FCA Alert

FCA Alert

DOJ Criminal Division Will Pursue All FCA Claims in Departure from Current Practice

Posted in Legislation & Amendments, Penalties & Damages

The Criminal Division of the U.S. Department of Justice (“DOJ”) will now be reviewing all new qui tam complaints filed under the False Claims Act. A spokesperson for the Criminal Division announced the new procedure on September 17, 2014 at the Taxpayers Against Fraud Education Fund Conference.

Although FCA cases may be reviewed concurrently by the Criminal and Civil Divisions, it is a marked change to assert that the Criminal Division will review all new cases. In practice, this means that the Civil Division and the Criminal Division will share all qui tam cases as soon as they are filed. Then, prosecutors in the latter’s Fraud Section will determine whether to pursue a parallel criminal investigation. The two divisions will have to work together to plan how to effectively pursue the case in tandem.

Before this announcement, the Criminal Division usually would only pursue cases of alleged health care fraud. The DOJ has been vocal that the civil monetary penalties under the civil provisions of the FCA are not enough in certain instances to deter wrongful conduct. Now, the DOJ is encouraging potential qui tam relators and their attorneys to foster discussions with criminal authorities when appropriate, even if they have already begun to pursue a civil remedy.

This new qui tam procedure is noteworthy because it places the current state of the review process in flux. Alleged violators of the FCA will not necessarily know immediately whether the Criminal Division’s review of the matter will actually come to fruition in parallel civil and criminal investigations.


Supreme Court Denies Cert in FCA Cases

Posted in Decisions Interpreting FCA Elements, Penalties & Damages, Relator Issues

Last week, the U.S. Supreme Court denied certiorari in two Fourth Circuit FCA cases—United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., 741 F.3d 390 (4th Cir. 2013), cert. denied, No. 13-1399 (U.S. Oct. 6, 2014), and United States ex rel. Rostholder v. Omnicare, Inc., 745 F.3d 694 (4th Cir. 2013), cert. denied, No. 13-1411 (U.S. Oct. 6, 2014).

In Bunk v. Gosselin, the U.S. joined a qui tam action against a Belgian shipping company accused of submitting thousands of false invoices under its U.S. Department of Defense contract.  The district court refused to impose the statutory minimum of $5,500 per claim, which would have resulted in a penalty in excess of $50 million, holding that this amount was  “grossly out of proportion to [defendant’s] misconduct, and thus in contravention of the constitutional proscription against excessive fines.”  The district court also rejected the relator’s requested award of $24 million, holding that, because “the FCA does not give the Court any discretion to award any other civil penalty, it is not authorized to impose a lesser civil penalty than would be within constitutional limits.”  Reversing this decision, the Fourth Circuit held that “the court must permit the government or its assignee the freedom to navigate its FCA claims through the uncertain waters of the Eighth Amendment.”  Accordingly, the Court remanded the decision for entry of the requested award. 

The Gosselin Court also rejected the defendant’s argument that the relator lacked standing under the FCA because he sought civil penalties alone, and not actual damages.  Quoting the Supreme Court in Vermont Agency, 529 U.S. 765, 765 (2000), the Fourth Circuit noted that an “adequate basis for the relator’s . . . suit is to be found in the doctrine that the assignee of a claim has standing to assert the injury in fact suffered by the assigner,” i.e., the United States.  The Fourth Circuit joined the Fifth and Tenth Circuits in holding that this doctrine applies equally to civil penalties as it does to damages. 

In Rostholder v. Omnicare, the Fourth Circuit affirmed the dismissal of a relator’s complaint for failure to state a claim upon which relief can be granted.  The relator alleged that his former employer violated a series of Food and Drug Administration (FDA) safety regulations pertaining to the packaging of penicillin.  The relator further argued that, because the drugs were thereby ineligible for Medicare and Medicaid reimbursement, any reimbursement claims presented to the government for those drugs violated the FCA.   The district court dismissed the complaint, finding that the relator failed to allege that the defendant actually made a false statement to the government or engaged in fraudulent conduct.  In affirming this decision, the Fourth Circuit stated:

Were we to accept relator’s theory of liability based merely on a regulatory violation, we would sanction use of the FCA as a sweeping mechanism to promote regulatory compliance, rather than a set of statutes aimed at protecting the financial resources of the government from the consequences of fraudulent conduct.  When an agency has broad powers to enforce its own regulations, as the FDA does in this case, allowing FCA liability based on regulatory non-compliance could “short-circuit the very remedial process the government has established to address non-compliance with those regulations.”  

The Supreme Court’s refusal to hear these cases leaves only one FCA decision on the Court’s docket this term, Kellogg Brown & Root Services Inc., et al. v. United States ex. rel. Carter, 710 F.3d 171 (4th Cir. 2013), cert. granted, 134 S. Ct. 2899 (U.S. July 1, 2014).  As noted in an earlier blog post, this case raises issues involving the FCA’s first-to-file bar and the Wartime Suspension of Limitations Act. 

Opening Brief Filed in Case Where Supreme Court is to Interpret FCA Statute of Limitations and First-to-File Bar

Posted in Decisions Interpreting FCA Elements

The Supreme Court granted certiorari in Kellogg Brown & Root Services, Inc., et al. v. United States ex. rel. Carter on July 1, 2014, as we noted in an earlier blog post. On August 29, the petitioners (defendants) filed their opening brief.

This decision is important because the Court will decide (1) whether the Wartime Suspension of Limitations Act (WSLA) applies to toll the statute of limitations in civil FCA cases, and (2) whether the first-to-file bar “functions as a ‘one case-at-at-time’ rule.” There is a significant circuit split on the latter question.

Petitioners’ opening brief raises several arguments. First, petitioners maintain that the Fourth Circuit’s ruling which interprets the first-to-file bar as one that creates a “one case-at-a-time” rule is incorrect. Petitioners argue that the Fourth Circuit’s interpretation fails to promote the bar’s “twin goals” of encouraging the disclosure of fraud, but discouraging opportunistic private litigants plaintiffs as it allows subsequent relators to file similar claims once a first-filed case has been dismissed. With respect to the statute of limitations issue, petitioners dispute that the WSLA is applicable to civil qui tam actions and instead, argue that it should only apply to criminal cases. In support of this position, petitioners point to the FCA’s inherent “detailed limitations scheme that includes an absolute 10-year statute of repose” and as such, the WSLA’s application here would be “particularly inappropriate.”

The case will likely be argued in December 2014 or January 2015.

Eighth Circuit Finds Doctor’s FCA Claims Parasitic

Posted in Relator Issues

On Aug. 7, 2014, the Eighth Circuit affirmed the dismissal of a qui tam False Claims Act suit, finding the alleged fraudulent acts alleged by the relator had already been publicly disclosed and the relator doctor was not an original source. See U.S. ex rel. Paulos v. Stryker Corp., Nos. 13–2509, 13–2647, — F.3d —- (8th Cir. Aug. 7, 2014).

Dr. Lonnie Paulos (an orthopedic surgeon and former consultant at Stryker) alleged that medical device makers Stryker Corp. and I-Flow Corp. violated the FCA by marketing their pain pumps to encourage the placement of pain pumps directly into patients’ joint spaces after orthopedic procedures, despite lack of testing and possible dangerous side effects.  The District Court for the Western District of Missouri granted defendants’ motion to dismiss pursuant to 31 U.S.C. § 3730(e)(4)(A) because numerous media reports, FDA reports, and federal regulatory disclosures essentially revealed the allegations of fraudulent marketing forming the basis for Dr. Paulos’ claims and Dr. Paulos was not an “original source” of the information underlying his claims.

The Eighth Circuit first examined Paulos’ argument that the specific fraudulent acts at issue were not publicly disclosed and only appeared substantially similar to the public disclosures at the “highest level of generality.”  The Circuit court found that there was no meaningful distinction between the public disclosures and Paulos’ claims and therefore concluded the district court did not err in finding a public disclosure sufficient to meet § 3730(e)(4)(A). 

Having found this, the Circuit court considered whether Paulos’ claims could still survive dismissal because he was an “original source” under § 3730(e)(4)(B). Paulos based his “original source” argument on two claims: 1) that he was among the first to suspect and investigate a causal connection between pain pumps and  a painful medical condition involving cartilage- loss called chondrolysis; and 2) he had independent knowledge relating to Stryker’s scienter in that he warned Stryker executives of a connection between the pain pumps and chondrolysis.  The Eighth Circuit concluded that Paulos’ proposed independent knowledge could not be said to “materially add to the publicly disclosed allegations or transactions,” and he was therefore not an “original source.”  

Seventh Circuit Dismisses “Worthless Services” Action

Posted in Decisions Interpreting FCA Elements, Relator Issues

On August 20, 2014, the Seventh Circuit vacated a judgment against Momence Meadows Nursing Center in an anticipated decision that may limit the scope of “worthless services” liability under the False Claims Act. 

In U.S. ex rel. Absher et al. v. Momence Meadows Nursing Center, Inc. et al., two former employees of Momence filed a whistleblower suit against the nursing home, alleging that Momence knowingly submitted “thousands of false claims to the Medicare and Medicaid programs” in violation of the FCA.  The relators presented evidence that Momence systematically violated Medicare and Medicaid regulations concerning standards of care, duties of personnel, and protocols for addressing patient care issues, and that Momence actively concealed the extent of its non-compliance from government regulators.  The relators argued that Momence violated the FCA based upon both “worthless services” and “false certification” theories of liability.  The United States declined to intervene in this case.

As to the “worthless services” theory of liability, the district court instructed the jury that “[s]ervices can be worthless, and the claims for those services can, for that reason be false, even if the nursing facility in fact provided some services to the patient.  To find the services worthless, you do not need to find that the patient received no services at all.”  On appeal, the Seventh Circuit held that this jury instruction was “incorrect,” and that, to succeed on a “worthless services” claim under the FCA, “the performance of the service [must be] so deficient that for all practical purposes it is the equivalent of no performance at all.”  The Court explained that “[i]t is not enough to offer evidence that the defendant provided services that are worth some amount less than the services paid for.  That is, a ‘diminished value’ of services theory does not satisfy this standard.  Services that are ‘worth less’ are not ‘worthless.’”  Although the Court did not address the validity of the “worthless services” theory of liability, it held that, even if it were to recognize such a theory, “no reasonable jury could have found that Momence provided truly or effectively worthless nursing services to its residents.”  In fact, the Court held that “any such claim would be absurd in light of the undisputed fact that Momence was allowed to continue operating and rendering services of some value despite regular visits by government surveyors.”

As to the false certification theory of liability, the relators argued that Momence violated the FCA by both expressly and impliedly certifying that Momence was compliant with Medicare and Medicaid regulations.  The Seventh Circuit rejected these arguments for lack of evidence and/or failure to present the theories to the jury, and chose not to determine whether implied certification is a valid theory of FCA liability.  The Court noted, however, that several other circuits have permitted FCA claims to proceed under an implied certification theory (citing U.S. ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295, 306 (3d Cir. 2011); U.S. ex rel. Hutcheson v. Blackstone Med., Inc., 647 F.3d 377, 387 (1st Cir. 2011); U.S. v. Sci. Applications Int’l Corp., 626 F.3d 1257, 1267-70 (D.C. Cir. 2010); Ebeid ex rel. U.S. v. Lungwitz, 616 F.3d 993, 996 (9th Cir. 2010); U.S. ex rel. Conner v. Salina Reg’l Health Ctr., Inc., 543 F.3d 1211, 1217 (10th Cir. 2008); U.S. ex rel. Augustine v. Century Health Servs., Inc., 289 F.3d 409, 415 (6th Cir. 2002); Mikes v. Straus, 274 F.3d 687, 699-700 (2d Cir. 2001)).

Dismissal Of Relator Action Held To Be Without Prejudice Against Government

Posted in Relator Issues

The Western District of Virginia found that dismissal of a relator’s suit based on collateral estoppel and failure to prosecute does not prejudice the United States’ ability to subsequently pursue the same FCA claims, notwithstanding an earlier decision not to intervene. U.S. ex rel. Prince v. Virginia Resources Authority, No. 5:13CV00045, 2014 WL 3405657 (W.D. Va. July 10, 2014).

Relator Mark W. Prince alleged, on behalf of the United States, that the Virginia Resources Authority (“VRA”) and others violated the False Claims Act by knowingly presenting, or causing to be presented, a false or fraudulent claim for payment for approval related to federal subsidies and tax exempt status for certain bonds through the Build America Bonds program. The VRA successfully moved to dismiss Prince’s allegations based on a collateral estoppel defense arising from a Final Order issued in an action between the two parties in Shenandoah County Circuit Court.

The United States maintained that the action giving rise to collateral estoppel was inapplicable to the Government because it was not a party to that action and thus, it did not result in a valid, final judgment against the United States. The court agreed. The court further found that the dismissal for failure to prosecute was without prejudice to the Government because “[s]uch a dismissal is the result of [relator’s] failure to act, not any fault on the part of the United States, and is furthermore not a dismissal on the merits.”


FEMA Unable to Avoid 30(b)(6) Deposition Based on Touhy Regulations

Posted in Decisions Interpreting FCA Elements, Relator Issues

In U.S. ex rel. Touhy v. Ragen, 340 U.S. 462, 468 (1951), the Supreme Court held that federal government agencies may promulgate regulations requiring litigants to make a “Touhy request” to obtain documents or testimony from a federal agency or federal agency employees during discovery where the government is not a party.  In In Williams v. C. Martin Company Inc., et al., No. 07-5692, 2014 U.S. Dist. LEXIS 91802 (E.D. La. July 7, 2014), the district court reversed the Magistrate Judge’s decision and granted the defendant’s motion to compel the Federal Emergency Management Agency (“FEMA”) to produce a witness for a 30(b)(6) deposition.

Relator, Robyn Williams, filed a qui tam action on behalf of the United States to recover damages under the FCA against two groups of defendants, the Medley Jarvis Defendants (“MJI”) and the C. Martin Defendants (“CMC”).  The claims arise out of two contracts awarded by FEMA to CMC.  On November 14, 2012 CMC filed a Touhy request with FEMA seeking documents related to the contracts, and on December 4, 2012 MJI filed its own Touhy request with FEMA.  On April 21, 2014 the United States produced over 26,000 pages of documents related to the contracts. 

On May 22, 2014, CMC requested a 30(b)(6) deposition of FEMA pertaining to the 26,000 pages of documents FEMA produced.  FEMA invoked its Touhy regulations and notified CMC that it would not appear for the deposition.  CMC responded with a Motion to Compel.  FEMA, in an attempt to avoid attending the deposition, argued that in order to challenge FEMA’s decision to withhold a witness from a deposition, sovereign immunity requires litigants to follow the Administrative Procedures Act (“APA”).  The district court held that it has jurisdiction to compel FEMA’s compliance with CMC’s subpoena, reasoning that “nearly every court faced with this issue has determined that sovereign immunity does not insulate a federal agency from complying with a Rule 45 subpoena.”  The district court further held that FEMA’s decision to decline sitting for the deposition was arbitrary and capricious.  FEMA argued that the deposition would be unduly burdensome because the United States was not a party, but the district court held: “While it is technically true that the United States is not a party to a FCA case in which it declines to intervene, it is beyond dispute that the United States is the real party in interest in this matter.  The FCA provides that the government is entitled to at least 75% of the proceeds of this action. 31 U.S.C. § 3730(d).”  Thus, the district court granted the motion to compel and ordered FEMA to appear for the deposition.


Claims for Non Federal Money Do Not Trigger FCA Liability

Posted in Rule 9(b) Decisions

The Fifth Circuit held that the False Claims Act does not extend to claims submitted under the Education Rate (E-Rate) Program, which is administered by the Universal Service Administrative Company (USAC) with funds from the Universal Service Fund (USF), because there were no federal funds involved and the USAC is not a governmental entity.  See U.S. ex rel. Shupe v. Cisco Systems, Inc.

Relator Rene Shupe brought a qui tam action, alleging that defendant telecommunication companies violated the False Claims Act in connection with contracts to install and operate communications networks for school districts and libraries throughout South Texas, which was partially funded by the E-Rate program.  Shupe alleged that the defendants “tampered with the competitive bidding process, engaged in the ‘gold-plating’ of equipment provided, and substituted E–Rate ineligible products for eligible ones.”  

As set forth in the decision, in 1996 the Federal Communications Commission (FCC) designated the USAC, an independent, not-for-profit corporation owned by an industry trade group, to serve as the administrator of the USF.  The money in the USF is collected from private telecommunication providers under a mandate from Congress and the FCC and distributed in accordance with FCC regulations.

But, the Fifth Circuit held that this regulatory interest was insufficient to establish a claim under the FCA because the government was not in a position to lose money due to the alleged fraud.  Moreover, the FCC’s power over the fund indirectly, and through its oversight of the USAC, did not call for a different result because the government has no actual control over the fund.  Thus, “[b]ecause there are no federal funds involved in the program, and USAC is not itself a government entity,” the Government did not “provide any portion of the requested money under the FCA,” and the relator had no claim under the FCA.


Supreme Court to Decide Two Important False Claims Act Issues

Posted in Decisions Interpreting FCA Elements, Statute of Limitations

On July 1, 2014, the Supreme Court granted certiorari in Kellogg Brown & Root Services, Inc., et al. v. United States ex. rel. Carter, which raises two issues central to False Claims Act litigation involving, respectively, the FCA’s first-to-file bar and statute of limitations.   

Benjamin Carter, a former employee of Kellogg Brown & Root (KBR) filed a qui tam action against KBR, alleging that the company had fraudulently billed the United States for services provided to the U.S. military in Iraq in 2005.  After prior versions of his complaint were dismissed for procedural defects, Carter filed an amended complaint in 2011.  The district court dismissed Carter’s 2011 complaint with prejudice on two grounds.  First, the district court held that the complaint had been filed beyond the FCA’s six-year statute of limitations, and that the Wartime Suspension of Limitations Act (WSLA)—which would have tolled the statute of limitations—did not apply.  Second, the district court held that it lacked subject matter jurisdiction over Carter’s claims under the FCA’s first-to-file rule because his allegations substantially overlapped with a previously-filed suit that was dismissed shortly after Carter filed his 2011 complaint.  The Fourth Circuit reversed on both grounds.

The WSLA tolls the statute of limitations for “any offense” involving fraud against the federal government “[w]hen the United States is at war.”  18 U.S.C. § 3287.  The Fourth Circuit held that the Act applies to all civil actions, including FCA claims brought by private relators in which the United States has declined to intervene.  The Court also held that the Act “does not require a formal declaration of war,” reasoning that such a requirement “would be an unduly formalistic approach that ignores the realities of today[.]”  Accordingly, the Court held that Carter’s claim was not time-barred.  Petitioners argue that this holding effectively repeals the statute of limitations for civil fraud claims and authorizes an indefinite tolling of FCA claims pursuant to the WSLA. 

The first-to-file bar provides that “[w]hen a person brings an action under [the FCA], no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.”  31 U.S.C. § 3730(b)(5).  The Fourth Circuit joined the Seventh and Tenth Circuits in holding that the rule bars duplicative qui tam suits only during the period that a related, previously-filed suit remains “pending,” and permits the duplicative suit to proceed once the prior action has been resolved.  Petitioners argue that, as held by the First, Fifth, Ninth, and D.C. Circuits, the first-to-file rule bars new suits even if the initial action is no longer pending.  Petitioners contend that the fundamental purpose of the first-to-file rule is satisfied “even when an earlier-filed case has been dismissed” because the earlier case “alerted the government to the essential facts of an alleged fraud[.]”

The Supreme Court will address both issues on appeal.  Specifically, the Court will decide (1) whether the WSLA “applies to claims of civil fraud brought by private relators, and is triggered without a formal declaration of war;” and (2) whether the FCA’s first-to-file bar “functions as a ‘one case-at-a-time’ rule.”  The Court’s decision will resolve a significant circuit split on the first-to-file bar, and will carry important practical consequences regarding the scope of FCA liability.     

D.C. Circuit Grants Writ of Mandamus Reinforcing that Attorney- Client Privilege Applies to Internal Investigations

Posted in Investigations

On June 27, 2014, the D.C. Circuit Court of Appeals overturned a District Court’s decision which found that documents generated through an internal investigation were not protected by the attorney-client privilege in a qui tam action against a defense contractor brought under the False Claims Act. See In re Kellogg Brown & Root, Inc., 14-5055 (D.C. Cir. June 27, 2014).

The relator worked for Kellogg Brown & Root (“KBR”), a defense contractor, and alleged that KBR and various subcontractors, while administering military contracts in wartime Iraq, had engaged in a scheme to defraud the United States Government by using a subcontracting procedure that inflated costs and accepted kickbacks. See United States ex rel. Barko v. Halliburton Co., 1:05-CV-1276 (D.D.C. Mar. 6, 2014). The relator moved to compel KBR to produce documents relating to its internal investigation of the alleged misconduct. KBR argued that the internal investigation had been conducted for the purpose of obtaining legal advice, and therefore, was protected by the attorney-client privilege. After reviewing the disputed documents in camera, the District Court determined that the attorney-client privilege protection did not apply because, among other reasons, KBR had not shown that “the communication would not have been made ‘but for’ the fact that legal advice was sought.” The court found that the internal investigation was “undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice.”

Following the issuance of this discovery order, KBR asked the District Court to certify the privilege question to the Court of Appeals for interlocutory appeal and to stay the District Court’s order pending a petition for mandamus in the Circuit Court. The District Court denied those requests and ordered KBR to produce the disputed documents to the relator within a matter of days. KBR promptly filed a petition for a writ of mandamus in the Circuit Court.

In its decision regarding the petition for a writ of mandamus, the Court of Appeals found that the District Court had erred and employed the wrong legal test. The D.C. Circuit found that the but-for test applied by the District Court was not appropriate for attorney-client privilege analysis. Rather, under common law and Upjohn Co. v. United States, 449 U.S. 383 (1981), the attorney-client privilege applied to corporations so long as the communication involved was made “for the purpose of obtaining or providing legal advice to the client.” The D.C. Circuit held that, “[s]o long as obtaining or providing legal advice was one of the significant purposes of the internal investigation, the attorney-client privilege applies, even if there were also other purposes for the investigation and even if the investigation was mandated by regulation rather than simply an exercise of company discretion.”

The D.C. Circuit granted KBR’s petition for a writ of mandamus because the District Court’s erroneous privilege ruling could have potentially far-reaching consequences.