On November, 2, 2015, President Obama signed into law the Bipartisan Budget Act of 2015 (“BBA”), a two-year budget deal that funds the government through the 2017 fiscal year. A relatively inconspicuous provision of the BBA, the “Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015” (Section 701), requires federal agencies to make inflationary adjustments to civil monetary penalties. The initial “catch-up adjustment” is to be made through an interim rulemaking under the Administrative Procedures Act (“APA”) and must go into effect by August 1, 2016. Under the “catch-up” provision, the amount by which civil penalties must be adjusted is based on the difference between the Consumer Price Index (“CPI”) in October of the calendar year in which they were last adjusted and the CPI in October 2015, but is capped at 150%. Agencies are also required to make annual adjustments thereafter, also based on changes in the CPI. Unlike the catch-up adjustment, these subsequent adjustments are made automatically and without regard to the rule-making requirements of the APA.

What Providers Need to Know

Although this tension has always existed, the BBA’s impending escalation of the FCA’s already draconian civil penalties has thrown it into even sharper relief. This is particularly true in health care cases alleging fraud in Medicare billing since they often involve the submission of thousands and thousands of claims for payment, thus resulting in statutory penalties that bear little or no relation to the actual loss amount or to the degree of the defendant’s culpability.

Given the lack of clear guidance regarding the interplay between mandatory civil penalties and an FCA defendant’s rights under the Excessive Fines Clause, an FCA defendant’s potential exposure has never been greater, nor has it ever been more unpredictable. Moreover, the BBA’s compulsory increase in civil penalties will no doubt serve to further encourage qui tam relators to bring cases in which there is no evidence of actual loss.

The Department of Justice (“DOJ”) last increased civil penalties under the False Claims Act (“FCA”) following the Debt Collection Improvement Act’s 1996 amendment to the Federal Civil Monetary Penalties Inflation Act of 1990. That amendment required federal agencies to review their civil monetary penalties every four years and adjust them up to 10% of the existing penalty. In August 1999, the DOJ applied the full 10% increase, raising civil penalties under the FCA to their current levels, from a minimum of $5,000 to $5,500, and from a maximum of $10,000 to $11,000.

Under Section 701 of the BBA, these penalties, which are automatic and mandatory for each false claim, even in the absence of proof of damages, see S. Rep. No. 99-345 at 8 (1986), could potentially increase to a minimum of $7,850, and a maximum of $15,700, per claim. Even at their present levels, FCA civil penalties can, and very often do, result in awards that far eclipse any actual economic harm to the government.

Although courts do have some discretion under the Eighth Amendment’s Excessive Fines Clause, which prohibits the imposition of penalties that are “grossly disproportional to the gravity of a defendant’s offense,” to depart from the FCA’s penalty scheme if the penalties would be unconstitutionally excessive, what constitutes an “excessive” penalty is far from clear.

Related Case

In United States ex rel. Bunk v. Gosselin World Wide Moving, 741 F.3d 390 (4th Cir. 2013), an FCA case involving the submission of 9,136 false invoices to the Department of Defense (“DOD”) pursuant to a contract under which the DOD paid out a total of approximately $3.3 million, the Fourth Circuit reversed the district court’s refusal to impose a civil penalty and remanded for entry of an award of $24 million.

• The district court had determined that the penalty amount, which, based on the $5,500 minimum for the 9,136 false claims would necessarily exceed more than $50 million, was grossly out of proportion to the defendant’s misconduct and would contravene the Excessive Fines Clause, especially given the dearth of evidence at trial of actual damages.
• The district court concluded that it lacked discretion to reduce the statutory penalties below the minimum per-violation penalty, and thus no penalty could be awarded at all.
• The Fourth Circuit disagreed, holding that the government and Relator were allowed to seek a reduced penalty amount of $24 million, and, moreover, that such sum was not unconstitutionally “excessive.” In so concluding, the court focused principally on what it perceived was the “necessary and appropriate deterrent effect” of the award.
• The Fourth Circuit court did not completely ignore the issue of economic harm to the government, however, noting that the district court’s conclusion that there had been insufficient proof of damages was inconsistent with Gosselin’s apparent profit motive in making the statements at issue, and that the government undoubtedly had suffered significant opportunity costs as a result of Gosselin’s scheme.
• The court thus indicated that while the “concept of harm need not be confined strictly to the economic realm,” actual loss to the government remains at least part of the inquiry into whether a civil penalty violates the Excessive Fines Clause. Nevertheless, the court failed to offer any meaningful guidance as to when civil penalties under the FCA would cross the line from constitutionally permissible to unconstitutionally excessive, leaving unresolved the increasing tension between the FCA’s mandatory civil penalty provision and the Eighth Amendment’s constitutional guarantee against the imposition of excessive fines.