Designed for busy in-house counsel and compliance professionals, this newsletter seeks to bring you up to speed on key federal and state False Claims Act (FCA) developments, with links to primary resources. Each quarter, we will provide key takeaways and discuss some of the most significant false claims topics.
In this third newsletter of 2023, we ask: How does the Supreme Court’s recent decision in SuperValu impact the FCA’s scienter standard and what should companies be doing in response? In what ways does the Polansky decision provide a guide to companies seeking to dismiss FCA claims? How might the new guidance from the National Institutes of Health (NIH) for grant awardees that is scheduled to take effect in October lead to new FCA claims? Why might a new proposal by the U.S. Department of Health and Human Services (HHS) disqualify Medicare providers? Which recent FCA cases have produced record recoveries and settlements? What do companies and individuals in New York, as well as out of state, need to know about the expansion of New York’s FCA statute? The answers to these questions and more are here in our July 2023 FCA Update.
Federal
Supreme Court Picks a Winner: Resolving Circuit Split, Court Finds that Proof of FCA Scienter Depends on Defendant’s Subjective Beliefs. On June 1, 2023, the Supreme Court issued a landmark decision in United States ex rel. Schutte v.SuperValu, Inc. , unanimously holding that proving scienter (knowledge of alleged wrongdoing) under the False Claims Act depends on a defendant’s subjective belief as to whether the submitted claim was false, and not on what an objectively reasonable person may have known or believed. In other words, it is sufficient for a relator (or the government) to prove that a defendant knew or suspected a submitted claim was false, even if an objectively reasonable person may not have known or believed otherwise. Of note for corporations: when discussing SuperValu’s subjective belief, the Court highlighted internal emails and other documentation showing that SuperValu was aware that the rationale for its claims was likely faulty and that it was submitting false claims. Thus, under Schutte, faulty but reasonable compliance views can trigger FCA liability, undermining a common defense.
Evidence of actual knowledge can establish scienter under the FCA, of course, but so can evidence of deliberate ignorance or reckless disregard of the truth. So, although the SuperValu decision resolved a circuit split on one issue, it probably created new uncertainty when it held that defendants act with “reckless disregard” for the falsity of claims if they are “conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway.” We expect to see litigation to determine just what constitutes a “substantial and unjustifiable risk” sufficient to show reckless disregard.
Companies that submit claims to the federal government can take away two lessons from SuperValu: It is important to (1) review whether there are any ambiguous regulatory, contractual, or other legal requirements and create non-privileged records that demonstrate the companies’ good faith efforts to understand and abide by the ambiguous criteria; and (2) review internal compliance programs to ensure they are consistent with the Department of Justice’s Evaluation of Corporate Compliance Programs.
Supreme Court Decides Government Has Broad Discretion to Dismiss FCA Cases. On June 16, 2023, the Supreme Court issued a decision in United States ex rel. Polansky v. Executive Health Resources, Inc., giving the U.S. government broad power to dismiss qui tam FCA lawsuits even after it has initially declined to intervene. The Court held that the government may subsequently intervene and move to dismiss at any point in the case “upon a showing of good cause.” The Supreme Court did not define “good cause,” but noted in a footnote to its opinion that the Third Circuit held below that it was “neither a burdensome nor unfamiliar obligation.” The Court also clarified that a district court should apply Federal Rule of Civil Procedure 41(a) to analyze a motion to dismiss by the government. Under this rule, the government is given “substantial deference” and will succeed in “all but the most exceptional cases.” In his dissent, Justice Thomas raised a long-dormant question about whether the FCA’s qui tam procedures violate Article II of the U.S. Constitution. Under this theory, the Act’s qui tam procedures improperly give a private party—the relator—authority to control the litigation on behalf of the United States, a responsibility that the Constitution exclusively vests in the Executive Branch. That theory garnered additional support in a concurrence by Justices Kavanaugh and Barrett. We advised in our client alert that FCA defendants should keep the Polansky ruling in mind when requesting DOJ to intervene and dismiss meritless and unduly burdensome FCA matters, and should also consider raising a constitutionality defense if DOJ declines and the qui tam relator wishes to continue pursuing the FCA suit.
NIH’s New Grant Guidance May Lead to New FCA Claims. On May 19, 2023, NIH issued updated policy guidance requiring that primary grant awardees impose written obligations on foreign entity subawardees to provide all relevant research records every three months. NIH published notice of these new obligations in the Federal Register on June 5, 2023, inviting public comment on the updated policy which is set to take effect on October 1, 2023. These new requirements are widely seen as an effort by HHS Office of Inspector General to impose greater accountability on prime grant awardees’ oversight of subawards to foreign entities. As such, the new requirements are likely to lead to increased enforcement activity and new FCA claims. If the requirements are enacted, NIH prime awardees will need to take affirmative steps to ensure compliance. This will include modifying contracts with foreign subawardees to include formal written agreements requiring that the foreign entity must provide copies of all lab notebooks, all data, and all documentation that supports the research outcomes. These supporting materials must be provided to the prime awardee with each scientific update no less than once every three months. Prime NIH grant awardees must also be able to produce copies of written agreements with subrecipients detailing these requirements. While the new requirements will lead to greater scrutiny of foreign subrecipients, the prime awardee will bear the responsibility for compliance. Prime awardees should pay special attention to these requirements if they engage with foreign subawardees, as many may lack the type of infrastructure necessary to support adequate recordkeeping and record preservation, and should regularly monitor foreign subawardees’ research records and data.
HHS Proposal to Disqualify Medicare Providers with Prior FCA Judgment. Under proposed Medicare regulations scheduled to be published on August 7, 2023, HHS’s Centers for Medicare & Medicaid Services (CMS) could revoke or deny a company’s Medicare billing privileges if the company (or its “owner, managing employee, officer, or director”) has had a civil FCA judgment imposed against it in the last 10 years. The regulations include a number of factors (e.g., monetary amount of judgment, age of judgment, history of adverse actions against company) that CMS could consider in making its decision. Any adverse decisions are subject to administrative and judicial review (42 CFR § 498.5). CMS contends that this proposal addresses a vulnerability within Medicare by allowing CMS to revoke Medicare enrollment if serious misbehavior occurs and is brought to light in an FCA civil judgment. Crucially, the proposed regulations provide that settlement agreements would not count as judgments. The comment period closes on September 11, 2023. If these proposed regulations become final, Medicare suppliers and providers will need to carefully consider whether to settle or to contest FCA liability—as an FCA judgment could have ramifications beyond the immediate lawsuit. Medicare suppliers and providers may want to comment on these regulations during the notice-and-comment period.
Consulting Firm Settles One of the Largest Procurement Fraud Matters in History. On July 21, 2023, consulting firm Booz Allen Hamilton agreed to pay the United States $377 million to settle FCA allegations that, between 2011 and 2021, the company improperly billed commercial and international costs to its government contracts. In this qui tam complaint, the government alleged that these costs had either no relationship to government contracts or were allocated to contracts in disproportionate amounts. The government also alleged that Booz Allen failed to disclose the methods by which it accounted for costs supporting its commercial and international businesses and obtained reimbursements for these costs that provided no benefit to the United States. In its press release, DOJ announced that this is one of the largest procurement fraud settlements in history and that the relator would receive close to $70 million in connection with the settlement.
Defense Contractor Reaches Largest FCA Settlement from Iraq War. On July 5, 2023, Aerospace and Defense Contractor KBR, Inc. entered into a $108.75 million settlement with relators over allegations that the company routinely charged the U.S. Army for unnecessary materials under an Iraq War logistics contract. KBR was awarded a multibillion-dollar Logistics Civil Augmentation Program contract with the Army, which required KBR to check if it had excess materials available in the relevant country before ordering new materials. The FCA complaint alleged that KBR frequently failed to check its warehouses in Iraq when ordering materials and “routinely lied” to the Army about those checks, which led to $340 million in excess materials – including ordering electrical wire, when it already had 65 years of inventory in Iraq warehouses. The relator will receive close to $35 million and the settlement is reported as the largest recovery for fraud stemming from the Iraq War.
Hospital Settles Medicare Kickback Case. On May 31, 2023, the Detroit Medical Center (DMC) agreed to pay over $29 million to resolve FCA allegations that it operated a kickback scheme and falsified Medicare claims. DOJ alleged that DMC selected 13 physicians who had referred a large number of patients to its hospitals and arranged to send nurse practitioners and physician assistants to these private physicians at no cost or below market value in order to encourage the physicians to refer Medicare patients to DMC facilities.
State
New York Expands its False Claims Act Statute. A new law took effect on May 3, 2023, expanding the scope of the New York False Claims Act (NY FCA) to include entities and individuals that fail to file tax returns in New York. The NY FCA imposes liability on any party that “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the state or a local government.” The amended NY FCA now applies to tax law violations where an entity or individual “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the state or a local government, or conspires to do the same.” The prior version of the NY FCA excluded the failure to file tax returns from the scope of the statute. Unlike the federal version, the NY FCA is limited to defendants with taxable income or sales over $1 million in the tax year and damages in excess of $350,000. Companies and individuals—including those based outside New York that operate in the state—should take note of this change in the law as it will likely incentivize whistleblowers to bring qui tam suits against non-filers.
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