent conduct beyond a regulatory violation that would constitute an FCA violation.”  Id. at 21. In addition to emphasizing that regulatory violations alone are not FCA violations, the case is an important first-of-the-year reminder of the importance of a defendant’s mental state when evaluating FCA claims.  Since the landmark decision in Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), a lot of attention has focused on the FCA’s materiality requirement.  It must be remembered, however, that Escobar recognized that both of “[t]hose requirements [the FCA’s materiality and scienter requirements] are rigorous.”  136 S. Ct. at 2002.  Rigorous enough, in fact, that cases lacking sufficient evidence of scienter will be dismissed on summary judgment, as in Skibo.

The Department of Justice’s (“DOJ”) most recent settlement with Indivior Solutions, Inc., Indivior Inc., and Indivior plc (together, “Indivior”) demonstrates not only that the DOJ is continuing its pursuit of claims and settlements related to the opioid crisis, but also that the DOJ is searching for creative penalties beyond large monetary payouts. In a July 24, 2020 press release, the DOJ announced a $600 million civil and criminal settlement against Indivior related to marketing the opioid-addiction-treatment drug Suboxone. This settlement follows a larger, $1.4 billion settlement with Rickeitt Benckiser Group PLC, Indivior’s former parent company, inked in 2019. The DOJ touts the combined $2 billion value of the 2019 and 2020 settlements as the largest-ever resolution in a case brought by the DOJ involving opioid drugs. The civil settlement resolves claims from six qui tam lawsuits brought against various combinations of the Indivior entities under the False Claims Act (“FCA”). United States ex rel. Finkelstein v. Reckitt Benckiser Pharms., Inc., No. 14-cv-00059 (W.D. Va.); United States ex rel. Williams v. Reckitt Benckiser, Inc., No. 13-cv-00036 (W.D. Va.); United States ex rel. Lemons v. Reckitt Benckiser Pharms., No. 15-cv-00016 (W.D. Va.); United States ex rel. Kruszewski v. Reckitt Benckiser Pharms., Inc., No. XX-cv-XXXX [UNDER SEAL] (D.N.J.); United States ex rel. Scott v. Reckitt Benckiser Pharms, Inc., No. XX-cv-XXXX [UNDER SEAL] (N.D.J.); United States ex rel. Greene v. Indivior PLC, No. XX-cv-XXXX [UNDER SEAL] (D.N.J.). Under the civil settlement, Indivior Inc. and Indivior plc agreed to pay $300 million, with $209.3 million going to the federal government and $90.7 million going to certain participating states. The amount awarded to the individual whistleblowers has yet to be determined. While Indivior did not admit fault in its civil settlement, the settlement resolves three main allegations. First, the DOJ alleged Indivior knowingly promoted the sale and use of Suboxone to physicians who were writing prescriptions not for a medically-accepted indication, lacked a legitimate medical purpose, were issued without counseling or psychosocial support, were for unsafe, ineffective, and medically-unnecessary uses, or were often diverted. Second, the DOJ alleged that Indivior knowingly promoted the sale or use of Suboxone Film to physicians and state Medicaid agencies using false and misleading claims that Suboxone Film was less susceptible to accidental pediatric exposure than Suboxone Tablets. And third, the DOJ alleged that Indivior tried to delay the entry of generic competition to control the price of Suboxone—including pricing to federal healthcare programs. Such actions allegedly included the improper submission of a petition to the Food and Drug Administration (“FDA”) claiming that Suboxone Tablet had been discontinued “due to safety concerns” about the tablet formulation of the drug. As part of the criminal resolution, Indivior Solutions pleaded guilty to a one-count felony criminal information charging false statements related to health care matters, in violation of 18 U.S.C. § 1035. See United States v. Indivior Solutions, Inc., 19-cr-00016-JPJ-PMS (W.D. Va.). The plea included an admission that Indivior Solutions made false statements to promote the film version of Suboxone to the Massachusetts Medicaid programs regarding the safety of Suboxone Film around children. The settlement includes a criminal fine, forfeiture, and restitution in the combined amount of $289 million. The criminal resolution also includes novel, non-monetary components, requiring that Indivior Inc. permanently disband its entire Suboxone sales force and a prohibition from using data obtained from surveys of health care providers for marketing, sales, or proposal purposes. Indivior’s CEO will also be required to annually certify—under penalty of perjury—either that: (1) Indivior was complaint with the Food, Drug, and Cosmetic Act and did not commit health care fraud; or (2) list all of Indivior’s non-compliant activity and the steps taken to remedy it. Finally, Indivior Inc. is also required to remove health care providers from its promotion programs at high risk of inappropriate prescribing. Neither the press release nor settlement materials explain how Indivior is supposed to identify high-risk providers. Failure to meet the above requirements will cause contempt sanctions and a reinstatement of the dismissed charges. Besides the civil and criminal settlements, Indivior also agreed to a five-year Corporate Integrity Agreement with the Department of Health and Human Services Office of Inspector General, under which Indivior will implement numerous accountability and auditing provisions, including a yearly compliance certification by Indivior executives and Board of Directors, annual risk assessments and other monitoring, and multi-faceted audits conducted by an independent review organization. These cases serve as a reminder that the DOJ continues to aggressively pursue both civil and criminal claims related to the opioid crisis and provides insight into the non-monetary, compliance-based penalties the DOJ may pursue as part of global civil and criminal resolutions. As the stated by Elton Malone, Assistant Inspector General for Investigations with the Office of Inspector General of the U.S. Department of Health and Human Services, “[t]his resolution, along with our law enforcement partners’ work, should serve as a warning that large companies will face prosecution if they break the law.”

Last week, the U.S. District Court for the District of New Jersey dismissed a qui tam action against Defendants Pioneer Education, LLC, Pioneer Education Manager, Inc., Jolie Health & Beauty Academy, and Joseph Visconti (collectively, “the Academy”) alleging violations of the False Claims Act (“FCA”), 31 U.S.C. § 3729-33. United States ex rel. Lampkin v. Pioneer Educ., LLC, No. 16-cv-1817, 2020 U.S. Dist. LEXIS 136022 (D.N.J. July 31, 2020). In doing so, the Court reiterated that the “rigorous” and “demanding” materiality principle post-Escobar that requires specific allegations of deception which, had the government been made aware of the misrepresentations, influenced the payment of allocated funds. See Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). According to Relator’s Amended Complaint, there were several instances of improper administration practices occurring at the Academy, which specializes in cosmetology education and training. Relator alleged, for example, misrepresentations or “half-truths” about student attendance violations, various code of conduct infractions, and lack of satisfactory academic performance. Relator also alleged that the Academy’s failure to disclose this information established an FCA claim because the Academy was required, as an express condition of payment, to ensure adequate and efficient administration of the funds it received from the Department of Education. These misrepresentations, Relator contended, had “a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property”—triggering a FCA violation. 31 U.S.C. § 3729(b)(4). The Court disagreed. Reiterating that the FCA is “not meant to be a vehicle for punishing garden-variety breach of contract or regulatory violations,” the Court concluded the Amended Complaint failed to demonstrate how, if at all, the Academy’s purported misrepresentations were material. In particular, the Court noted that the Relator’s Complaint was completely devoid of any, much less sufficient, allegations from which a fact finder could infer that the Department of Education would have ceased payment of Title IV funds as a result of the Academy’s conduct. Nor was it enough, the Court said, that the Relator’s complaint broadly alleged that the Academy’s conduct caused the Department of Education to pay claims under Title IV that it would not have paid but for the Academy’s fraud. Instead, the Court explained, the materiality standard demands specific allegations demonstrating the alleged misrepresentations had a tendency to influence the Department of Education’s disbursement of funds. Broad, conclusory declarations without substantive details demonstrating materiality will not do. This decision once again serves as a reminder that a conclusory declaration of materiality will not suffice for purposes of stating a FCA claim. Instead, Courts will look for particular factual allegations demonstrating that a purported misrepresentation did, or was likely to, affect the recipient’s actual behavior. Moreover, the potential increase in FCA actions as a result of the billions of dollars disbursed by the government in COVID-19 relief (and often based on certifications or representations from an individual or business that they are entitled to such relief), means that courts will likely continue to regularly confront questions of materiality in the future to determine whether any alleged misrepresentations actually affected the government’s payment decisions.

As has been emphasized with the disclosure of the “Granston Memo” in January 2018 and several cases since, the government may request dismissal of a qui tam action filed under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq., in certain circumstances, and even over the relator’s objection and when the government has declined to intervene. Recently, the Southern District of New York evaluated the underlying merits of such a request. At issue was the Government’s motion to dismiss whistleblower claims alleging that Standard Chartered Bank engaged in banking practices that violated U.S. sanctions against Iran. United States ex rel. Brutus Trading, LLC v. Std. Chartered PLC, No. 18 Civ. 11117 (PAE), 2020 U.S. Dist. LEXIS 116728 (S.D.N.Y. July 2, 2020). The court decided in favor of the government and dismissed the suit. Id. at *13. Review of the decision is helpful to better understand (1) some of the factors that support dismissal of qui tam claims filed under the FCA, and (2) the two approaches relating to the appropriate standard of review courts should apply when evaluating the government’s request to dismiss qui tam actions. The FCA allows a private party (also known as a relator or whistleblower) to bring a civil suit on behalf of the government in order to enforce the law against entities submitting fraudulent claims to the government. 31 U.S.C.at § 3730(b)(1). The FCA not only imparts significant control to the Government over such suits, but also permits the Government to intervene (or not) and move to dismiss (or not). Id. at § 3730(b)–(c). Historically, the government’s power to dismiss qui tam actions has been exercised sparingly, largely because the statute expressly provides that “relators can proceed with certain qui tam actions following the government’s declination.” See Granston Memo (Jan. 10, 2018). The initial DOJ guidance related to dismissal cautioned that: [A] decision not to intervene in a particular case may be based on factors other than merit, particularly in light of the government’s limited resources. Accordingly, [the government has been] circumspect with the use of this tool to avoid precluding relators from pursing potentially worthwhile matters, and to ensure that dismissal is utilized only where truly warranted. Id. at 1–2. The Granston Memo, however, encouraged DOJ trial attorneys to use its power to dismiss relator’s claims more often. We have previously reported on the Granston Memo, and readers can learn more about it here. Government motions to dismiss have been scrutinized under two different standards. The first approach articulated by the Ninth Circuit requires the government to identify “a valid government purpose” and “a rational relation between dismissal and accomplishment of the purpose.” United States ex rel., Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998). Next, the burden shifts to the whistleblower “to demonstrate that dismissal is fraudulent, arbitrary and capricious, or illegal.” Id. The D.C. Circuit, however, has articulated a more deferential test, recognizing that dismissal is the government’s “unfettered right” and is unreviewable by the court absent fraud. Swift v. United States, 318 F.3d 250, 252–53 (D.C. Cir. 2003). Here, the court declined to definitively adopt either standard, recognizing that the government had already met the more rigorous standard set forth in the Ninth Circuit. Brutus Trading, 2020 U.S. Dist. LEXIS 116728 at *8. The court reasoned that the whistleblower was not responsible for uncovering the fraud in the earlier investigation (dating back to 2013), and furthermore, had not aided the government in discovery of any new FCA violations since. Secondly, the court accepted the “well-established basis” set forth by the government: that were the case to proceed to discovery, the Government would be “required to expend resources on a matter that it has found meritless.” Id. at *10. The court also found particularly compelling that the government had already recovered hundreds of millions of dollars from the defendants over the previous decade without relator’s help. Id. The Government’s asserted reasoning not to spend additional resources was accepted as a “valid government purpose.” The whistleblower was then unable to meet its burden that dismissal would nonetheless be “fraudulent, arbitrary and capricious, or illegal.” Id. at *10–11 (internal quotations omitted). The court dismissed the relator’s “subjective disagreement with the Government’s investigative strategy and ultimate decision” as ineffectual reasoning and rejected relator’s characterization of the investigation as wasteful simply “because it did not reach the conclusion that relator deems correct.” Id. at *11–12. Because the government had met either standard, the claims against defendants were dismissed. The final takeaway here for parties to qui tams: the government continues to exercise its priorities under the Granston Memo to dismiss qui tams, and whether such a case is dismissed can depend on the approach taken by the particular circuit.

Shortly before COVID-19 halted jury proceedings across the United States, a Mississippi jury sided with the Government to return a $10.8 million verdict against Stone County Hospital and several affiliates for what the jury found were false Medicare claims submitted in violation of the False Claims Act (“FCA”). United States ex rel. Aldridge v. Corporate Management, Inc., et al., Case No. 1:16cv369-HTW-LRA (S.D. Miss.). In May 2007, James Aldridge, the former Chief Operating Officer of Stone County Hospital, filed a qui tam action against the hospital and several defendants involved in its management and operation, including Ted Cain, Julie Cain, Tommy Kuluz, and Corporate Management, Inc. (the “Defendants”). The complaint alleged the Defendants submitted false records to secure payment under Medicare for services not actually performed and otherwise conspired to submit false claims in violation of the FCA. The Government investigated for nearly eight years before intervening in the lawsuit in 2015. The intervening complaint contained detailed allegations that the Defendants and others abused the special Medicare rules for Critical Access Hospitals from 2004 through 2015 by improperly claiming expenses for work not performed. Such false claims allegedly included the excessive and unwarranted compensation of Mr. Cain—who owned both Stone County Hospital and Corporate Management—as well as claims submitted for Mr. Cain’s personal luxury automobiles. The Government further alleged that Stone County Hospital’s Medicare cost reports misallocated expenses of Corporate Management to the hospital and contained inflated, unnecessary, and duplicative costs purportedly incurred by Corporate Management and related businesses owned by Mr. Cain. The Government alleged the Defendants submitted false records and statements to Medicare seeking reimbursement for these false and fraudulent expenses. After a nine-week trial, a Mississippi jury returned a $10.8 million guilty verdict against Ted Cain, Julie Cain, Stone County Hospital, Corporate Management, and Tommy Kuluz on March 12, 2020. The jury found the sixth defendant—Starann Lamier, the Chief Operating Officer of Corporate Management—not guilty. The 33-page verdict allocated the majority of the damages—$9.6 million—to Mr. Cain’s salary billed to Medicare through Stone County Hospital and Corporate Management. Under special reimbursement policies for critical access hospitals that service rural, underserved areas, Corporate Management passed on the vast majority of Mr. Cain’s multi-million dollar compensation to Stone County Hospital, which Medicare had reimbursed at 101% from 2004 to 2013 and 90% from 2013 to 2015. In addition, the jury awarded the Government over $850,000 in damages for fraudulent compensation paid to Julie Cain, who allegedly received compensation both for her work at Stone County Hospital and Corporate Management, although the jury found she rarely worked at the hospital and could not provide evidence of any consulting work performed for the hospital. The jury also awarded the Government over $380,000 for home office costs improperly submitted to Medicare. The Court scheduled oral argument on the imposition of penalties for March 26, 2020, but postponed the argument to May 6, 2020 due to the COVID-19 pandemic. In light of this delay—and the Government’s desire to quickly attach a judgment to the Defendants’ assets to secure future payment—the Government moved for immediate entry of judgment consistent with the jury’s verdict, seeking to apply the mandatory treble damages under the FCA to each Defendant, and recommended that the Court impose the minimum penalty permitted by law for the 12 claims at issue. On May 10, 2020, the Court entered judgment and calculated damages and penalties consistent with the jury verdict, the FCA, and the Government’s requested relief, applying the mandatory treble damages under FCA and the minimum penalty for each false claim found by the jury. Once trebled, the judgment held each Defendant jointly and severally liable for the amounts up to their respective liability, ranging from $27 to $32 million, as well as statutory penalties ranging from $66,000 to $71,000. The Court’s judgment also continued its prior order forbidding the Defendants from transferring, dissipating, selling or disposing of any of their assets. This case is noteworthy for several reasons. First, FCA cases rarely proceed to trial—or, at least, last the length of a trial to verdict. This case, however, resulted in a verdict after nine weeks. This case also exemplifies the criminal prosecution of individuals under the FCA. Although the Yates memorandum has placed an emphasis on individuals in FCA investigations and prosecutions since 2015, the majority of FCA prosecutions remain directed at corporate defendants. Next, this case demonstrates the significant duration of many FCA investigations. Although the relator originally filed his sealed complaint in 2007, the Government did not intervene until 2015. In the interim, Defendants were found to have continued submitting false claims for which they were ultimately held liable. Finally, this case is an important reminder about joint and several liability under the FCA and the significant and mandatory statutory penalties and damages in FCA cases. As exemplified by the verdict form in this case, juries are asked only to find the number and monetary amount of each false claim. Only after receiving the jury verdict does the court treble the amount of false claims to represent total damages and add statutory penalties based on the number of false claims. This two-step process emphasizes the risk of significant monetary liability under the FCA for both individual and corporate defendants, which, of course, is likely one reason most FCA cases resolve prior to jury verdict.

Over three years after the filing of the initial sealed complaint, a New York-based construction company and several affiliates—including its bonding company—have agreed to pay a combined $4.47 million to settle a False Claims Act case alleging a decade-long scheme to fraudulently obtain federal contracts set aside for Service-Disabled Veteran-Owned Small Business Concerns (“SDVOSBCs”) and small businesses operating in Historically Underutilized Business Zones (“HUBZones”). United States of America, ex rel. James Hagan v. Northland Associates, Inc., et al., No. 5:17-cv-00036-GTS-TWD (N.D.N.Y.). The Small Business Administration (“SBA”) maintains several programs that provide small and disadvantaged businesses exclusive opportunities to procure certain set-aside contracts with the federal government, i.e., contracts that non-eligible companies cannot compete for. These programs are governed by an extensive set of statutes, regulations, and rules. Under the Small Business Act, certain size standards apply when determining if a business qualifies as a “small business” for government contracting purposes. See 13 C.F.R. § 121.201. When assessing size, small businesses must consider whether any relationship rises to the level of “affiliation,” which exists when another business controls or has the power to control the small business. See 13 C.F.R. § 121.103. Control by an affiliate may arise in several ways, including through ownership, management, financial support, employee sharing, or other relationships or interactions between the parties. Id. Small business must meet additional standards set forth by the SBA to obtain more specialized SBA certifications. For instance, the SDVOSBC program requires a small business to be 51% owned and controlled by a military veteran injured in the line of duty. 15 U.S.C. § 632(q); 38 U.S.C. § 101(2), (16); 13 C.F.R. § 125.10; 38 C.F.R. § 74.4. Under the SBA’s separate HUBZone program—designed to encourage investment and employment in historically underutilized communities—a small business may obtain a HUBZone certification if it is located in a designated underutilized business zone. 13 C.F.R. § 126. In Northland Associates, two former-employee relators filed a complaint alleging that Northland Associates, Inc. (“Northland”) created a sham company—Diverse Construction Group, Inc. (“Diverse”)—to bid for and fraudulently obtain over $50 million in construction set-aside contracts for the SBA’s SDVOSBC and HUBZone programs. The complaint alleged that Northland and its owner, James Tyler, worked with a service-disabled veteran, the late Hunter Grimes, to establish and certify Diverse as a SDVOSBC. According to the complaint, the parties further certified Diverse as a HUBZone business by setting up an office for the company in Plessis, New York. The complaint, however, alleged Grimes lacked the experience or capabilities to run a construction company, and that he did not take part in the management of Diverse or any day-to-day decision-making. Instead, the complaint alleged Northland controlled Diverse at all relevant times—including the bid process and the performance of contracts awarded to Diverse—from Northland’s office in Liverpool, New York. Going beyond certification-related misrepresentations, the relators’ complaint alleged that Northland, Tyler, and Diverse took several affirmative actions to prevent discovery of their scheme. For instance, the complaint alleged that after a competitor initiated a bid protest involving Diverse in September 2009, the SBA conducted a size determination and concluded that Diverse did not qualify as a small business due to its affiliation with Northland. According to the complaint, Diverse successfully appealed the determination based upon declarations in which Tyler and Grimes allegedly misrepresented that: (1) Northland did not control Diverse, (2) Northland did not assist Diverse in the bid process; (3) Northland did not share employees, equipment, or facilities with Diverse; and (4) Northland did not financially assist Diverse or help it obtain bonding. The companies also allegedly attempted to hide their financial affiliation by transferring money through a Northland subsidiary, Maple Ridge Plateau, Inc., and using different bonding companies. The Department of Justice (“DOJ”) opted to intervene and simultaneously filed its settlement agreement with Northland, Defense, and Tyler. In the settlement agreement, Northland, Diverse, and Tyler admitted to their involvement in “a scheme devised and engaged in . . . to circumvent service-disabled veteran-owned small business and HUBZone contract requirements.” They further admitted to the undisclosed affiliation between Northland and Diverse—including employee-sharing, funneling of funds through a Northland subsidiary, Northland’s involvement in the bid process, and Northland’s performance under the Diverse contracts—and that the declarations submitted in response to the bid protest contained material misrepresentations. In addition, the DOJ filed a separate settlement agreement with Rose & Kiernan, the bonding company used by Northland and Diverse. Notably, Rose & Kiernan had not been named as a defendant in the complaint. In the settlement agreement, Rose & Kiernan admitted that it “knew or should have known . . . that Diverse and Northland were affiliated in violation of SBA regulations and that [Northland and Diverse] took steps to hide their affiliation from the government to obtain and receive payment on government set-aside contracts.” Rose & Kiernan further admitted that “[w]ithout the surety bonds that [Rose & Kiernan] helped Diverse procure . . . Diverse’s fraud would not have been possible.” Combined, the defendants and bonding company agreed to pay $4,470,000 to settle the allegations, although the bonding company’s share was only $120,000. The relators—two former Northland employees—will receive $1,000,000. This resolution provides three important reminders for all those who contract with the United States government. First, companies applying for any small or disadvantaged business certification must carefully and accurately assess their eligibility. This includes, importantly, assessing whether they have any affiliates and whether those affiliates affect eligibility. Second, bonding companies should look closely at the DOJ’s settlement agreement with Rose & Kiernan. Although FCA liability is most frequently applied to contractors who submit claims to the government, this settlement evidences an expansive reading of the FCA in which a bonding company knowledgeable of underlying fraud can be held liable under the FCA. Finally, the government eagerly and aggressively investigates fraud in its contracting programs—particularly where funds earmarked for veterans and small businesses are involved. As the DOJ reiterated in its press release, “those who contract with the United States government must do so fairly and honestly,” and “[p]roviding false information to gain access to SBA’s preferential contracting programs is fraught with peril and is especially egregious when it involves programs intended to benefit our nation’s service-disabled veterans.” Given the large number of set-aside contracts that have been awarded under tight deadlines in response to the current COVID-19 crisis, we are likely to see an increase in small business-related FCA investigations and prosecutions in the coming months and years.

I. Introduction The CARES Act allocated $100 billion in relief funds to hospitals and other healthcare providers, to be distributed by the Department of Health and Human Services (“HHS”) through the Public Health and Social Services Emergency Relief Fund (or “Provider Relief Fund”). Many healthcare providers across the country have received payments from the Fund, beginning with an initial tranche of $30 billion distributed in mid-April, and many more will be receiving additional funding in coming weeks. These funds provide critical support to hospitals, physician-owned practices, and other providers who face significant financial challenges caused by the dual shocks of preparing to treat COVID-19 patients while simultaneously losing revenue because of suspension of elective procedures. But the relief funds are subject to extensive terms and conditions, and with those conditions comes exposure to potential liability under the False Claims Act (“FCA”). This exposure is particularly acute given the broad and ambiguous language of some of the terms and conditions, the expectation of intensive government enforcement efforts following distribution of relief funds, and the economic incentives for private relators to commence FCA lawsuits. Although many providers are understandably rushing to obtain relief funds immediately, it is critical to pay attention to the strings attached to those funds. Prudent providers can and should take steps now to mitigate the risk of potentially costly FCA claims that could arise later. II. FCA Basics The False Claims Act, enacted in 1863 to “stop[] the massive frauds perpetrated by large contractors during the Civil War,” Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 1996 (2016), imposes liability where a defendant “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” to the Government. 31 U.S.C. § 3729(a)(1). A person “knowingly” presents a false claim if he “(1) has actual knowledge of the information,” i.e., actually knows the claim is false; “(2) acts in deliberate ignorance of the truth or falsity of the information; or (3) acts in reckless disregard of the truth or falsity of the information.” 31 U.S.C. § 3729(b)(1); see United States v. Munoz-Escalante, 2015 U.S. Dist. LEXIS 142167, at * 6 (D.S.D. 2015) (citing United States ex rel. Quirk v. Madonna Towers, Inc., 278 F.3d 765, 767 (8th Cir. 2002)). Upon proving a violation, the Government can recover treble damages plus civil penalties. 31 U.S.C. § 3729(a)(1). The Government itself may commence an FCA action, or a private relator may do so on behalf of the Government, in which case the Government may or may not choose to intervene in the case. In either case, damages recovered belong to the Government, but the relator is entitled to a share of the proceeds. See generally United States ex rel. Hunt v. Cochise Consultancy, Inc., 887 F.3d 1081, 187 (11th Cir. 2018). Where, as here, the Government’s payment of funds is conditioned on compliance with certain requirements, FCA exposure can arise if the recipient of funds is alleged to have “falsely” certified compliance with the terms and conditions of payment. See, e.g., Escobar, 136 S. Ct. at 1995 (confirming the “implied false certification theory can be a basis for liability” under the FCA). III. Terms & Conditions of Provider Relief Fund Payments Providers who receive disbursements from the Provider Relief Fund are required to sign an attestation agreeing to the Government’s terms and conditions for receipt of the funds. In addition to a prohibition on using relief funds for expenses or losses reimbursed by other sources (i.e., no “double dipping”), and numerous other specific provisions, the terms and conditions prohibit “balance billing” out-of-network patients for “all care for a presumptive or actual case of COVID-19.”[1] The terms and conditions also impose a broad limitation on the purposes for which relief funds may be used: The Recipient certifies that the Payment will only be used to prevent, prepare for, and respond to coronavirus, and that the Payment shall reimburse the Recipient only for health care related expenses or lost revenues that are attributable to coronavirus. The latter two conditions in particular engender the potential for FCA litigation because they are both broadly applicable and ambiguous. For example, the prohibition on balance billing extends to “presumptive” cases of COVID-19, but fails to define a “presumptive” case. As experience with COVID-19 rapidly evolves, providers and public health agencies continually update clinical signs and symptoms of the disease, many of which are nonspecific. Virus test kits remain in short supply. Absent a test confirming a patient’s infection with the novel coronavirus, how is a provider to define “presumptive” cases of COVID-19 so as to comply with this condition? The Provider Relief Fund website states that “providers must agree not to seek collection of out-of-pocket payments from a COVID-19 patient that are greater than what the patient would have otherwise been required to pay if the care had been provided by an in-network provider” (emphasis added). This suggests that the out-of-pocket limitation applies only to COVID-19-related diagnosis and care, but ambiguity remains due to the lack of specific guidance. The broad limitation on use of relief funds is similarly problematic. Given the devastating breadth of the COVID-19 pandemic’s medical, economic, and social effects, how are providers to distinguish “expenses or lost revenues” that are “attributable to the coronavirus” as opposed to some other cause? For example, do “health care related expenses . . . attributable to the coronavirus” include only the direct costs of purchasing additional personal protective equipment, ventilators, and other supplies necessary to treat COVID-19 patients? Or does this category include associated administrative costs, costs of training, etc.? Do “lost revenues . . . attributable to the coronavirus” include only revenues from elective procedures cancelled pursuant to government order or by medical necessity? Or could this category also include, for example, procedures that could have gone forward but were cancelled by patients because of perceived infection risk? Could it include loss of business opportunities that are shelved or cancelled because of the broader effects of the pandemic? The Government’s decision to distribute a portion of the funds immediately and broadly to all providers that received Medicare fee-for-service reimbursement in 2019 suggests that “attributable to the coronavirus” should include lost revenue caused by the economic downturn attributable to the coronavirus. But again, a lack of guidance on how directly lost revenue must be attributable to the coronavirus pandemic creates ambiguity. So-called “subregulatory guidance,” that thicket of agency memoranda, website “FAQs,” and other directives not promulgated through notice-and-comment rulemaking or legislation, compounds the problems raised by ambiguous terms and conditions. Agencies are scrambling to issue new rules, directives, and direction as the COVID-19 pandemic evolves. This scramble is understandable, but it creates significant pressure for agencies to do something—fast—and that urgency does not lend itself to legislative action or the ordinary notice-and-comment rule-making process. From an administrative perspective, Department of Justice trial attorneys have been directed to not pursue FCA cases premised on violations of “sub-regulatory guidance”—this is the so-called “Brand Memo” of January 2018, which was later memorialized in section 1-20.000 of the Justice Manual. Likewise, the Courts have started to express some hostility to FCA cases premised on such violations, particularly in the wake of the June 2019 Supreme Court decision in Azar v. Allina Health Services, 139 S. Ct. 1804 (2019), which underscored the importance of notice-and-comment rulemaking to create substantive legal standards. Nevertheless, agencies will continue to promulgate subregulatory guidance, and it will continue to play a role in litigation, in one form or another. IV. The Risks of Ambiguous Payment Conditions As the foregoing examples suggest, there is room for interpretation and debate over the meaning of the broad language used in the terms and conditions attached to the Provider Relief Fund. And where there is room for debate, the potential for litigation increases considerably. This is particularly true where the Government is expected to ramp up enforcement efforts following disbursement of stimulus funds. Indeed, in announcing the allocation of additional funds, HHS Secretary Azar promised “significant anti-fraud and auditing work . . . by HHS, including the work of the Office of the Inspector General,” to enforce the conditions imposed on the disbursements. The Government’s efforts likely will focus on clear cases of willful fraud, rather than good-faith disputes over the meaning of ambiguous language in the terms and conditions. But recipients of relief funds cannot rely on good faith and prosecutorial discretion alone, because private relators still have significant financial incentives to pursue FCA claims. Ambiguous terms and conditions provide relators (and creative attorneys) a potential path to generate claims the Government probably would not pursue. Fortunately for recipients of Provider Relief Fund payments, the federal courts generally hold that a defendant will not face FCA liability for violating a vague or ambiguous law, regulation, or contractual condition if the defendant’s interpretation of the condition was objectively reasonable. See, e.g., United States ex rel. Donegan v. Anesthesia Assocs. of Kansas City, 833 F.3d 874, 879 (8th Cir. 2016); United States ex rel. Purcell v. MWI Corp., 807 F.3d 281, 288 (D.C. Cir. 2015); United States v. Southland Mgmt. Corp., 326 F.3d 669, 684 (5th Cir. 2003) (en banc) (Jones, J., concurring) (“Where there are legitimate grounds for disagreement over the scope of a contractual or regulatory provision, and the claimant’s actions are in good faith, the claimant cannot be said to have knowingly presented a false claim.”). This principle, which functions as a particularized application of the knowledge or scienter requirement of an FCA claim, “helps to ensure that innocent mistakes made in the absence of binding interpretive guidance are not converted into FCA liability, thereby avoiding the potential due process problems posed by ‘penalizing a private party for violating a rule without first providing adequate notice of the substance of the rule.’” Purcell, 807 F.3d at 287 (quoting Satellite Broad. Co. v. Fed. Commc’ns Comm’n, 824 F.2d 1, 3 (D.C. Cir. 1987)). There is an additional nuance, however: Even if a defendant received funds on the basis of an objectively reasonable interpretation of applicable conditions, the defendant still may be liable “if a Relator (or the United States) produces sufficient evidence of government guidance that ‘warned [the defendant] away from an otherwise reasonable interpretation’ of an ambiguous regulation.” Donegan, 833 F.3d at 879 (quoting Purcell, 807 F.3d at 290). V. Mitigating FCA Risk Associated with Provider Relief Fund Payments The foregoing case law should provide a viable defense for Provider Relief Fund recipients who use funds in accordance with good-faith, objectively reasonable interpretations of HHS’s terms and conditions. But providers should not simply hope to win the interpretive battle after an FCA claim is filed; there are steps providers can take now to bolster the likely strength of their defenses if litigation occurs. First, recipients of Provider Relief Fund Payments should carefully monitor and track the uses of these funds, so they can demonstrate compliance with the terms and conditions. (Relatedly, note that the terms and conditions expressly require compliance with federal financial management and record retention regulations, including 45 C.F.R. §§ 75.302 and 75.361-365). Second, recipients should carefully consider, articulate, and document how particular uses of relief funds meet the HHS conditions. Having supportable financial data to show that the recipient suffered an abnormal loss of revenue that can be attributable to coronavirus will likely be important to defend a recipient’s use of relief funds to support its operating expenses during the public health emergency. With respect to uses that may be debatable, providers should think critically and actively now about how those uses fit within the conditions, rather than waiting to generate a post hoc explanation after litigation arises. For example, in United States ex rel. Donegan v. Anesthesia Associates of Kansas City, the court ascribed some significance to the defendant’s reasonable definition of a vague regulatory term, adopted by the defendant’s Professional Practice Committee and documented in its Corporate Compliance Plan. 833 F.3d at 879. Thoughtful and deliberate development of internal definitions and processes not only helps generate more defensible interpretive positions; it also should help to demonstrate that the recipient is acting thoughtfully and in good faith. While there is some disharmony in the case law regarding the legal significance of a recipient’s subjective good faith, see, e.g., John T. Boese & Douglas W. Baruch, Civil False Claims & Qui Tam Actions § 2.06 (4th ed.), a defendant’s good faith will almost always be relevant to the Government’s exercise of prosecutorial discretion, and to the judges and juries who ultimately decide cases. Third, fund recipients should continue to monitor communications and guidance from HHS regarding the terms and conditions and use of funds. Even where agency guidance may not be legally binding, it often remains important as a practical matter and, even if not dispositive, it can play an evidentiary role in FCA litigation. Fourth, recipients must be vigilant about understanding the nature and purpose of any deposits of Government funds. It is a mistake to take the view that “if HHS deposited the funds in our account, my organization was entitled to them.” The FCA’s reach is very broad—it is not just limited to affirmative requests for funds, but extends also to the knowing retention of overpayments and so-called “reverse” false claims. See 31 U.S.C. § 3729(a)(1)(G). Finally, recipients should seek the advice of counsel regarding appropriate uses of Provider Relief Fund payments and other applicable conditions and regulatory requirements. Good, proactive legal advice can help mitigate the risk of facing FCA claims, and under certain circumstances can even provide a defense to an FCA claim if litigation occurs. See, e.g., United States ex rel. Bidani v. Lewis, 2001 U.S. Dist. LEXIS 260, at *24 (N.D. Ill. 2001) (citing United States v. Cheek, 3 F.3d 1057, 1061 (7th Cir. 1993)). It should be noted, however, that the advice-of-counsel defense may not be available to a defendant who “shops around” for a favorable legal opinion or otherwise does not act in good faith. See United States ex rel. Drakeford v. Tuomey Healthcare Sys., Inc., 792 F.3d 364, 380 (4th Cir. 2015). VI. Conclusion The Provider Relief Fund offers crucial support to hospitals, clinics, and other providers who face dire and immediate financial need. Providers in need of assistance certainly should avail themselves of this support as appropriate, but should be conscious of the attendant risks. Proactive, deliberate compliance actions are the best way to mitigate the risks of costly litigation likely to sweep through the healthcare industry on the heels of the COVID-19 pandemic.   [1] “[F]or all care for a presumptive or actual case of COVID-19, Recipient certifies that it will not seek to collect from the patient out-of-pocket expenses in an amount greater than what the patient would have otherwise been required to pay if the care had been provided by an in-network Recipient.”  

An importer recently agreed to pay $5.2 million to settle a False Claims Act (“FCA”) case alleging evasion of antidumping duties (“AD”) on wooden bedroom furniture from China. The importer, Blue Furniture Solutions, LLC (now doing business through its successor, XMillenium LLC), allegedly imported merchandise into the United States using false descriptions and invoices that claimed the merchandise was outside the scope of the China wooden bedroom furniture AD order, and therefore not subject to a 216.01% AD rate. Using the FCA’s qui tam provisions, the importer’s competitor brought the case in the Western District of Texas as a “relator” (i.e., whistleblower) in 2015, claiming that U.S. Customs and Border Protection (“CBP”) was deprived of $1.7 million in AD payments because of the importer’s intentional misrepresentations. After investigating the allegations, the U.S. Department of Justice (“DOJ”) decided to intervene under the FCA. On April 14, 2020, DOJ announced the $5.2 million settlement, which includes a $4.7 million payment by the importing company, and a $550,000 payment by the importer’s former corporate executives as their personal liability. In addition, the former corporate executives pleaded guilty last year in a related criminal prosecution for their roles. The FCA settlement appears in the civil case, United States ex rel. University Loft Company v. Blue Furniture Solutions, LLTC et al., No. 15-CV-588-LY (W.D. Tex.). The related criminal matter appeared under the case name United States v. Zeng, No. 19-CR-64-DCN (D.S.C.). The FCA permits actions against importers and other parties involved in importations for knowingly evading duties owed to CBP. Under the FCA, liability is three times the amount of import duties that should have been paid to CBP, and the relator in a qui tam action may be entitled to a portion of the U.S. Government’s recovery as an award. The U.S. Government has a variety of tools to investigate and prosecute alleged duty evasion. Under the FCA, importers’ competitors may become “whistleblowers,” file a complaint in federal district court alleging duty evasion, and seek an award from any recovery. Separately, CBP and DOJ can charge importers with civil and criminal penalties for duty evasion and recover unpaid duties under customs law. CBP and its sister agency, U.S. Immigration and Customs Enforcement, use investigative resources to help detect underpayment of duties to pursue those cases. The Department of Commerce also frequently investigates evasion of AD and countervailing duty (“CVD”) orders. The Trump administration has imposed tariffs on a variety of imports from China and the European Union under Section 301 of the Trade Act of 1974, subject to certain exclusions. In addition, new duties have been placed on imports of aluminum and steel products from all countries under Section 232 of the Trade Expansion Act of 1962, with certain exceptions. These tariffs can lead to significant liability for importers that incorrectly declare the tariff classification, origin, valuation, liability for additional duties such as AD/CVDs, or applicability of tariff exclusions to CBP. Dorsey & Whitney attorneys can help review a company’s imports to assess risks and potential mitigation measures for any inaccuracies in import declarations, as well as respond to any FCA or other U.S. Government claims of unpaid import duties.

On Monday, the U.S. Court of Appeals for the Eighth Circuit affirmed the Eastern District of Missouri’s dismissal of appellant’s retaliation claim under the False Claims Act, as well as his state law wrongful discharge claim and quasi-contract claims. The decision, Sherman v. Berkadia Commer. Mortg. LLC, No. 19-1373, 2020 U.S. App. LEXIS 11713 (8th Cir. Apr. 14, 2020), is yet another example of the difficult “but-for” causation standard required by the Eighth Circuit—but not all circuits—to establish a prima facie case of retaliation under the FCA. Appellant, Richard Sherman, was a former senior vice president and chief underwriter for Berkadia Commercial Mortgage LLC. Sherman was responsible for a team of underwriters that reviewed mortgages to ensure Berkadia’s compliance with the Department of Housing and Urban Development’s (“HUD”) commercial lending regulations. Sherman’s role required him to voice concerns if his team suspected HUD violations or other wrongdoing. As described in the opinion, tensions arose between Sherman and Berkadia. Eventually, the relationship between Sherman and Berkadia’s production manager became unworkable and Berkadia procured an outside consultant to mediate the situation. When those efforts failed, Berkadia terminated Sherman’s employment. Sherman sued Berkadia alleging, among other things, retaliation in violation of the False Claims Act. Berkadia brought a motion for summary judgment, which the district court granted in full and the Eighth Circuit affirmed. The appeals court concluded Sherman failed to meet his burden of proof necessary to establish a prima facie case of FCA retaliation. That burden required that Sherman show “(1) [he] engaged in protected conduct, (2) [Berkadia] knew [he] engaged in protected conduct, (3) [Berkadia] retaliated against [him], and (4) the retaliation was motivated solely by [Sherman's] protected activity.” Id. at *10 (citing United States ex rel. Strubbe v. Crawford Cty. Mem’l Hosp., 915 F.3d 1158, 1168 (8th Cir. 2019)). The court emphasized, regarding the fourth element, that “[t]he ‘motivated solely by’ causal link required as part of the prima facie case of a FCA retaliation claim is tighter than that required in other types of retaliation and discrimination claims where we use the same McDonnell Douglas framework.” Id. at *11 (citations omitted). It is “tighter” because it establishes “but-for” causation. Id. Moreover, it is especially tight in the Eighth Circuit because “but-for” causation is required at the prima facie stage. Other circuits only apply a “causal connection” or similar standard at the prima facie stage, and reserve “but-for” causation at the final pretext stage. See Garcia v. Prof’l Contract Servs., 938 F.3d 236, 241-43 (5th Cir. 2019) (noting “[t]he circuits are split on this issue,” and holding consistent with the Third and the Fourth Circuits that “the heightened but-for causation requirement applies only in the third step (the pretext stage) of the McDonnell Douglas framework”); Singletary v. Howard Univ., 939 F.3d 287, 293 (D.C. Cir. 2019) (requiring that “the retaliation was motivated ‘at least in part’ by her protected activity”). In Sherman’s case, the court concluded that he failed to meet the Eighth Circuit’s but-for standard at the prima facie stage because the record evidence showed that Sherman failed to meet Berkadia’s performance expectations, especially with regard to his inability to cooperate with others. Thus, no reasonable jury could find Berkadia fired Sherman “solely” because of activity protected under the FCA. Although Sherman waived his wrongful discharge claim on appeal, the court also held he failed to show that Berkadia’s activity violated “clearly mandated public policy.” This decision serves as a reminder of the Eighth Circuit’s position requiring “but-for” causation to prove a prima facie case in support of a FCA retaliation claim, but also a reminder that not all circuits are as “tight” as the Eighth Circuit on this issue.

As the public health and economic responses to COVID-19 dominate the headlines and traditional government enforcement actions slow, anticipate a significant increase in government enforcement actions, internal investigations related to corporate fraud, and qui tam (whistleblower) actions in the coming months.  The CARES Act contains appropriations for tens of millions of dollars for agency inspector general enforcement.  Leaders in federal law enforcement are telling us they are shifting enforcement priorities to target individuals and businesses for fraud, waste, and abuse related to COVID-19.  This effort will last for years given the trillions of government dollars now pouring into the economy.  These investigations will focus on decisions and actions (or inactions) being made now.  Organizations must be looking to mitigate risk now. Current Enforcement Picture – Scams, Statement Prosecutions, and Snake Oil State law enforcement authorities are forming task forces to combat fraud, waste, and abuse related to COVID-19.  Prosecutions will initially focus on fraudsters and price gougers seeking quick gains.  Arizona and Georgia are among the latest to form such task forces, joining many others, including Nevada, South Carolina, New Jersey, Pennsylvania, Kentucky, and Louisiana.  They are also already producing results.  On April 9, for example, Georgia announced its task force arrested a woman for illegally selling an unregistered pesticide as a cure for the coronavirus. The task forces are joint operations between state and federal agencies, which is unsurprising given the specialized knowledge of state investigators and Attorney General William Barr’s direction to every U.S. Attorney’s Office on March 16 “to prioritize the detection, investigation, and prosecution of all criminal conduct related to the current pandemic.”  The Department of Justice has also created at least one nationwide federal law enforcement task force.  In a March 24 Memorandum Attorney General Barr announced the creation of the “COVID-19 Hoarding and Price Gouging Task Force.”  This task force announced on April 10 the arrest of a man for wire fraud for attempting to sell $750 million in nonexistent personal protective equipment to the Department of Veteran Affairs.  In a March 16 letter, the National Whistleblower Center encouraged Attorney General Barr to form additional nationwide task forces, including a task force to monitor and investigate COVID-19 related False Claims Act allegations. Small Businesses and Shareholders On March 27, the CARES Act made $350 billion available in loans to small businesses under the Paycheck Protection Program (PPP).  The SBA made it clear in its Interim Final Rule that the applications, and hence the money, would be available on a “first-come, first-served” basis.  The SBA approved the final loan application form on March 31, and small businesses scrambled to submit applications beginning April 1. The PPP loan application for borrowers requires small businesses—i.e., generally fewer than 500 employees—to certify their eligibility as a small business. Numerous businesses may run afoul of SBA’s affiliation rules, which prevent large organizations consisting of multiple small affiliated businesses from qualifying for loans intended for small businesses.  Organizations that falsely certify their small business status for federal funding are at risk for substantial penalties under the False Claims Act and other Federal enforcement statutes.  The risk is especially great here given the pressure on businesses to submit applications, the ambiguity of the loan program guidance and application materials, and the current financial pressures. These same organizations will be under extreme financial pressure in the future to request loan forgiveness.  For example, the loan application requires the applicant to certify that they “understand that loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities, and not more than 25% of the forgiven amount may be for non-payroll costs.”  It also requires the applicant to submit supporting documentation relative to such costs for the eight-week period following the loan.  The pressure to obtain maximum loan forgiveness will be great.  The SBA, too, has announced in its Interim Final Rule that any shareholder, member, or partner of a small business that uses PPP funds for unauthorized purposes will be subject to liability for fraud.  Task forces and whistleblowers and will be watching. Banks and Lenders Predatory lending practices also peak in times of crisis.  Some lending institutions will exploit American consumers to survive financially, and in the worst cases, to make substantial profits.  Consumer protection groups working with task forces are investigating these practices.  Legislators are encouraging regulators to implement rules to protect vulnerable consumers from high interest rates.  Agencies are already paying attention: the SBA is on alert for such frauds and limits the fees a broker can charge a borrower to 3% for loans $50,000 or less and 2% for loans $50,000 to $1,000,000 with an additional ¼% on amounts over $1,000,000. The False Claims Act—and its qui tam whistleblower provision—presents significant risk for lenders and banks participating in the federal stimulus programs.  For example, the PPP loan applications require the borrower to certify “acknowledge[ment] that the lender will confirm the eligible loan amount using required documents submitted.”  But underwriting loans, where time is short and the desire to help borrowers is extremely high, may lead in hindsight to questionable loan acceptances.  Law enforcement may pursue lenders for recklessly disregarding false statements in loan applications.  Qui tam actions are inevitable. Hospitals and Medical Providers When the CARES Act was signed into law on March 27, it allotted $100 billion in relief funds specifically to hospitals and other healthcare providers on the front lines of the pandemic.  On April 10, as part of the “CARES Act Provider Relief Fund,” the U.S. Department of Health & Human Services (HHS) distributed $30 billion of these allotted funds to eligible providers.  Payments to providers are based on their share of total Medicare fee for service reimbursements in 2019.  The payments are not loans, they are not to be repaid, and they are being automatically deposited into provider accounts via direct deposit. Providers must sign an attestation, within thirty days of receiving the payment, confirming receipt of the funds and agreeing to HHS’s terms and conditions of payment.  These terms and conditions include a certification from the provider “that the Payment will only be used to prevent, prepare for, and respond to coronavirus, and shall reimburse the Recipient only for health care related expenses or lost revenues that are attributable to coronavirus.”  In addition, the terms and conditions require the provider to certify “that it will not use the Payment to reimburse expenses or losses that have been reimbursed from other sources or that other sources are obligated to reimburse.”  Providers receiving other federal stimulus loans for similar relief, such as PPP loans for small business providers, may be targets of qui tam relators under the False Claims Act.  Task forces and relators will examine data months and years from now for anomalies and evidence of double dipping. Retail Stores, Wholesalers, and Suppliers Retailers should be wary of price increases for items that limit the spread or effect of COVID-19, such as facemasks, sanitizers, disinfectants, cough medicine, and others.  As scarcity continues to be a concern, the Department of Justice and state governments are responding by implementing and increasing enforcement of price gouging orders. President Trump recently issued Executive Order 13910 on March 23 authorizing the Secretary of Health and Human Services to designate certain healthcare and medical items as protected.  Under the Order and the Defense Production Act, it is a crime to accumulate designated items—which include ventilators, respirators, PPE such as face masks and gloves, sterilization products, and disinfectant products—either over a person’s reasonable needs or to sell it over prevailing market prices.  Attorney General Barr issued a March 24 Memorandum (described in the introduction) stating the Department’s intent to investigate and prosecute violators of the Order and creating the COVID-19 Hoarding and Price Gouging Task Force. Retail stores are at particular risk of enforcement actions related to these orders and should take care when adjusting prices for protected equipment.  In New York City alone, the Department of Consumer and Worker Protection has received more than 7,200 complaints of price gouging related to COVID-19.  New York City has filed three lawsuits against repeat offenders seeking over $100,000 in fines.  With more states putting similar orders into place and the creation of the federal task force, greater enforcement of price gouging rules is inevitable. Procurement Fraud Although it received less attention than the new loan programs, the straight appropriations in the CARES Act presents increased fraud risk.  Appropriated funds will be used to procure PPE, vaccines, COVID-19 tests and other medical supplies, cleaning services, and to fund the construction of new field hospitals and healthcare facilities. Enforcement against procurement fraud is already underway.  As noted in the introduction, the Department of Justice announced on April 10 that it arrested and charged a Georgia man with wire fraud after fraudulently misrepresenting his ability to deliver 125 million facemasks and other personal protective equipment from domestic suppliers to the Department of Veterans Affairs.  The orders would have totaled more than $750 million.  As precedent, in the two years after Hurricane Katrina, the Department of Justice brought 800 prosecutions and conducted numerous qui tam and non-qui tam investigations. Businesses working to fulfill orders for personal protective equipment and other supplies are facing significant increased demand.  Businesses must guard against producing substandard products, ignoring product failures and flaws, and passing through counterfeit product, all of which may lead to civil and criminal enforcement actions. These concerns apply equally to products in development.  Businesses developing therapies and treatments for COVID-19 are under intense market pressure to bring their product to market.  While there is insatiable demand for products that treat the virus, its symptoms, and/or prevent its spread, a business that prematurely brings a product to market that causes patient harm may face substantial exposure after the emergency passes. Whether businesses are new to the government procurement process or serve only government customers, the desire to move quickly cannot ignore compliance risk.  Businesses must certify compliance with applicable regulations in exchange for payment from the government.  Businesses must still pay attention to the details while working fast to satisfy government needs and being paid for that work. What Can My Organization Do Now? Understand the key legal remedies that will drive future risk—statutes like the False Claims Act. Pay attention to the details of government loan and procurement programs.  Know what is required and comply.  The implementing rules are a moving target and are being created “on the fly”—there is no substitute for understanding the details to minimize enforcement risk. Maintain internal controls and due-diligence procedures—through the good times and the hard times. Internal investigations remain—even in this environment—the key tool to identify and mitigate risks.  While internal investigation activity may be slowed by the pandemic and its economic effects, curtailing investigations creates risk that the organization lacks visibility into misconduct or allegations of misconduct. Take internal complaints seriously.  A cottage industry of qui tam relators is coming; the False Claims Act bar is recruiting whistleblowers now.  You can mitigate that risk when internal whistleblowers feel “heard” and have their complaints addressed promptly and effectively. Understand the value of a timely, well-packaged voluntary disclosure to law enforcement or to the applicable agency.  Busy agents and prosecutors may be receptive to “fully potted” disclosures and offer maximum cooperation credit in return.

Less than a year after United States Attorney Christina E. Nolan warned electronic health records (“EHR”) companies in a DOJ press release that they “should consider themselves on notice” following a $57.25 million FCA settlement with EHR software developer Greenway Health LLC, the DOJ announced in a recent press release a $145 million settlement with another EHR vendor, Practice Fusion, Inc.  The settlement includes $26 million in criminal fines and forfeitures, which Practice Fusion agreed to pay as part of a deferred prosecution agreement.  That settlement figure is notable as the largest criminal fine in the District of Vermont’s history.  Practice Fusion agreed to pay another $118.6 million in civil settlement, which includes approximately $113.4 million to the federal government and up to $5.2 million to states that opt to participate in separate state agreements. Practice Fusion, founded in 2005, provided electronic medical record software called Practice Fusion Solution free of charge. Instead of making money through software sales and support, the company supported itself through drug advertising revenues. The government brought both civil and criminal claims against Practice Fusion.  Like the Greenway case, the government alleged Practice Fusion submitted false claims by certifying its EHR software products had specific capabilities when the software apparently did not.  The settlement also resolves claims that Practice Fusion violated anti-kickback laws through programs it ran with opioid and other drug manufacturers.  According to the criminal Information filed in the District of Vermont by U.S. Attorney Nolan—the same district that filed charges leading to the Greenway settlement—Practice Fusion created pain clinical decision support (“CDS”) alerts that were inconsistent with CDC Guidelines and clinical quality measures.  As alleged, these CDS alerts were intended to prompt physicians to prescribe—and therefore increase sales of—extended release opioids in exchange for remuneration from the opioid manufacturer.  The extended release opioid CDS alerts began in 2016, even as the opioid crisis was coming to a head and the CDC released guidelines identifying addiction and overdosing as concerns with opioid use. The settlement is noteworthy for several reasons.  It resolves the first ever criminal prosecution of an EHR company, according to the press release.  It also demonstrates the government’s willingness to combat the opioid crisis by targeting entities other than opioid drug manufacturers.  In addition, the settlement was the result of charges brought solely by the government without any qui tam relators, just like the case in the Greenway settlement, demonstrating the government’s willingness to investigate EHR companies on its own initiative.  Finally, the settlement clearly emphasizes U.S. Attorney Nolan’s prior admonition, “EHR companies should consider themselves on notice.”

On February 5, the U.S. District Court for the Eastern District of Pennsylvania rejected a defendant’s public disclosure bar defense, allowing the relators to proceed with their qui tam action under the False Claims Act. Sturgeon, et al., v. PharMerica Corp, No. 15-cv-6829, 2020 WL 586978, at *1 (E.D. Pa. Feb. 5, 2020).  In denying defendant PharAmerica’s motion to dismiss, the Court explained why the FCA’s public disclosure bar under 31 U.S.C. § 3730(e)(4)(A)—which generally shields defendants from liability when a relator’s allegations have already been publicly disclosed elsewhere—was inapplicable. PharMerica is a long-term care pharmacy that processes prescriptions from nursing home physicians.  As alleged by the relators, PharMerica defrauded Medicare and Medicaid by billing for prescriptions with altered dosages, form (i.e., tablet vs. capsule), and kind (i.e., brand name vs. generic).  More specifically, the relators’ complaint alleges that when PharMerica technicians manually entered data, they did so in a way that did not match the prescription authorized by the physicians.  This conduct allegedly enhanced PharMerica’s profit margins by increasing reimbursements from suppliers. PharMerica moved to dismiss the relators’ allegations under the FCA’s public disclosure bar.  This bar, created by Congress to prevent parasitic lawsuits, generally requires the dismissal of FCA claims when the allegations are “substantially the same” as allegations made public through earlier litigation.  At the time the lawsuit commenced, PharMerica had previously litigated fraud allegations in United States ex rel. Denk v. PharMerica, No. 09-720, (E.D. Wis. July 23, 2009).  Because both lawsuits involved allegations of prescription fraud, PharMerica argued that the allegations are “substantially the same” warranting dismissal. The Court disagreed.  Cautioning against a generalized inquiry, the Court recognized that “a careful look at the details of each alleged fraud” does not demonstrate “substantially the same fraud.”  In particular, the Court noted that although the Denk litigation alleged a number of prescription fraud schemes, each scheme involved the absence of a prescription.  By contrast, the allegations at issue in Sturgeon include the altering of valid prescriptions in a way that maximizes reimbursements.  In other words, the fact that both matters alleged fraudulent prescriptions was not sufficient to trigger the public disclosure bar and preclude liability.  Instead, the Court explained, the relevant inquiry is whether the way each fraudulent scheme is effectuated is “substantially the same.” This decision serves as a reminder that the public disclosure bar requires something more than generic or superficial similarity: it requires a similar “mode and means” of allegedly fraudulent conduct.  Thus, FCA defendants seeking to trigger the public disclosure bar should strive to connect the alleged misconduct to the “how” and “why” of previously disclosed schemes.

In an article published late last year, Dorsey reported on the Department of Justice’s announcement regarding the formation of a new Procurement Collusion Strike Force.  The Strike Force focuses on the nexus between antitrust and public procurement, with the stated aim of targeting antitrust crimes “such as bid-rigging conspiracies and related fraudulent schemes.”  If there was any question whether DOJ was serious about targeting such conduct, a recent DOJ settlement suggests it is. In a press release last week the Department announced a $29 million False Claims Act settlement to resolve allegations that three corporate defendants rigged the bidding of an auction to buy a government loan on the cheap.  The underlying lawsuit accused defendants Hybrid Technology LLC, Hybrid Tech Holdings LLC (collectively, “Hybrid”), and Ace Strength International of rigging bids for the right to acquire a $168.5 million nonperforming loan from the Department of Energy (“DOE”), which was secured by the assets of now-bankrupt Fisker Automotive Inc. and Fisker Automotive Holdings Inc. (collectively, “Fisker”).  Hybrid submitted the sole bid, for $25 million, and won the nonperforming Fisker loan.  The qui tam action was filed by FAH Liquidating Trust, the successor to the official committee of unsecured creditors of Fisker, and its legal counsel William R. Baldiga.  As successful relators, the Trust and Baldiga will receive $5.2 million of the $29 million settlement. The lawsuit more specifically alleges that Hybrid was one of three bidders that made it to the final stage of the DOE’s auction process, the live auction.  The other two bidders were Wanxiang America, Inc. (“Wanxiang”) and WM GreenTech Automotive Corp. (“GTA”).  Hybrid allegedly communicated with Wanxiang to discourage Wanxiang from bidding, including phone calls between Hybrid and Wanxiang executives while the live auction was taking place.  Hybrid allegedly repeated that conduct with GTA, and was successful in dissuading both Wanxiang and GTA from bidding such that Hybrid won the auction with its sole bid for $25 million. Hybrid faced the threat of liability under the FCA for allegedly making false statements and submissions to the government about Hybrid’s independent participation in the auction, per the lawsuit’s allegations.  As a precondition to participating in the auction, the lawsuit alleges Hybrid was required to state that it would “act independently” as a bidder, that its “bids would be submitted in good faith,” and that its participation in the auction would be “conducted in accordance with the law.”  After having won the auction, the lawsuit alleges Hybrid signed a Loan Purchase Agreement with DOE wherein Hybrid further represented it would continue to abide by the law and that its prior statements of independence, good faith, and legal conduct, remained “true and correct in all material respects.”  The lawsuit alleges Hybrid’s collusion with Wanxiang and GTA rendered Hybrid’s statements and representations to DOE false. This particular case was not the direct result of the Department’s new Procurement Collusion Strike Force, as the investigation into Hybrid preceded its creation.  But the case is symbolic of the conduct targeted by the Strike Force, and serves as a reminder that the Department is willing to team up in other ways—here with the relators and a “coordinated effort” led by the Civil Division, the District of Columbia U.S. Attorney’s Office, and DOE’s Office of Inspector General—to root out anticompetitive behavior involving government contracts.  Moreover, to avoid attracting the attention of such authorities, including the Department’s Procurement Collusion Strike Force, organizations in the public procurement space that are involved in joint ventures or that are collaboratively working with business partners should be mindful of the antitrust issues that can surface at the intersection of industry and government contracts.

Earlier this month, the United States Department of Justice issued a press release to announce recoveries of over $3 billion from False Claims Act cases in FY2019. In making the announcement, Assistant Attorney General Jody Hunt of the Civil Division emphasized, “The significant number of settlements and judgments obtained over the past year demonstrate the high priority this administration places on deterring fraud against the government and ensuring that citizens' tax dollars are well spent.” But what do the numbers say about the administration’s reliance on qui tam actions to deter fraud? In short, qui tam actions appear to be less of a priority than they have been historically. The $3 billion in recoveries were announced in conjunction with FY2019 statistics revealing that $2.2 billion of those recoveries came from qui tam actions—lawsuits brought by whistleblowers or “relators” suing on behalf of the government under the FCA’s qui tam provisions. In addition, the FY2019 statistics showed the relators’ shares of the $2.2 billion topped $271 million. These qui tam numbers may appear robust on their own, but the following chart shows they are well below their five and ten year historical averages: Qui Tam Recoveries Total Recoveries (Qui Tam & Non-Qui Tam) % Qui Tam Recoveries to Total Recoveries Relators’ Share of Qui Tam Recoveries % of Relators’ Share to Total Recoveries FY2019 2,210,401,366 3,054,425,050 72% 271,941,791 9% 5 Yr Avg. 2,587,832,070 3,493,333,981 75% 437,397,496 13% 10 Yr Avg. 2,902,873,770 3,791,266,748 78% 489,500,130 13% The decline in qui tam recoveries to total recoveries, and the decline in the share of relators’ recoveries to total recoveries, perhaps are not that surprising. Blog readers may remember FCA Now’s earlier reports on Attorney General William Barr’s documented disdain for the FCA’s qui tam provisions in 1989 when he served in the Office of Legal Counsel to provide advice to the President and executive branch agencies. In that role, Attorney General Barr wrote a memorandum arguing that the qui tam provisions of the FCA were “patently unconstitutional” and that private qui tam actions were a “devastating threat to the Executive’s constitutional authority.” Those earlier views may have influenced the present based on the Department’s latest historical data, but there are other factors in play, too. For example, in January 2018, over a year before Barr became the Attorney General in February 2019, the Department of Justice instructed its prosecutors in what is known as the “Granston Memo” to more seriously consider dismissing meritless FCA qui tams when in the government’s best interest to do so. The Department’s announcement, in fact, emphasized that the FCA provides “authority for the government to dismiss cases that do not advance the goal of fraud prevention, and during the past year the government made increasing use of this tool to help prioritize and protect the expenditure of government resources.” In addition, the United States Supreme Court’s decision nearly four years ago in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), which required courts to apply a “rigorous” and “demanding” standard of materiality in FCA actions, may have resulted in more dismissals and smaller settlements. In other words, relators and their counsel—the ones responsible for filing qui tams—may be less willing to pursue such cases in today’s post-Granston and post-Escobar world. Time will tell of course whether the downward trend of qui tam recoveries continues, but because the Department’s announcement also revealed that new qui tam matters for FY2019 (636) are at their lowest number since 2011 (634), and are well below the five and ten year historical averages (662 and 665, respectively), lower overall qui tam and relator recoveries seem certain for FY2020.

On November 21, 2019, the Second Circuit held that allegedly fraudulent loan requests presented to one or more of the Federal Reserve System’s twelve Federal Reserve Banks are “claims” within the meaning of the FCA. The court clarified that while personnel of those Federal Reserve Banks are not officers or employees of the United States, the Federal Reserve Banks themselves are agents of the United States and fraudulent requests to them are subject to the FCA. In so holding, the court revived a long-running whistleblower case and rejected the arguments of the lower court, the U.S. Government, and the Federal Reserve Board of Governors. The lawsuit was first filed by plaintiffs in 2012. According to the complaint, two banks engaged in a massive fraud in the early to mid-2000s against the U.S. Department of the Treasury by representing to regional Federal Reserve Banks that they were in sound financial condition and thus eligible for desirable credit programs. The regional Federal Reserve Banks are subject to a Board of Governors, but their stock is held by private commercial banks. According to the federal government, the regional banks administer their money-lending activities for themselves. The regional banks’ loans are delivered in the form of credit to the borrowing bank, not lent out of federal money. The lower court—U.S. District Judge Brian M. Cogan for the Eastern District of New York—dismissed the fourth amended complaint in May of 2018. The lower court concluded that under the Federal Reserve Act, the 12 Federal Reserve Banks (one for each of the Federal Reserve’s 12 districts) are private corporations separate from the actual Federal Reserve System. Moreover, because the Federal Reserve Banks do not receive government money, the lower court concluded that defendants could not be properly accused of submitting false claims to the government by requesting loans from the regional banks. On appeal, the Second Circuit requested that the government weigh in on whether regional Federal Reserve Banks should be considered part of the government for FCA purposes. In August of 2019, the Federal Reserve Banks’ Board of Governors responded unequivocally that the regional banks should not be treated as part of the government due to their relative autonomy and lack of government appropriations. The Board of Governors likened the regional banks to other “federally chartered corporations” such as Amtrak, Fannie Mae, and Freddie Mac, entities that courts have treated as separate from the government for FCA claims. The Second Circuit disagreed. According to the appellate panel, the federal government created the regional banks to extend emergency credit to banks on the federal government’s behalf. Those regional banks must extend emergency credit in compliance with regulations from the Board of Governors—an independent agency within the executive branch. The appellate panel stated that the FCA does not require “agents” for purposes of the Act to be actual government agencies, but instead merely requires that those agents are empowered to act on behalf of the government. The Second Circuit’s opinion is a major win for qui tam relators. The Second Circuit affirmed that in enacting the FCA, “the objective of Congress was broadly to protect the funds and property of the Government from fraudulent claims, regardless of the particular form, or function, of the government instrumentality upon which such claims were made.” The case is U.S. ex rel. Kraus et al. v. Wells Fargo & Co. et al., Case Number 18-1746, in the U.S. Court of Appeals for the Second Circuit.

Following the passage of the Affordable Care Act (“ACA”), which placed new limits on physician-owned hospitals, St. Luke’s Health System (“System”) took action to change one of its hospital’s ownership structures through a buy-out of the physicians’ partnership interests pursuant to the Texas Securities Act (“TSA”). The TSA allows rescission for the original price paid for a security, plus interest, in exchange for a release of potential liability under TSA. Three of the physician-owners, who resisted the System’s attempt to rescind their ownership interests, sued the System and other defendants in connection with the buy-out alleging state-law violations and violations of the Anti-Kickback Statute (“AKS”), 42 U.S.C. § 1320a-7b(b), the Stark Law, 42 U.S.C. § 1395nn, and by extension, the False Claims Act (“FCA”), 31 U.S.C. § 3729-3733. The district court dismissed the federal claims with prejudice. U.S. ex rel. Patel v. Catholic Health Initiatives, 312 F. Supp. 3d 584 (S.D. Tex. 2018). Relying heavily on the district court’s lengthy and thorough decision, the United States Court of Appeals for the Fifth Circuit affirmed in a nonprecedential decision. U.S. ex rel. Patel v. Catholic Health Initiatives, 2019 U.S. App. LEXIS 34741 (5th Cir. Nov. 20, 2019) (per curiam). The physician Relators first alleged that the process by which the physician-owners were bought out under the TSA resulted in payments to the physician-owners substantially above market value of their stakes in the hospital. According to the Relators, these high prices were set with the intent by the System of maintaining referral relationships with those physicians, in violation of the AKS and Stark Law. The Relators’ second alleged scheme concerned the System’s false representations to federal and state health care programs about the true ownership of the hospital. The Relators alleged that despite their retained ownership in the hospital after the partial buyout process, the System began representing to the government that the partnership was defunct and that a different entity owned the hospital. According to the Relators, this rendered the System’s representations factually false, leading to violations of both the FCA and the Texas Medicaid Fraud Prevention Act. Ultimately, the district court reasoned that while the Relators “might well have had legitimate grievances” and that the complaint had “an abundance of detail,” the claims “[did] not add up to liability under the [FCA]” because “the [FCA] ‘is not an all-purpose antifraud statue or a vehicle for punishing garden-variety breaches of contract or regulatory violations.’” U.S. ex rel. Patel, 312 F. Supp. 3d at 589 (quoting Univ. Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 2003 (2016)). “More is needed to establish that false or fraudulent claims have been made on the government.” Id. The Fifth Circuit affirmed, rejecting the Relators’ AKS and Stark Law claims because the System “had a reasonable basis to utilize the TSA approach” to try to comply with the ACA, “and nothing ties the allegedly high payment for physician shares to any inducement or referrals.” U.S. ex rel. Patel, 2019 U.S. App. LEXIS 34741, at *5. In affirming the dismissal of the FCA claims, and rather than relying on the district court’s analysis of whether the ownership representations were factually or legally false, the Fifth Circuit “conclude[d] that the alleged falsity, under the circumstances of this case, was not material.” Id. at *8. Because “[n]othing in Relators’ filings suggests that that the government would stop the flow of funds to this hospital if it knew the truth of its ownership,” and because “the System has continued to submit claims and receive reimbursement, even after a court determined that the entity designated as owner of the [h]ospital was not really the owner,” the Fifth Circuit found the alleged falsity immaterial. Id. at *9-10. “This suggests that the government does not care who the 'rightful' owner of the hospital is, and Relators have not alleged facts to the contrary.” Id. at *10. The case is another example of Escobar in action, and a reminder that FCA claims, even if very detailed with allegations of breaches of contract and regulatory violations, are unlikely to survive a motion to dismiss unless the materiality of the false claims can be established.

The False Claims Act (“FCA”) is an ever-present concern among health care providers and counsel, which is why it is no surprise that the Department of Health and Human Services' (HHS) recent “Regulatory Sprint to Coordinated Care” may impact FCA enforcement trends.  Dorsey’s Health Law Blog team has been closely monitoring the “Regulatory Sprint,” including the sweeping set of proposed regulations issued by the HHS Office of Inspector General (“OIG”) and Centers for Medicare & Medicaid Services (“CMS”) that introduce significant new value-based terminology, safe harbors and exceptions to the federal anti-kickback statute (“AKS”) and federal physician self-referral law (“Stark Law”), respectively. These developments are of note for potential FCA enforcement trends, particularly because the AKS provides that a claim that includes items or services resulting from a violation of the AKS constitutes a false or fraudulent claim for purposes of the FCA.  Further, the federal government and qui tam relators are increasingly pursuing alleged violations of the Stark Law under the FCA, based on arguments, for example, that claims submitted in violation of the Stark Law are false claims for FCA purposes.  The new proposed AKS safe harbors and Stark exceptions and policy clarifications from the agencies that are intended to ease compliance burdens may potentially lead to fewer alleged violations of non-compliance with these laws, and thus fewer FCA actions based on non-compliance with them. To read more about the Regulatory Sprint, Dorsey’s FCA Now blog is pleased to refer you to Dorsey’s Health Law Blog landing page for an overview and link to further resources.

The Second Circuit Court of Appeals recently emphasized the heightened pleading standard that a relator in a qui tam False Claims Act (“FCA”) suit must satisfy to avoid dismissal under Rule 12(b)(6). United States ex rel. Gelbman v. City of New York, Case No. 18-3162, 2019 U.S. App. LEXIS 30889 (2d Cir. Oct. 17, 2019). In Gelbman, the relator, a former information specialist for the New York State Department of Health (“NYSDOH”), filed a complaint against New York City (“the City”) and the New York City Health and Hospital Corporation (“HHC”) under the FCA claiming more than $14 billion in fraudulent billings. United States ex rel. Gelbman v. City of New York, Case No. 14-cv-771, 2018 U.S. Dist. LEXIS 169435 (S.D.N.Y. Sept. 30, 2018). The relater alleged that he, in his former position with the NYSDOH, participated in regular meetings for approximately 9 years in which representatives from the City and the NYSDOH “conspired to manipulate and rig” the manner in which Medicaid claims were processed through an automated computer screening tool. Id. at *5. Upon observing the alleged scheme, the relator alleged he pressed his supervisor to explain why certain Medicaid claims were being paid despite not meeting the requisite criteria, to which his supervisor responded that the payments were necessary to avoid the City’s “financial ruin” and “political problems [in] the administration.” Id. In his complaint, the relator included specific details of the alleged scheme. Specifically, the relator described five types of false claims the City allegedly caused the State to pay – untimely claims, claims lacking valid prior approval, duplicative claims, provider ineligible claims, and claims already paid by other insurance. Id. at *5-6. For each type of claim, the relator provided at least one “exemplar claim,” which included payment information such as dates, amounts, and the edit codes used in the claims processing platform. Id. at *6. According to the relator, each of these five categories of claims had been routinely flagged as “edits” by the online processing system as ineligible claims but were nevertheless submitted by the City to the federal government for reimbursement. Id. Despite these details, the district court dismissed the complaint for failing to satisfy the particularity requirements imposed by Rule 9(b). The court noted that “[t]he crux of Relator's allegations is that certain edit codes . . . were applied to claims that various New York City medical providers submitted to Medicaid.” Id. at *19. The court concluded inter alia that this allegation, even when coupled with detail about the edit code and exemplar claims, was insufficient to plead fraud because the relator failed “to allege how the existence of an edit rendered the claim false or why the claim was not ultimately entitled to payment.” Id. On appeal, the Second Circuit Court of Appeals affirmed the district court’s decision. Gelbman, 2019 U.S. App. LEXIS 30889. Even though the relator alleged irregularities in the City’s Medicaid claim process to support his fraud theory, coupled with corroborating evidence, the Second Circuit concluded that the “flagged edits” that suggested fraud were not sufficient to meet the Rule 9(b) standard. That claims were flagged as ineligible prior to their submission for payment did not necessarily mean the claims were fraudulent. Id. at *7-8. For instance, the flag itself might have been error later discovered and corrected, or the underlying problem that caused the flag may have been addressed prior to submission. Id. Thus, to adequately plead FCA claims under the relator’s theory, the relator needed to allege how the online payment processing system was rigged or who in particular carried out the rigging to cause the fraudulent submissions to close the missing link in his theory and establish “the eligibility status of the Medicaid claims at the time of their submission to the federal government.” Id. at *7 (emphasis in original). The relator did neither. For this reason, among others, the Court affirmed the dismissal of the FCA claims because it was “left to speculate as to the specific design and implementation of a scheme that purportedly defrauded the federal government of more than $ 14 billion over the course of six years.” Id. at *9-10. As evidenced by the Second Circuit’s decision in Gelbman, where “there’s smoke, there’s fire” is an adage not applicable to many claims asserted under the FCA. The decision serves as a reminder that the FCA’s heightened pleading standards operate to winnow out claims that do not plead the alleged fraud with particularity by specifying the fraudulent statements, who made them, where and when they were made, and why the statements were fraudulent. Id. at *6-7.

The Department of Justice can move to dismiss a whistleblower’s claim under the False Claims Act without first holding an in-person hearing, the Third Circuit recently ruled in Chang v. Children’s Advocacy Center of Delaware, No. 18-2311 (3d Cir. Sept. 12, 2019). The FCA requires that a qui tam relator have “an opportunity for a hearing” if the DOJ moves to dismiss. 31 U.S.C. § 3730(c)(2)(A). But in a precedential opinion authored by Judge David J. Porter, the Third Circuit panel held that an “opportunity” does not equate to a guaranteed hearing. The court joined other jurisdictions in holding that the FCA does not require a hearing “unless the relator expressly requests a hearing or makes a colorable threshold showing of arbitrary government action.” Here, the relator never requested a hearing, and the court characterized the relator’s filing opposing dismissal as failing to demonstrate arbitrary government action. The court declined to weigh in on a putative circuit split as to whether a court must approve the DOJ’s dismissal of a qui tam action. The D.C. Circuit has held that the DOJ has “an unfettered right” to dismiss a qui tam action, and need not seek court approval. Swift v. United States, 318 F.3d 250, 252–53 (D.C. Cir. 2003); Hoyte v. Am. Nat’l Red Cross, 518 F.3d 61, 65 (D.C. Cir. 2008). On the other hand, the Ninth and Tenth Circuits require the government to prove to the court that there is (1) “a valid government purpose” for the dismissal, and (2) “a rational relation between dismissal and accomplishment of the purpose.” Id. at 1145. If the government meets these prongs, “the burden switches to the relator to demonstrate that dismissal is fraudulent, arbitrary and capricious, or illegal.” United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145–46 (9th Cir. 1998); United States ex rel. Ridenour v. Kaiser-Hill Co., LLC, 397 F.3d 925, 934–35 (10th Cir. 2005). The Third Circuit found that the relator’s showing fell short even under the stricter standard of the Ninth and Tenth Circuits. The Third Circuit’s ruling lends further support to the DOJ’s recent and increasing trend towards dismissing those qui tam actions that it declines to join. The trend finds its roots in the Granston Memo, authored in January 2018, which has since been adopted as formal DOJ policy. With the Granston Memo, the DOJ encouraged prosecutors to dismiss declined qui tam actions, due to the purported waste of DOJ resources and risk of engendering unfavorable precedent in weak cases. Per the Memo: “Even in non-intervened cases, the government expends significant resources in monitoring these cases and sometimes must produce discovery or otherwise participate. In cases that lack substantial merit, they can generate adverse decisions that affect the government’s ability to enforce the FCA.” Regardless of whether a court needs to approve a dismissal, Senator Chuck Grassley wrote a letter to Attorney General Barr on September 4, 2019, expressing concern that the DOJ was too eager to dismiss FCA claims. Senator Grassley alleged that the DOJ had moved to dismiss multiple cases “without first conducting cost-benefit analyses or other evaluations of the merits of a case.” He also asked Attorney General Barr to consider whether the Granston Memo creates “perverse incentives for alleged fraudsters to engage in abusive litigation tactics to prompt a case’s dismissal.” Grassley’s defense of FCA qui tam actions comes as no surprise; he was one of the primary authors behind the 1986 amendments that revived the FCA and authorized qui tam actions. Given Attorney General Barr’s previously documented hostility to FCA actions—in 1989 he argued the qui tam provisions of the FCA were “patently unconstitutional”—it is not clear how the Attorney General will respond to Senator Grassley’s letter. For the moment, at least, the table appears set for the DOJ to continue dismissing declined qui tam actions, as highlighted by the recent decision of the Third Circuit (and a recent decision of the Eighth Circuit, as previously reported here by this blog). Defendants that are embroiled in these claims should remain cognizant of the opportunity, under the right circumstances, for an early exit with the support of the DOJ.

Last month, the D.C. Circuit revived a False Claims Act (“FCA”) retaliatory discrimination claim by a former employee of Howard University contending that she was fired by the University for objecting both internally and externally to the University’s alleged failure to maintain the humane laboratory animal living conditions on which the University’s receipt of federal funding was conditioned. See Singletary v. Howard University, No. 18-7158 (D.C. Cir. Sept. 20, 2019). The lower court dismissed the case for failure to state a claim and denied the employee’s motion for leave to amend her complaint on the grounds of futility. In reversing the lower court’s decision, the D.C. Circuit reasoned that the lower court took too narrow of a view of the FCA’s protection for whistleblowers, and clarified the proper standards for analyzing what constitutes protected activity under the FCA’s anti-retaliation statute. As a voluntary recipient of funding from the federal government for research activities involving live animals, the University is subject to the Animal Welfare Act and the Health Research Extension Act. In addition to mandating internal compliance with these acts and their corresponding regulations, they also require that each qualifying institution file a report with the Department of Agriculture and the National Institutes of Health (“NIH”) certifying compliance with the required animal welfare standards. These certifications are necessary for research institutions to receive and retain grant monies. In her proposed amended complaint, the plaintiff, Dr. Sylvia Singletary, alleged the following. In 2013, Singletary was retained by the University for a 30-month appointment as the Attending Veterinarian at its Medical School. Singletary alleges that over an approximately nine month period she repeatedly warned her direct reporting superior that the air temperature in the laboratory animals’ living quarters was too high, was not in compliance with the NIH standards, and constituted violations of the terms and conditions of the University’s grants from the NIH. She urged him to take corrective action to remedy the temperature deviations and report the non-compliance to the federal government, but her superior did neither. She then voiced her concerns with the Dean of the Medical School and another superior, who both likewise were unresponsive. Over the same time period that Singletary was registering warnings and complaints internally, the University made certifications to the NIH and other federal agencies that the laboratory animals were being maintained and cared for under certain federally mandated ambient living conditions. Things came to a head when in mid-April 2014, Singletary arrived at work to find 21 mice dead from apparent heat exhaustion. Because she believed her superiors had not acted in response to her prior complaints, she took matters into her own hands by e-mailing the NIH directly to report the rodents’ deaths and air temperature issues generally. The NIH thanked Singletary and directed her superior to submit a corrective action plan; this prompted the University to finally solve the air temperature problem. Shortly thereafter, Singletary’s superior excoriated her at a faculty meeting and the University subsequently notified Singletary that it was cutting her appointment short by six months. Singletary subsequently filed a lawsuit against the University alleging that the University’s termination of her employment constituted a violation of the FCA’s anti-retaliation provision (31 U.S.C. § 3730(h)). The FCA offers protection to whistleblowers who seek to expose or to prevent government fraud. To make out a claim of retaliation under the FCA, a plaintiff must plead facts showing: (1) that he/she engaged in protected activity, (2) because of which he/she was retaliated against. To satisfy the second element, a plaintiff must further allege (a) that the employer knew he/she engaged in protected activity, and, at least in the D.C. Circuit, (b) that the retaliation was motivated at least in part by his/her protected activity (the majority of circuits require “but-for” causation). As the Court explained in its opinion, protected activity under the FCA takes two forms: (1) lawful acts done in furtherance of an action under the FCA – that is, steps taken antecedent to a FCA proceeding; namely, investigating matters that reasonably could lead to or have a distinct possibility of leading to a viable FCA claim; or (2) lawful acts done in furtherance of other efforts to stop one or more violations of the FCA. In Singletary, the Court focused its analysis on the second protected activity prong, which unlike the first, is not tied to the prospect of a FCA proceeding. Instead, it focuses on the whistleblower’s efforts to stop violation of the statute before they happen or recur. As the Court explained, “[t]o put it simply, the focus of the second prong is preventative—stopping ‘violations’—while the first prong is reactive to an (alleged) actual violation of the statute.” Like the first prong, the second prong requires that the employee’s efforts pertain to fraud in connection with the submission of a claim for federal government funds. That test is met if the employee has an objectively reasonable belief that the employer is violating, or will violate, the FCA. This reasonable belief standard is meant to avoid burdening a lay person with the “sometimes impossible task” of correctly anticipating how a given court will interpret a particular statute. The Court found that Singletary’s proposed amended complaint sufficiently alleged protected activity under the second prong, and thus reversed the lower court. In doing so, the Court first reasoned that the lower court had incorrectly analyzed the second protected activity prong to require the plaintiff to have investigated matters that reasonably could lead to a viable FCA claim. The Court clarified that this requirement only applies to the first prong, as the second prong focuses exclusively on preventing or abating violations of the law in the first place. Second, the Court stated that the lower court had wrongly required Singletary to allege that her efforts were outside the scope of her responsibilities as Attending Veterinarian; a causal inquiry that also only applies to the first prong. Thus, the Court held that when viewed through the proper lens, the proposed complaint plausibly alleges that Singletary undertook lawful acts in furtherance of her efforts to stop one or more violations of the FCA. The Court also went on to find that Singletary had plausibly alleged the remaining elements of a retaliation claim, which require a showing of (a) a qualifying retaliatory employment action; (b) the University’s knowledge that she was engaged in protected activity; and (c) facts showing that the employment action was caused by engagement in that activity. The Court also pointed out that the lower court incorrectly suggested that FRCP 9(b)’s heightened pleading standard for fraud is applicable to the relation claim. The Court clarified that while FRCP 9(b) does apply to FCA qui tam actions, it does not extend to retaliation claims because such claims do not themselves assert or seek to prove actual fraud. The D.C. Circuit’s opinion provides a useful clarification for lower courts regarding the differing and applicable standards for analyzing what constitutes protected activity under the first and second prongs of the anti-retaliation statute. As the Court reiterated throughout its opinion, the second prong is focused on conduct that is meant to prevent or abate violations of the FCA, when the employee reasonably believes the employer has or will violate the law.

In early August, the U.S. District Court for the Western District of Texas granted a hospital system’s motion to dismiss a False Claims Act case that illustrates the increasing intersections in FCA litigation between data analytics and health care providers’ efforts to increase revenue through aggressive management of coding and billing practices. United States ex rel. Integra Med Analytics, LLC v. Scott et al., No. 5:17-CV-886-DAE, 2019 U.S. Dist. LEXIS 136547 (W.D. Tex. Aug. 5, 2019). Plaintiff Integra Med Analytics bills itself as a data analytics and litigation support firm, but it also files FCA cases as a relator. Integra alleged the defendants, including Baylor University Medical Center-Dallas and related entities, engaged in a scheme to submit fraudulent Medicare claims by systematically upcoding claims with “Complication or Comorbidity” (“CC”) or “Major Complication or Comorbidity” (“MCC”) codes, which add $1,000 to $25,000 to the value of reimbursement claims. Integra’s allegations focused on the defendants’ training programs that allegedly encouraged doctors to apply MCC and CC codes, and encouraged use of terminology in medical records that would justify application of these codes. Integra pressed for an inference of fraud based on its statistical analysis, which purportedly showed the defendants’ use of certain MCC and CC codes was above average as compared to other hospitals. The defendants moved to dismiss, attacking the case as a classic “parasitic” FCA claim brought by a serial relator and argued the FCA’s public disclosure bar foreclosed the suit because Integra’s analytics brought no new information to the government beyond what was already inherent in the underlying CMS data. They also contended Integra’s allegations of fraud were mere conclusions and opinions, unsupported by specific factual allegations, and thus Integra had failed to state a plausible claim for relief under Rule 8(a) or plead the alleged fraud with particularly under Rule 9(b) of the Federal Rules of Civil Procedure. The Court agreed that Integra failed to plead sufficient facts to make out a plausible claim for relief. Citing CMS guidance “encourag[ing] hospitals to engage in complete and accurate coding,” and to “focus their documentation and coding efforts to maximize reimbursement,” the Court concluded that the “mere fact that Defendants took targeted steps to increase their coding of CCs and MCCs to increase hospital[] revenues is neither fraudulent, nor improper per se.” Ultimately, the Court found Integra’s allegations were “‘not only compatible with’ but arguably ‘more likely explained by’ lawful conduct.” That is, at least as plausible as an inference of fraud was the inference that the defendants’ targeted coding programs and above-average utilization of certain codes were explained by their simply being “better than their peers in their efforts to ensure their medical documentation and coding maximized the opportunities for legitimate reimbursement from CMS.” Integra failed to plead any specific facts suggesting the defendants applied any of the codes with fraudulent intent, and in the absence of such facts, the mere fact that the defendants’ training and coding practices were effective in increasing revenue did not mean they were fraudulent. The case stands as a reminder to healthcare providers that programs designed to maximize reimbursement opportunities can give rise to litigation exposure, particularly in the era of big data. Of course, such programs can be entirely legitimate and legal—as the Court emphasized in this case—but providers would be wise to ensure that any program focused on driving revenue through coding practices places equal emphasis on compliance, integrity, and honesty.

Just days after the twelfth anniversary of the Minnesota 35W bridge collapse, the Eighth Circuit summarily affirmed the dismissal of a False Claims Act case alleging that Minnesota government officials conspired to submit false claims and obtain $250 million in federal funding. United States ex rel. Davis v. Hennepin Cty., No: 19-2298 (8th Cir. Aug. 14, 2019). Focused on the aftermath of the 35W bridge collapse of 2007, the case alleged that Hennepin County and Minnesota Department of Transportation officials fabricated material, labor, and other expenses related to bridge reconstruction for the purpose of obtaining federal disaster relief funding, grants, and stimulus funding by false pretenses. Relators filed the first version of this case in June 2015. United States ex rel. Davis v. Hennepin Cty., No. 15-cv-2671, 2016 U.S. Dist. LEXIS 192496 (D. Minn. July 8, 2016). The Government declined to intervene, and the lawsuit was dismissed for relators’ failure to be represented by counsel (relators must be represented by counsel to pursue FCA cases on behalf of the government). Id. Relators tried again in the Northern District of Florida, but met the same fate—declination by the Government, then dismissal. United States ex rel. Davis v. Hennepin Cty., No. 5:17-cv-81-RH-GRJ, 2017 U.S. Dist. LEXIS 96013 (N.D. Fla. May 23, 2017). In June 2018, relators filed their complaint yet again—this time represented by counsel. United States ex rel. Davis v. Hennepin Cty., No. 18-cv-01551 (ECT/HB), 2019 U.S. Dist. LEXIS 23482 (D. Minn. Feb. 13, 2019). The Government declined intervention for the third time, and then moved to dismiss the case pursuant to 31 U.S.C. § 3730(c)(2)(A). Under Section 3730(c)(2)(A), “[t]he Government may dismiss the action notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.” Though this FCA provision has long been on the books, it had been largely unused until the release of the “Granston Memo” in January 2018. The Granston Memo encouraged prosecutors to consider dismissing FCA qui tam cases even after declination, to avoid the strain on DOJ resources and potential for developing unfavorable precedent in weak cases. Relators challenged the Government’s dismissal, citing United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139 (9th Cir. 1998) to argue that dismissal is only appropriate under Section 3720(c)(2)(A) if “supported by a valid government purpose and a rational relation between dismissal and accomplishment of the articulated purpose.” Davis, 2019 U.S. Dist. LEXIS 23482, at *1, 11-12. In response, the Government argued that the plain text of Section 3730(c)(2)(A) sets forth only two requirements for dismissal—notification to the plaintiff and opportunity for a hearing—leaving no room for court intervention, so long as those requirements were met. Id. at *1, 13-15 (citing Swift v. United States, 318 F.3d 250, 251 (D.C. Cir. 2003)). The district court recognized that the parties represented both sides of a circuit split regarding the standard for dismissal under Section 3730(c)(2)(A). After analyzing Sequoia Orange, Swift, and legislative history, the court concluded that the statute required “nothing more or less” than its explicit requirements: notice and an opportunity for a hearing. Id. at *18-19. Even so, the court found the Government to have met either standard, accepting “a great deal of burden and expense for the United States, with no resulting recovery” as a rational reason for dismissal. Id. at *19-21. On appeal, the Eighth Circuit affirmed the lower court’s holding in its entirety, with a two-sentence judgment: “This court has reviewed the original file of the United States District Court. It is ordered by the court that the judgment of the district court is summarily affirmed.” United States ex rel. Davis v. Hennepin Cty., No: 19-2298 (8th Cir. Aug. 14, 2019). This case marks a victory for the objectives set forth in the Granston Memo—namely, cutting off a declined qui tam case that the Government believes strains its resources while offering only a small likelihood of success. Other currently-pending appellate cases should provide further insight into the Government’s FCA dismissal power, including United States v. United States ex rel. Thrower et al., No: 18-16408 (9th Cir.), where the Government has appealed the denial of its Section 3730(c)(2)(A) dismissal, asking the Ninth Circuit to set aside or distinguish the “valid government purpose” and “rational relation” requirements in Sequoia Orange.

The past 18 months have been a (relatively) wild time for the False Claims Act — on the books since 1863. In FY2018 the Department of Justice obtained more than $2.8 billion in settlements and judgments from cases involving fraud and false claims against the United States government. Add to this staggering statistic the fallout of the Supreme Court’s decision in Universal Health Services Inc. v. United States ex rel. Escobar, circuit splits on key timing provisions, and a change in DOJ leadership, and we are left with some very costly questions. Fortunately, government enforcement agencies and the Supreme Court are providing some much-needed guidance on open issues and interpretative revisions that make it an opportune time to take another look at “Lincoln’s Law.” DOJ and Barr to curb qui tam actions? The vast majority of recoveries from FCA cases come from lawsuits filed by whistleblowers, or “relators,” suing on behalf of the government under the FCA’s qui tam provisions. In 2018, the director of DOJ’s Civil Frauds section issued a memorandum encouraging DOJ trial attorneys to consider dismissing unmeritorious qui tam cases (even over the objection of the relator). The DOJ’s authority to dismiss FCA cases has long been built directly into the governing statute, 31 U.S.C. § 3730(c)(2)(A). But in practice DOJ trial attorneys rarely used this power, preferring to allow qui tam cases in which DOJ declined to intervene to continue being prosecuted by the relator. The new internal guidance suggests that DOJ attorneys should be more energetic in dismissing qui tam cases that lack substantial merit, are the product of parasitic relators, or that would unduly tax government resources. Meritless qui tam cases may also “generate adverse decisions that may affect the government’s ability to enforce the FCA.” The early returns show that DOJ seems to be more willing to dismiss declined qui tams than at any point in recent memory. This development is notable under a department headed by Attorney General William Barr. Before serving as AG under George H.W. Bush, Barr served in the department’s Office of Legal Counsel, where he provided legal advice to the president and executive branch agencies. In 1989, Barr authored a memorandum arguing that the qui tam provisions of the FCA were “patently unconstitutional,” in violation of the Appointments Clause, the Article III standing doctrine, and the doctrine of separation of powers. Barr wrote that private qui tam actions are a “devastating threat to the Executive’s constitutional authority.” When pressed, Barr walked back this position during his recent confirmation hearing before the Senate Judiciary Committee, noting he would enforce the FCA “diligently” and “in good faith.” While it remains to be seen whether dismissals increase under his leadership, DOJ has already moved to dismiss at least one high-profile case after SCOTUS denied review. See Gilead Sci. Inc. v. U.S. ex rel. Campie, U.S. No. 17-936, pet. denied Jan. 7, 2019 (9th Cir.). Consolidated guidelines regarding cooperation credit The DOJ also recently released a revised and consolidated set of guidelines for determining cooperation credit for organizations facing exposure under the FCA. The consolidated guidelines — revisions to the U.S. Attorney’s Manual — identify the main factors that the DOJ will consider when assessing the maximum “credit” parties will get for (1) voluntarily self-disclosing misconduct; (2) proactively cooperating with FCA investigations; and (3) taking effective remedial measures. The guidelines define “credit” as, typically, “reducing the penalties or damages multiple sought by the Department.” The guidance aims to consolidate and add uniformity to how these issues will be addressed — something that historically could vary considerably. Although the guidelines do not significantly alter existing DOJ policy, they provide a clearer and concise set of guidelines to the AUSAs and Civil Frauds trial attorneys who will evaluate an organization’s cooperation and self-disclosure. For organizations seeking to understand their own obligations and potential options, understanding the government’s playbook has never been more important. SCOTUS settles circuit split regarding tolling of statute of limitations While circuits remain divided on many key issues (see below), on May 13, 2019, the U.S. Supreme Court decided Cochise Consultancy, Inc. v. United States ex rel. Hunt, 587 U.S. ___ (2019), and resolved a circuit split regarding the statute of limitations for an FCA claim brought by a relator between six and 10 years after a violation, but fewer than three years after the government knew or should have known the relevant facts. The court held that relators can invoke a statute that tolls the usual six-year FCA statute of limitations to permit suit until up to three years “after the date when facts material to the right of action are known or reasonably known to the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed.” 31 U.S.C. § 3731(b). This means a relator can claim the benefit of this tolling provision even when the government declines to intervene and the relator knew of the alleged violation before the usual six-year statute of limitations expires. Bottom line: relators under certain circumstances now have more time to sue, and targets of FCA claims must now prepare themselves for the possibility of defending against qui tam FCA claims for up to ten years after an alleged violation. Falsity and materiality post-Escobar SCOTUS’ guidance ends there, as it has denied all six recent petitions asking the court to clarify both the falsity and materiality requirements of its decision in Universal Health Services Inc. v. United States ex rel. Escobar , 136 S. Ct. 1989 (2016). While Escobar clarified that contractors requesting payment could be liable under the FCA for concealing their failure to comply with contract requirements that are important to the government, it did not provide guidance on when a violated contractual requirement is material. One enduring circuit split concerns whether a complaint automatically fails for lack of materiality when a contractor shows that the government knew about noncompliance but still continued to pay the contractor. Compare Gilead, U.S. No. 17-936 (9th Cir.) with United States ex rel. Harman v. Trinity Indus. Inc., U.S. No. 17-1149, pet. denied Jan. 7, 2019 (5th Cir.). Another split involves whether a complaint must identify specific misrepresentations a contractor made about performance, as well as materiality, to adequately allege falsity. One hundred and fifty-six years have passed since the FCA’s passage, but the passage of time hasn’t necessarily clarified many of the FCA’s nuances and ambiguities. For regulated entities that are subject to the FCA (and for the lawyers who represent them), nuance and ambiguity can be a source of liability and grief — or a source for defenses and advocacy. In short, it has never been more important to understand the peril and promise of a very old law.

Amid increased public and government attention to cyber security, a qui tam plaintiff’s lawsuit has resulted a large settlement for a government contractors’ purported misrepresentations regarding compliance with government cyber security standards. In what is believed to be the first-of-its-kind settlement of an FCA claim premised upon cyber security misrepresentations, Cisco Systems recently agreed to pay $8.6 million to the federal and state governments. The case, United States of America v. Cisco Systems, involved allegations from a former-subcontractor whistleblower that Cisco Systems knowingly sold video monitoring technology containing security flaws to the United States, eighteen states, and the District of Columbia. See Complaint, Case No. 11-cv-400 (W.D.N.Y. May 5, 2011). According to the whistleblower, the security flaws to the video monitoring technology created a backdoor to the system, enabling a potential user to gain unauthorized access to the entire network of a federal agency, take control of or bypass an agency’s physical security systems, or even allow an unauthorized user to obtain administrative access to the system to make modifications. Id. Notwithstanding its awareness of the security flaws, and knowing that the disclosure of the security flaws would have prevented the federal government from purchasing the video monitoring technology, the Relator alleged that Cisco Systems withheld information regarding the security flaws from multiple federal and state agencies to which it sold the video monitoring technology. Id. On July 31, 2019, the federal government, fifteen states, and the District of Columbia settled the claims against Cisco Systems. Pursuant to that agreement, Cisco Systems will pay $2.6 million to the federal government to resolve the FCA claims and approximately $6 million to state governments to resolve similar state law fraud-in-contracting claims.  Cisco framed the settlement as a “partial refund” to the governments involved, and did not explicitly admit liability.  The company acknowledged that “times and expectations have changed.” The settlement may be a harbinger of more cyber security claims to come. Information security has become an increasingly prominent component of all government contracts, extending well beyond contracts in the information technology space. Government contractors will therefore be increasingly required to abide by the security standards imposed by the Federal Information Security Management Act and related regulations when selling products to the government. The recent seven-figure settlement emphasizes the government’s interest in pursuing FCA actions premised upon cyber security shortcomings, and serves as a reminder to government contractors to be mindful of their cyber security compliance obligations.

On June 20, 2019, more than six years after the case was first set into motion by the Relator, the U.S. Attorney's Office for the District of Maryland announced in a press release that Hart to Heart Ambulance Services, Inc. (“Hart to Heart”) settled a false claims act case—which alleged that it submitted false claims to Medicare for ambulance transports that were not medically necessary—for $1.25 million. The road to settlement was a long one. The Relator, a former Hart to Heart employee, filed the original complaint under seal on March 29, 2013. United States, et al. ex rel. Arvey v. Hart to Heart Transp. Servs., Inc. et al., No. 13-cv-01554-RDB (D. MD March 29, 2013) (ECF Nos. 1-3). After the complaint was filed, the United States secured multiple extensions of time to make an intervention decision. Id., ECF Nos. 5-11. Two-and-a-half years later, the United States still had not made a decision, and the court denied further requests for an extension of time, presumably because it decided the case needed to move forward. Id., ECF No. 14. Forced to make a decision, the United States declined to intervene on October 19, 2015, because it had not completed enough of its investigation to prosecute the case. Id. The United States continued to investigate after the case was unsealed and even engaged with Hart to Heart in settlement negotiations. Id., ECF Nos. 49-50, 53, 58. The parties began moving through the pleadings stage, id., ECF Nos. 14-51, but before the case could get off the ground, the parties negotiated and requested a stay, which the court granted on August 23, 2016, id., ECF No. 52. The stay ultimately continued until November 30, 2018, the same day the United States intervened against Hart to Heart, EMS Billing Solutions, Inc. (“EMS”) (Hart to Heart’s billing arm), and the companies’ owners and operators. Id., ECF Nos. 64-66. The complaint filed by the United States alleged that Hart to Heart fraudulently received millions of dollars of Medicare payments by submitting claims for ambulance transportation for patients who could sit, stand, walk, or otherwise did not need to be transported by ambulance. Id., ECF. No. 66 at ¶¶ 1-2. The United States further alleged that from 2010-2018, the owners and operators of Hart to Heart trained, threatened, and coerced its employees as well as EMS’s billing employees to transport patients by ambulance unnecessarily and to falsify records to make it appear as though it was medically necessary. Id. at ¶ 3. When that did not work, the United States alleged that Hart to Heart and EMS falsified the billings directly. Id. Despite the slow start, the case settled seven months after the United States filed its Intervention Complaint, and the parties never got passed the pleadings stage. Hart to Heart did not admit any of the allegations, but did resolve all claims from January 2, 2010 to December 31, 2017 to the tune of $1.25 million. See DOJ Press Release. The Relator will receive approximately $251,000 from the settlement. Id. Government investigations can take a long time and settlements even longer. Even when the government initially declines to intervene, it may later change course and intervene upon a showing of good cause under 31 USC § 3730(c)(3) because, as Yogi Bera famously said, “it ain’t over ‘till it’s over.”

On May 31, 2019, U.S. Attorney Stephen McAllister of the District of Kansas announced a $250,000 settlement with Coffey Health System to resolve a False Claims Act case.  The case arose from allegations that the hospital’s patient data security was insufficient to justify an incentive payment from the federal government.  The two whistleblowers each will receive $50,000 from the settlement. In 2016, two whistleblowers filed a qui tam complaint under the False Claims Act, alleging that Coffey Health System (“Coffey”) improperly certified information in its applications for federal incentives.  Coffey is a non-profit health provider that is affiliated with the local government in rural Coffey County, Kansas, and located in the town of Burlington with a population of approximately 3,000 city residents. As part of the American Recovery and Reinvestment Act of 2009 enacted in the wake of the last financial crisis, the U.S. Department of Health and Human Services administered an Electronic Health Records Incentive Program (“EHR”) as part of Medicare and Medicaid to encourage adoption of electronic record systems.  To apply for EHR, medical providers must attest their compliance with certain criteria, including patient data security measures and risk reviews.  The complaint in this case alleged that Coffey’s certification was knowingly inaccurate, because Coffey was aware of deficiencies in its data security measures, including the lack of security risk reviews.  The complaint alleged that Coffey received more than $2 million in EHR payments during the relevant years.  The whistleblowers are Coffey’s former chief information officer and former compliance officer. After a lengthy delay, the U.S. Government intervened in the case on May 23, 2019, leading to the unsealing of this case.  This settlement quickly followed a week later.  The settlement resolves this complaint without any determination of Coffey’s liability.  The case is a reminder that even small rural health providers are not immune from whistleblower actions and government intervention—and that data security obligations are the new frontier for FCA relators.