FCA Alert : Lawyers & Attorneys for Whistleblower, False Claims Act & Qui Tam Defense : Kelley Drye & Warren LLP

 In its Writ, Amgen describes some of the varying positions taken by the Circuits regarding the implied certification theory of liability:

1st Circuit:  dispensing with the “certification” framework, and holding that liability can be premised on failure to comply with a contractual, regulatory or statutory obligation whenever the government could theoretically reject a claim for non-compliance.  See New York ex rel. Westmoreland et al. v. Amgen, Inc. et al., 2011 WL 2937420 (1st Cir. July 22, 2011); United States ex rel. Hutcheson et al. v. Blackstone Medical, Inc., 2011 WL 2150191 (1st Cir. June 1, 2011).  For further details on the First Circuit decisions, click here, here, and here.

7th, 4th, and 5th Circuits:  have taken positions that are incompatible with an implied certification theory.  See United States ex rel. Yannacopoulos v. General Dynamics, 2011 WL 3084932, at *3 n.4. (7th Cir. July 26, 2011); Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 786-87 n.8 (4th Cir. 1999); United States ex rel. Marcy v. Rowan Cos., 520 F.3d 384, 389 (5th Cir. 2008).

2nd, 3rd, and 8th Circuits:  implied certification theory limited to where there is a statute or regulation that is a condition of payment.  See Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001); United States ex rel. Wilkins v. United Health Group, Inc., 2011 WL 2573380, at *9 (3d Cir. June 30, 2011); United States ex rel. Vigil v. Nelnet, Inc., 639 F.3d 791, 795–96 (8th Cir. 2011).

11th Circuit:  implied certification theory can be based on either a condition of payment or a condition of participation in the federal program.  See McNutt ex rel. United States v. Haleyville Medical Supplies, Inc., 423 F.3d 1256, 1259 (11th Cir. 2005).

D.C. Circuit:  holding that a violation of a contractual obligation that was “material” to the government’s obligation to pay a claim can form the basis for FCA liability.  See United States v. Science Applications Int’l Corp., 626 F.3d 1257, 1261 (D.C. Cir. 2010).

Amgen posed the following two questions to the U.S. Supreme Court:

1. Whether a claim can be deemed “false or fraudulent” within the meaning of the FCA because the claimant violated a statutory, regulatory or contractual obligation and, at the time the claim was submitted, the government payor could have but was not required to deny the claim on that ground.

2. Whether the draconian provisions of the FCA can be used to enforce compliance with statutes, regulations, contractual obligations, or other program requirements, even though no statute, regulation or contractual provision expressly conditions payment on compliance with those obligations.

In particular, at issue in the Amgen case is whether a violation of the Anti-Kickback Statute (AKS) can form the basis for liability under the FCA prior to the amendments to the FCA made by the 2010 Patient Protection and Affordable Care Act.  The First Circuit has held that compliance with the AKS is a precondition of payment of Medicare claims, and a violation of the AKS can cause factually true claims to be false and form the basis for liability under the FCA – whether or not the providers expressly certified compliance with the AKS.  The First Circuit has further held that liability can also be based on “a precondition of being entitled to payment,” i.e., violations of statutory, regulatory or contractual obligations which would give the government agency discretion to decline payment on the basis of the violation.

The 2010 Patient Protection and Affordable Care Act amended the FCA to specifically provide that a violation of the AKS causes the claim to be false under the FCA.  These amendments, however, are not retroactive, and so, the issue before the Supreme Court will be relevant to hundreds of FCA cases.

Brief of Amici Curiae AHA & PhRMA

Since the late 1990s, AHA, a national interest organization for hospitals, with over 42,000 institutional and individual members, has advocated for limitations to the False Claims Act. For the past several months, AHA has been pursuing discussions with the U.S. Attorney General and the Secretary of Health & Human Services and their representatives requesting that the government reconsider certain enforcement initiatives being pursued against hospitals pursuant to the False Claims Act. For more information about this issue, see our posts here and here.

In the Schindler case, AHA and PhRMA submitted an amicus brief in support of Petitioner Schindler Elevator Corp., the FCA defendant in the case. They argue that maintaining a strong public disclosure bar is of vital importance to the amici, their members, and all of the other companies, contractors, grant recipients, health care providers, universities, and others that receive – directly or indirectly – funds from the federal government. The amici further contend that upholding the Second’s Circuit’s decision – which significantly limits the scope of the public disclosure bar – would be harmful to millions of federal contractors, grantees, and program participants. They also argue that it would encourage citizens with no knowledge of or connection to an industry – not to mention the relators’ bar – to rummage through the government’s own files and use the threat of the FCA’s punitive damages to privately enforce any sort of minor violation that can be alleged, regardless of administrative remedies.

AHA and PhRMA provide statistics about the explosion of qui tam lawsuits in the past two decades in support of their argument:

• While 30 qui tam lawsuits were filed in 1987, nearly 600 were filed in 2010.
   
• Nearly 75% of the active qui tam cases are cases in which the government has declined to intervene after investigating the relator’s allegations of wrongdoing. Yet, relators regularly press on in these declined actions, motivated by the FCA’s bounty provision.
   
• Defending declined qui tam lawsuits exposes defendants to immense costs and burdens, even when those cases are ultimately found to lack merit. The vast majority of declined cases fall into this category: Over the past 23 years, only 3% of the amount recovered for the United States has come through cases that the government declined to pursue.

AHA and PhRMA further contend that the potential for lucrative awards has resulted not only in a cottage industry of relators; it has also produced a de facto “relators’ bar” of attorneys in regular pursuit of qui tam plaintiffs. Allowing FCA actions based on information obtained from the government through FOIA would be a gift to that bar. Qui tam plaintiffs’ lawyers would no longer need to limit themselves to trolling for unhappy company employees to serve as whistleblowing relators; they could expand their search to include anyone willing to submit a single FOIA request.

Oral Argument Before the Supreme Court

The Third Circuit – in an opinion drafted by then-Judge Alito – was the first appellate court to address the issue of whether an agency’s response to a FOIA request constitutes a “report” or “investigation” under the public disclosure bar of the FCA. In Mistick v. Housing Auth. of the City of Pittsburgh, 186 F.3d 376, 383-84 (3d Cir. 1999), Judge Alito looked at the plain meaning of the terms “report” and “investigation” and concluded that an agency’s response to a FOIA request is a “report” and its search for documents responsive to such a request is an “investigation” sufficient to trigger the FCA’s public disclosure bar. In Schindler, the Second Circuit took a contrary view and held that whether an agency’s response to a FOIA request is deemed a “report” or “investigation” under the FCA depends on the nature of the information provided and must be considered on a case-by-case basis.

During oral argument, the Justices tested vigorously Schindler’s position that every FOIA response is itself an administrative report. Justice Kennedy asked whether making files available in a reading room constitutes a report by an agency. Justice Sotomayor asked if an agency makes a report if it tells a person making a FOIA request to look on the agency’s website for the requested information. Justice Ginsburg inquired whether there was a difference between reports prepared by agencies commissioned to conduct investigations as opposed to reports from agencies that function merely as document repositories. Justice Alito asked whether documents that are turned over by an agency are themselves reports or whether they are simply “included in a report.” Schindler maintained that the hypothetical FOIA responses posed by the Justices were all “reports” for purposes of the FCA’s public disclosure bar.

When it was the relator’s turn to argue, the Justices had a number of questions about the test proposed by the relator to determine whether a FOIA response constitutes a “report” or “investigation.” At argument, the relator had difficulty articulating what the appropriate test should be – i.e., the test proposed by the Second Circuit or a dictionary definition of “report” or “investigation,” but maintained its position that the test should be done on a case-by case basis. The primary difficulty the Justices appeared to have with the relator’s test was that it was difficult to apply in contrast to the bright-line test proposed by Schindler pursuant to which all FOIA responses constitute “reports” under the FCA’s public disclosure bar. As Justice Scalia stated during relator’s argument:

“I don’t want to have to play these games every time there’s one of these qui tam actions. I mean, the advantage of [Schindler’s] solution is that it’s easy to apply. I don’t find yours easy to apply at all.”

If the Supreme Court adopts the Second Circuit’s test, it will likely encourage more potential relators to file qui tam suits. If the Supreme Court adopts the bright-line test proposed by Schindler, and accepted in a majority of circuit courts, it will prevent qui tam relators with no real insider information from maintaining a suit and will operate as a reasonable limitation on FCA actions. 

The Facts

Schindler manufacturers, installs and maintains elevators and escalators in buildings throughout the world, including some buildings owned and operated by the federal government. The relator, a former Schindler employee, alleges that Schindler falsely certified compliance with regulatory reporting requirements imposed by a rarely cited statute known as the Vietnam Era Veterans Readjustment Assistance Act (“VEVRAA”), 38 U.S.C. § 4212. VEVRAA and its implementing regulations require federal contractors to submit a report to the Secretary of Labor (a “VETS-100 report”), at least annually, stating the number of “qualified covered veterans” they employ. A government agency may not, with certain exceptions, enter into contracts with a contractor that has not filed a VETS-100 report for the previous fiscal year, if the contractor was required to do so.

The relator alleges that between 1998 and 2006, Schindler entered into hundreds of contracts with the federal government that were subject to VEVRAA while failing to comply with certain VEVRAA requirements. Specifically, the relator alleged that for several years during the period, Schindler failed to file any VETS-100 reports, and that, in other years, Schindler filed false VETS-100 reports. According to Schindler, the relator had no personal knowledge of Schindler’s VETS-100 filings through his prior employment at the company. Rather, his allegations are based on responses by the Department of Labor to several FOIA requests that his wife submitted seeking Schindler’s VETS-100 reports for various years. In response to these FOIA requests, a Department of Labor official reported that the Department was unable to locate any VETS-100 reports filed by Schindler for the years 1998 to 2003 and provided Schindler’s VETS-100 reports for 2004 to 2006.

The relator’s complaint alleges that Schindler failed to file VETS-100 reports from 1998 to 2003. It further alleges that VETS-100 reports filed by Schindler after 2003 contained false information in that they purportedly undercounted the number of covered veterans that Schindler employed. The relator’s complaint alleges damages to the federal government in excess of $100 million. If such damages were proved, the FCA’s treble damages provision would increase Schindler’s potential liability to more than $300 million, in addition to statutory civil penalties ranging from $5,500 to $11,000 for each violation. The United States did not intervene in the case.

The Public Disclosure Bar

The FCA’s public disclosure bar, codified at 31 U.S.C. § 3730(e)(4)(A), provides:

No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.

Section 3730(e)(4) was amended, effective March 23, 2010, by PPACA. However, that revision is not retroactive and therefore does not apply to the issue in this case. See Graham County Soil & Water Conservation Dist. v. United States ex. rel. Wilson, 130 S. Ct. 1396 (2010).

The Second Circuit’s Decision

The Second Circuit held that FOIA disclosures do not necessarily trigger the public disclosure bar – whether a particular disclosure triggers the bar depends on whether the particular document disclosed is one of the specific sources enumerated by § 3730(e)(4), such as a government report or investigation. The Second Circuit further held that whether the documents disclosed in response to FOIA requests constitute “reports” or “investigations” depends on the nature of the documents. Specifically, the Second Circuit held that the word “report” as used in § 3730(e)(4) “connotes the compilation of analysis of information in order to serve some end of government.” The Second Circuit further held that the word “investigation” as used in § 3730(e)(4) must be construed more “narrowly than simply a ‘detailed examination’ or ‘search.’ Instead, an ‘investigation’ here implies a more focused and sustained inquiry directed toward a government end, for example, uncovering possible noncompliance or assembling information relevant to a problem of particular concern to the government.” Because it determined that the documents turned over in response to the relator’s FOIA requests in this instance were not “reports” or “investigations” under these narrow definitions, the Second Circuit concluded that the public disclosure bar did not apply to the relator’s claims.

The Circuit Split

The Second Circuit’s decision conflicts with decisions by the First, Third, and Fifth Circuits which have held that an agency’s response to a FOIA request is a “report” and its search for documents responsive to such a request is an “investigation” sufficient to trigger the FCA’s public disclosure bar. See United States ex rel. Mistick v. Housing Auth. of the City of Pittsburgh, 186 F.3d 376, 383-84 (3d Cir. 1999); United States ex rel. Ondis v. City of Woonsocket, 587 F.3d 49, 56 (1st Cir. 2009); United States ex rel. Reagan v. E. Tex. Med. Ctr. Reg’l Healthcare Sys., 384 F.3d 168, 176 (5th Cir. 2004). The Tenth Circuit has likewise held, without extensive analysis, that a FOIA response triggered the public disclosure bar. See United States ex rel. Grynberg v. Praxair, Inc. 389 F.3d 1038, 1049 (10th Cir. 2004). In an unpublished decision, the Fourth Circuit also concluded, without analysis, that “FOIA information . . . does not operate as a jurisdictional bar.” See United States ex rel. Bondy v. Consumer Health Found., 28 F. App’x 178, 181 n. 2 (4th Cir. 2001).

The Second Circuit’s decision is in accord with the Ninth Circuit which has held that “a response to a FOIA request is not necessarily a report or investigation, although it can be, if it is from one of the sources enumerated in the statute.” See United States ex rel. Haight v. Catholic Healthcare West, 445 F.3d 1147, 1153-56 (9th Cir. 2006). According to the Ninth Circuit, “responding to a FOIA request requires little more than duplication,” and thus does not “involve extensive governmental work product” necessary to trigger the public disclosure bar.

The Sixth Circuit has noted the FOIA disclosure issue without fully resolving it. See United States ex rel. Burns v. A.D. Roe Co., 186 F.3d 717, 725.

To Be Continued…

Our next post will discuss the highlights from the oral argument in the matter and the amicus brief submitted by the AHA and PhRMA seeking reversal of the Second Circuit’s decision.

The trial court held that Spilton, a clinical social worker, committed 325 separate violations of the Missouri FCA by submitting Medicaid reimbursement claims for clinical services that she did not provide at all or did not provide in accordance with the rules governing the Medicaid program. The Missouri FCA provides for treble damages, so the trial court entered an award of damages in the amount of $136,155, based on single damages of $45,385. The Missouri FCA also provides for a penalty between $5,000 and $10,000 “for each separate act in violation” of the Missouri FCA. The trial court imposed a penalty of $5,000 for each of the 325 violations, for a total penalties award of $1,625,000.

On appeal, the Missouri Supreme Court rejected Spilton’s argument that the penalties award violated due process. The court distinguished statutory penalties from punitive damages awards by juries because the statute defines “in advance the prohibited conduct and the legislative prescribed penalty.” As applied to Spilton, the court found that the penalties provision was not vague or arbitrarily enforced, since the trial court applied the minimum permissible penalty to each of Spilton’s 325 violations. The Missouri Supreme Court further held that the penalties award did not violate the Eighth Amendment’s prohibition on excessive fines because “when the litigant receives the lowest possible penalty proscribed by a statutory range, as Spilton did, the penalty is not excessive.” The court also found that the penalties award did not constitute cruel and unusual punishment because $5,000-per-violation penalty assessed was not so grossly excessive “as to shock the conscience.”

U.S. Supreme Court decisions that limit punitive damage awards on due process grounds may provide a basis to limit excessive penalties awards under the FCA, especially when the amount of the penalties award far exceeds the government’s actual damages and the amount of actual damages is substantial. Although the U.S. Supreme Court has declined to set a bright line test for determining when an award would run afoul of the due process clause, a punitive damages award that exceeds a substantive actual damages award by a ratio of more than 1:1 may run afoul of the due process clause, and it would be unlikely that a punitive damages award that was more than 9 times compensatory damages could ever comport with due process requirements. See Exxon Shipping Corp. v. Baker, 128 S. Ct. 2605, 2624-25 (2008). The Supreme Court’s reasoning regarding punitive damages may be equally applicable to penalties awards under the FCA, a statute that the U.S. Supreme Court has held is punitive in nature. If so, the Missouri Supreme Court’s decision in Spilton may well be contrary to federal due process requirements of the U.S. Constitution, and may be subject to review by the U.S. Supreme Court.

The circuits have been split on whether this requirement means that the relator was required to provide the information to the Government before the “public disclosure” or simply before filing the lawsuit. In United States ex rel. Duxbury v. Ortho Biotech Products, L.P., 579 F.3d 13 (1st Cir. 2009), the First Circuit joined the Fourth and Eighth Circuits in holding that a relator need only provide information to the Government before filing suit, and not before the public disclosure. By contrast, the Sixth and DC Circuits have held that an “original source” must provide the Government with the information prior to any public disclosure. The Second and Ninth Circuits have adopted an even stricter requirement, holding that a relator must actually be the source of the public disclosure.

Congress recently amended the FCA’s “original source” provision in the Patient Protection and Affordable Care Act (PPACA), Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010). The PPACA provides that a person qualifies as an “original source” if the person either: (a) voluntarily discloses the information to the Government “prior to a public disclosure,” or (b) voluntarily discloses the information to the Government before filing an action and “has knowledge that is independent of and materially adds to the publicly disclosed allegations.” However, this provision of the PPACA is not retroactive, see Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, 130 S. Ct. 1396, 1400 n. 1 (2010), and thus, the Duxbury question and the circuit split will continue to have practical significance for cases that will be decided under the prior version of the FCA.