After a substantial jury verdict following a lengthy trial, the United States Court of Appeals for the Fifth Circuit declined to accept the defendants’ invitation to throw out the government’s complaint in intervention as a sanction for engaging in an eight-year investigation campaign in a False Claims Act (“FCA”) case. However, in a welcome turn of events, the Fifth Circuit substantially cut the damages in ruling that the government’s complaint did not relate back to the relator’s original complaint and that it could recover any damages from acts taken more than six years from the filing of its complaint in intervention due to the statute of limitations. This case could serve as a much-needed deterrent for the government to continue subjecting defendants to an extensive and burdensome investigatory process while the case remains under seal.
In U.S. ex rel. Aldridge v. Corporate Mgmt., Inc., et al., the Fifth Circuit addressed an appeal of the judgment against a hospital, its management company, and its owners, which found that the defendants falsified cost reports and paid management fees for work that was never performed. At trial, the jury awarded the government $10.8 million, which when trebled pursuant to statute and resulted in a verdict in excess of $32 million.
The FCA requires every new case be filed under seal. Here, the hospital’s former CEO filed a qui tam complaint in May 2007. Pursuant to 31 U.S.C. § 3730(b)(2) of the FCA, “The complaint shall . . . remain under seal for at least 60 days, and shall not be served on the defendant until the court so orders.” However, “[t]he Government may, for good cause shown, move the court for extensions of the time during which the complaint remains under seal.” Id. Despite the statutorily mandated 60-day investigation period, the government filed 18 sealed motions for extensions of time — the last of which in 2015. In the end, the government’s sealed investigation lasted eight years before it ultimately elected to intervene and take over the litigation.
On appeal, the defendants argued that (1) the FCA’s six-year statute of limitations bars claims accruing before September 2009 because the government’s claims did not relate back to the relator’s complaint; and (2) the FCA’s tolling period does not apply because the government failed to make a diligent investigation.
With respect to the first argument, the defendants argued that neither of the relator’s complaints nor the government’s notice letter to defendants (summarizing relator’s allegations) made any mention of the specific allegations of defendants’ excessive salaries or purchases of luxury cars. In applying the law, the Fifth Circuit stated that “relation back is generally improper when, though a new pleading shares some elements in common with the original pleading, it faults the defendant for conduct different than that alleged in the original complaint.” The Fifth Circuit found “[t]hat is the scenario here.” Specifically, the Fifth Circuit stated that “the upshot of the Government’s complaint was to fault [the defendants] for conduct different from that alleged by [the relator].” Thus, “[r]ather than ‘clarifying’ or ‘adding detail’ to the relator’s initial allegations, the Government’s intervening complaint set forth new ones,” which do not relate back to the original complaint.
Next, the Fifth Circuit addressed whether the FCA’s tolling provisions salvage the government’s pre-September 2009 claims. To benefit from the tolling period, the government must file suit within “3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances.” 31 U.S.C. § 3731(b)(2). “The Government must also have acted with due diligence to preserve its claim.” The defendants claimed that the government’s delayed response was “far too long to claim diligence.” The Fifth Circuit agreed, describing the government’s conduct as “dawdling” and finding that “the Government offers no explanation for how, despite [having] knowledge, it was nonetheless diligent in investigating and asserting its claims.” Thus, it refused to permit the government to invoke the tolling provision, and instead applied the FCA’s statute of limitations to bar the government’s claims that accrued before September 2009, six years prior to when the government filed its first complaint in intervention.
The Fifth Circuit lamented that “the Government’s incessant delay in intervening [was] inexcusable” and that the district court’s granting of 18 requests for extension of the seal “enabled the Government’s gamesmanship.” In addressing the defendants’ arguments, the Fifth Circuit held that “the Government’s dilatory conduct over the protracted procedural history of this case gives pause,” but declined to overturn the verdict entirely. Instead, it cut the verdict by more than half, leaving only those damages arising from claims before the limitations period expired.
It remains to be seen whether other courts will follow the Fifth Circuit’s strict interpretation of the permissible scope of the government’s investigatory period. But given that there was no sanction for the government’s abuse of the investigatory process, that would seem to be all the more reason that district courts should be vigilant in not allowing the government to abuse it because the injury the defendant sustains from the violation is largely irreparable.