False Claims Act – 2014 Year in Review

by Parker Poe Adams & Bernstein LLP
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Background

The False Claims Act (FCA) imposes liability on individuals and companies who defraud or submit false claims to the federal government.  The FCA allows the federal government to seek treble damages, civil penalties and attorney’s fees for violations of the Act.  Further, the FCA contains qui tam, or whistleblower, provisions which award whistleblowers up to 30% of the amount recovered by the federal government.  FCA suits and recoveries have exploded in recent years.  The federal government reports that FCA recoveries have topped $22 billion since 2009.[i]  Accordingly, the FCA is widely considered the fastest growing area of federal litigation and has been described as the “government’s most potent civil weapon in addressing fraud.”[ii]

2014 – Record-Breaking Year for the False Claims Act

2014 was a record-breaking year for the FCA.  In 2014, the federal government recovered $5.69 billion in settlements and judgments under the FCA – the highest one-year total ever.[iii]  This figure only reflects the federal government’s portion of the recoveries and does not include the billions of dollars recovered by states under the state versions of the FCA.[iv] 

The record-setting recoveries in 2014 were driven in large part by qui tam actions filed by whistleblowers who receive up to 30% of the amount recovered by the federal government.  In 2014, whistleblowers received more than $435 million under the FCA – the second-highest total ever.[v]  Given the huge financial incentives for whistleblowers and their counsel, it is no surprise that the number of FCA cases continues to rise year after year. 

Financial Services Industry

Of the $5.69 billion the federal government recovered in 2014, $3.1 billion came from banks and other financial institutions.[vi]  The financial services industry has been a primary target for the federal government and whistleblowers since the 2008 financial crisis.  In 2012, the Department of Justice formed the Residential Mortgage-Backed Securities (RMBS) Working Group to “identify, investigate, and prosecute instances of wrongdoing in the packaging, selling, and valuing of residential mortgage-backed securities.”[vii]  Investigations by the RMBS Working Group have led to huge settlements with banks and other financial institutions.  Indeed, in 2014 the federal government secured $3.1 billion in FCA settlements from four major banks.[viii]  These settlements involved allegations of fraudulent origination, underwriting or sale of federally-secured mortgages. The government’s recoveries from these four banks alone was approximately ten times its total recoveries from the financial-services industry in 2013.

The federal government’s focus on the financial services industry extends far beyond these four large settlements.  In September 2014, Attorney General Eric Holder stated that the Department of Justice had “brought more than 60 cases against financial institutions since 2009, resulting in recoveries totaling more than $85 billion, including civil remedies, criminal fines and consumer relief.”[ix]  These statistics show 2014 was not an anomaly for the financial services industry, and companies in this industry should expect even closer scrutiny from the government going forward.  

Health Care Industry

Historically, FCA claims have targeted the health care industry, and 2014 was no exception.  According to the Department of Justice, more than 60% of new matters were health care related, and 2014 health care-related recoveries exceeded $2.3 billion.[x]  This is the fifth straight year the federal government has recovered more than $2 billion from companies in the health care industry.[xi]

Pharmaceutical companies accounted for a substantial part of the $2.3 billion recovered from the health care industry in 2014.  For example, Johnson & Johnson and two of its subsidiaries paid $1.1 billion to resolve FCA claims involving allegations it violated the Anti-Kickback Statute by making improper payments to physicians and a pharmaceutical provider and engaged in off-label marketing of three prescription drugs.[xii]

The federal government also focused on hospitals and other medical providers in 2014.  For example, one large hospital chain paid more than $98 million dollars to resolve allegations it improperly billed Medicare, Medicaid and TRICARE for inpatient services which could have been provided in a less costly setting.[xiii]  Another large hospital chain paid $85 million to resolve allegations that it violated the Stark Law, which prohibits hospitals from billing Medicare for certain services when referred by physicians who have a financial relationship with the hospital.[xiv]

Given the federal government’s historic focus on the health care industry and the amount of government funding tied to the health care industry, we expect the number of health care-related cases will continue to rise in the future.

Government Procurement

Although the financial services and health care industries dominated FCA recoveries for 2014, the federal government has also historically focused on fraud in government procurement as well.  For example, in 2014 one large defense contractor paid $23 million to resolve allegations it submitted false claims for labor to the U.S. Air Force.[xv]  The defense industry may see a decline in new FCA matters as the United States devotes fewer resources to the conflicts in Iraq and Afghanistan.  However, defense and procurement are traditional FCA targets and government contractors must take proactive steps to avoid billing or compliance issues that may lead to FCA liability.

Takeaways from 2014

A review of FCA cases from 2014 provides valuable lessons for conducting business in 2015:

  1. The financial services industry is the new “hot spot” for FCA scrutiny given the Department of Justice’s formation of the RMBS Working Group and increased focus on mortgage and other types of financial fraud.  This trend should continue in 2015.
  1. The health care industry is a traditional FCA target and this industry should expect continued FCA scrutiny because of the amount of government expenditures for health care.
  1. The defense industry may see a decline in new FCA matters as the United States devotes fewer resources to the conflicts in Iraq and Afghanistan.  However, the defense industry is a traditional FCA target and government contractors must still take proactive steps to avoid billing or compliance issues that may lead to FCA liability.
  1. Companies should take internal reports of misconduct seriously.  More than 83% of new FCA matters were brought by whistleblowers.  Although whistleblowers have a great financial incentive to report alleged misconduct to the government, studies show that most whistleblowers report their conduct internally before going to the government.[xvi]  Implementing a compliance plan and conducting an internal investigation of internal reports of misconduct may defuse a FCA suit before it begins.

[i] Press Release, Office of Pub. Affairs, U.S. Dept. of Justice, Justice Department Recovers Nearly $6 Billion from False Claims Act Cases in Fiscal Year 2014 (Nov. 19, 2014), http://www.justice.gov/opa/pr/justice-department-recovers-nearly-6-billion-false-claims-act-cases-fiscal-year-2014.

[ii] Press Release, Office of Pub. Affairs, U.S. Dept. of Justice, Acting Assistant Attorney General Stuart F. Delery Speaks at the American Bar Association’s Ninth National Institute on the Civil False Claims Act and Qui Tam Enforcement (Jun. 7, 2012), http://www.justice.gov/iso/opa/civil/speeches/2012/civ-speech-1206071.html.

[iii] See id. Note 1.

[iv] See id.

[v] See id.

[vi] See id.

[vii] Press Release, Office of Pub. Affairs, U.S. Dept. of Justice, Attorney General Holder Speaks at the Announcement of the Financial Fraud Enforcement Task Force’s New Residential Mortgage-Backed Securities Working Group (Jan. 27, 2012), http://www.justice.gov/iso/opa/ag/speeches/2012/ag-speech-120127.html.

[viii] See id. Note 1.

[ix] See id.

[x] See id.; see also Fraud Statistics, U.S. Dept. of Justice (Nov. 20, 2014), http://www.justice.gov/civil/pages/attachments/2014/11/21/fcastats.pdf.

[xi] See id. Note 1.

[xii] See id.

[xiii] See id.

[xiv] See id.

[xv] See id.

[xvi] See Retaliation:  When Whistleblowers Become Victims, A Supplemental Report of the 2011NBES, http://www.ethics.org/nbes/

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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