Takeaway: The H.I.G. case will no doubt embolden the Department of Justice and whistleblowers going forward. Now DOJ and relators have a strong summary judgment opinion to ground liability in future cases and several sizeable recoveries against PE firms to use as comparators for settlement purposes. With a more rigorous regulatory environment under the Biden administration, we expect more FCA settlements in this space to follow.

Private equity firm H.I.G. Capital has settled a False Claims Act lawsuit pending in the District of Massachusetts. Under the settlement, H.I.G. will pay $19.95 million, with two former executives of H.I.G.’s portfolio company South Bay Medical Center (“South Bay”) paying an additional $5.05 million. The whistleblower is expected to receive $6.75 million under the settlement. The recovery is in addition to an earlier 2018 settlement where South Bay agreed to pay $4 million, bringing the Government’s total recovery to over $28 million. South Bay subsequently filed for bankruptcy.

The lawsuit, U.S. ex rel. Martino-Fleming v. South Bay Mental Health Centers (D. Mass.), was filed in 2015 and alleged that H.I.G.’s portfolio company used unlicensed or unqualified personnel to provide mental health care to patients and failed to properly supervise personnel. The Commonwealth of Massachusetts intervened in the whistleblower’s case, while the U.S. Department of Justice declined to do so.

Earlier this year, the District Court denied the remaining defendants’ summary judgment motions. The District Court found that there was sufficient evidence to go to trial on whether H.I.G. knew of fraudulent conduct at its portfolio company but refused to rectify the improper behavior. In other words, the court found that H.I.G. could face FCA liability if it knew of fraud occurring at its portfolio company but looked the other way. This settlement followed in the months after H.I.G.’s summary judgment motion was denied.

The H.I.G. case is the first successful FCA case against a PE firm to proceed through discovery and summary judgment. The FCA provides for expansive liability via its treble damages and civil monetary penalty provisions. Thus, defendants who fail at summary judgment face potentially crushing liability at trial, creating a substantial incentive to settle.

The H.I.G. recovery also appears to be the largest FCA settlement against a PE firm. In 2018, PE firm Riordan, Lewis and Haden Inc. along with its portfolio company settled the claims against them for $21.05 million, but their settlement obligations were joint, so it remained unclear how much the PE firm (as opposed to its portfolio company) actually paid to the government. Here, the $19.95 million is purely the obligation of the PE firm, making it effectively the largest FCA recovery against a PE firm to date. Not only that, but the H.I.G. case appears to be the only FCA recovery against a PE firm where the U.S. declined to intervene.

The H.I.G. case highlights the growing scrutiny of PE firms by regulators and whistleblowers alike. In the last decade, private equity has moved firmly into the highly regulated healthcare sector. Regulatory risk has followed. Of the five FCA recoveries against PE firms, four of those recoveries occurred in the last two years.

The H.I.G. case will no doubt embolden the Department of Justice and whistleblowers going forward. Now DOJ and relators have a strong summary judgment opinion to ground liability in future cases and several sizeable recoveries against PE firms to use as comparators for settlement purposes. With a more rigorous regulatory environment under the Biden administration, we expect more FCA settlements in this space to follow.