[co-author: Stacy Hadeka]
The False Claims Act, 31 U.S.C. §§ 3729-3733, continues to pose unique liability risk for aerospace, defense, and government services (ADG) companies that directly or indirectly conduct business with the U.S. Government. In 2016, the U.S. Department of Justice (DOJ) obtained more than US$4.7bn in settlements and judgments from civil cases involving alleged FCA violations and fraud committed against the Government. This represented roughly a 34 percent increase compared to amounts obtained in 2015. FCA lawsuits continue to be initiated often by whistleblowers under the statute’s qui tam provisions. Of the US$4.7bn obtained in 2016, US$2.9bn related to lawsuits filed by individual whistleblowers. The number of whistleblower-initiated qui tam lawsuits exploded to 702, or an average of 13.5 cases every week. Although the Health Care and Finance industries were most often the focal point of large FCA recoveries, the ADG industry continues to be a significant target for qui tam relators and Government enforcement authorities.
The following presents a discussion of the most significant FCA issues likely to impact the ADG industry in 2017.
The Trump administration’s prosecution of FCA actions will likely remain rigorous
The enforcement of the FCA is likely to continue under the Trump administration. The FCA has gained favor from both Democratic and Republican lawmakers, including influential Republican Senator Chuck Grassley who sponsored the 1986 FCA amendments that significantly strengthened the statute’s enforcement provisions. Public comments made by new U.S. Attorney General Jeff Sessions so far indicate solid support for FCA enforcement. In recent testimony before the Senate Judiciary Committee, Attorney General Sessions stated that he “will make it a high priority . . . to root out and prosecute fraud in federal programs and to recover any monies lost due to fraud or false claims.”1 In response to questions posed by Senator Grassley, Attorney General Sessions expressly stated that he supported the FCA, including the qui tam whistleblower provisions. The Attorney General's testimony is consistent with statements made by then-candidate Trump about reducing federal debt by eliminating waste, fraud, and abuse in the federal government.
It is uncertain, however, whether the Trump administration will formally continue several of the previous administration’s policies that relate to the FCA, such as those articulated in the so-called Yates Memorandum. The Yates Memorandum provides guidance to be used by DOJ civil and criminal lawyers “in any investigation of corporate misconduct” in order to “hold to account the individuals responsible for illegal corporate conduct.” In order to receive credit for cooperation, corporations are required to completely disclose “all relevant facts about individual misconduct,” including the identities of the individuals involved in the alleged misconduct.
Note, however, that in response to questions from Senator Mazie Hirono, D-Hawaii, at his confirmation hearing, Attorney General Jeff Sessions answered that “corporations are subject as an entity to fines and punishment for violating the law, and so are the corporate officers. And sometimes it seems to me … that the corporate officers who caused a problem should be subjected to more severe punishment than stockholders of the company who didn’t know anything about it.”
A dramatic spike in FCA civil penalties significantly increases financial risk for defendants
An interim final rule published 29 June 2016, nearly doubled the minimum and maximum statutory penalties under the FCA. For each false claim, the minimum penalty has increased from US$5,500 to US$10,781 and the maximum penalty from US$11,000 to US$21,563. The increase will apply to civil penalties assessed after 1 August 2016 for violations that occurred after 2 November 2015. This change dramatically increases the financial risk for FCA defendants, particularly in cases that involve the submission of hundreds or even thousands of separate invoices or claims to the government. In such cases, the increased penalty could incentivize the government and private litigants who sue on its behalf – known as relators – to pursue FCA claims even where damages may be difficult to prove. The FCA provides not only for penalties but also for damages, which are calculated at three times the amount of the loss sustained by the government. The increased penalty exposure will now need to be considered as defendants formulate their settlement strategies.
The courts and parties continue to wrestle with the implied false certification basis of liability
In Universal Health Services, Inc. v. United States ex rel. Escobar, the Supreme Court upheld the concept of "implied false certification” as a basis for FCA liability in some circumstances, but rejected attempts to expand liability under that theory to include any violation of a statute, regulation, or contract term that might lead the government to deny payment of a claim. Interpreting the FCA’s prohibition of “false or fraudulent” claims under the common law definition of fraud, the Court held that a defendant can be liable for a failure to disclose non-compliance with a legal requirement only if two conditions are satisfied:
The defendant’s claim not only requests payment but makes “specific representations about the goods or services provided;” and
The defendant’s failure to disclose non-compliance with legal requirements makes those representations misleading.
As discussed below, the Court also emphasized that, consistent with any theory that a claim is fraudulent by omission, the plaintiff must show that the legal requirement is material to the government’s payment decision. The Court expressly declined, however, to “resolve whether all claims for payment implicitly represent that the billing party is legally entitled to payment.”
Since the June 2016 issuance of the Escobar opinion, the courts have differed on whether the two conditions articulated in Escobar must always be satisfied. Many courts have strictly applied the Court’s requirement that the claim must include specific representations in order to be actionable under the implied false certification theory of liability.2 A few courts, however, have expansively read the Court’s declination to resolve whether all claims for payment implicitly represent entitlement to payment to essentially eviscerate the first condition of the Court’s two-condition test.3 The courts and parties will continue to grapple with whether the submission of a claim for payment can be deemed an implied false certification for purposes of FCA liability in cases where the alleged violation involves no specific representations about the goods or services provided.
The success of FCA defenses will often turn on the FCA’s “materiality” requirement
Perhaps the most significant aspect of Escobar will be the Court’s articulation of the gatekeeping role played by “materiality” in analyzing FCA liability. The Court held that FCA liability can arise from a violation of a legal requirement only if non-compliance with that requirement actually matters to the government’s decision to pay, and the defendant knew that it would. The Court described the materiality requirement as “rigorous” and “demanding,” and specifically rejected a lesser articulation of the standard offered by the Government and the relator. The Court ruled that “not every undisclosed violation of an express condition of payment automatically triggers liability.” The possibility that the government would be entitled to refuse payment if it were aware of the alleged violation is insufficient by itself to satisfy the FCA’s materiality requirement. The materiality requirement as articulated in Escobar already has been used successfully by an ADG company to defeat an FCA action.4
Recent decisions dictate that FCA liability does not apply to a defendant’s reasonable interpretation of an ambiguous regulation
On 9 January 2017, the Supreme Court denied certiorari in United States ex rel. Purcell v. MWI Corp., No. 16-361. In so doing, the Supreme Court let stand a significant decision by the D.C. Circuit that severely limits FCA liability where the allegations are dependent on violations of ambiguous agency regulations. In Purcell, the D.C. Circuit held that an FCA defendant did not knowingly submit a false claim by falsely certifying that it complied with a material–but ambiguous–regulation.5 The court explained that under such circumstances, courts should examine the “objective reasonableness” of the defendant’s interpretation of any ambiguous term and any evidence that the relevant agency warned the defendant away from that interpretation.6 The court’s decision in Purcell has been followed more recently in other jurisdictions.7
Successor liability for FCA violations does not easily attach in corporate asset purchases
In what appears to be the first opinion by a Federal Court of Appeals to address the issue, the Fourth Circuit in United States ex rel. Bunk v. Government Logistics N.V.8 recently held that the government or a relator seeking FCA recovery from a corporate wrongdoer’s successor-in-interest can do so only after articulating a theory of liability recognized in the common law. Federal common law recognizes that a corporation that acquires the assets of another corporation does not acquire its liabilities, unless: (1) the successor agrees to assume the liabilities; (2) the transaction is a de facto merger; (3) the successor is considered a “mere continuation” of the predecessor; or (4) the transaction is fraudulent. The mere continuation theory is available only if after the transfer of assets, only one corporation remains, and there is an identity of stock, stockholders, and directors between the two corporations. The court rejected the relator’s attempt to rely on a more relaxed “substantial continuity” theory. That theory would have expanded the common-law concept of “mere continuation” to allow courts to look at eight factors to determine whether successor corporation liability should be imposed.
The Government continues to have veto power over settlements
The courts of appeals continue to give the Government wide discretion in resolving False Claims Act cases. On 14 February 2017, in United States ex rel. Michaels v. Agape Senior Community, Inc., the Fourth Circuit concurred with the Fifth and Sixth Circuits that the language of Section 3730 is unambiguous and grants the Government “absolute veto power” over relator-defendant settlements throughout the litigation, regardless of whether the Government has intervened.9 The only Circuit to have limited the government’s veto power over voluntary relator-defendant settlements is the Ninth Circuit.10
The controversy over statistical sampling to prove liability continues
The Government and relators often seek to use statistical evidence to prove liability in cases with many individual claims. In Lawton ex rel. United States v. Takeda Pharm. Co., the relator alleged that the defendant had caused “false” claims to be submitted to the government by third parties as a result of the defendant “engag[ing] in an illegal off-label marketing campaign” for one of its drugs.11 The First Circuit stated that although a relator could use “factual or statistical evidence . . . without necessarily providing details as to each [submitted] false claim,” a relator still must identify, among other things, “specific medical providers who allegedly submitted false claims,” the “rough time periods, locations, and amounts of the claims,” and “the specific government programs to which the claims were made.”12 The First Circuit upheld the dismissal on 9(b) grounds.
In Agape, the district court rejected the relators request to use statistical sampling to prove liability for the allegedly false claims at issue. The district court found that the case was not suited for sampling because the underlying medical charts for all the claims at issue were intact and available for review to determine whether certain services furnished to nursing home patients were medically necessary.13 The Fourth Circuit let the district court opinion stand, finding that its grant of an interlocutory appeal on this issue was improvident.14
The expectation that the Trump administration will likely continue aggressive enforcement of the FCA, coupled with the recent increase in statutory penalties, underscore the significance of FCA risk to ADG companies. ADG companies will continue to defend against allegations that alleged noncompliance—whether with material testing and quality assurance contractual requirements, product specifications, labor qualification requirements, domestic preference requirements, certified cost and pricing disclosure requirements, and other regulatory and contractual requirements—has rendered their claims for payment actionable under the FCA. The defense of such actions in 2017 is certain to be shaped by the fallout from Escobar as the courts and parties to FCA actions continue to assert differing interpretations of key aspects of that Supreme Court opinion.
1 Jeff Sessions, U.S. Senator, Prepared Remarks at His Attorney General Hearing (10 January 2017), available at https://www.nytimes.com/2017/01/10/us/politics/sessions-remarks-transcript.html.
2 See, e.g., United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325, 332 (9th Cir. 2017); United States ex rel. Mateski v. Raytheon Co., No. 2:06-cv-03614-ODW (C.D. Cal. Feb. 10, 2017) at 6-10; United States ex rel. Tessler v. City of N.Y., No. 14-CV-6455, 2016 WL 7335654, at *4 (S.D.N.Y. Dec. 16, 2016); United States v. Academi Training Ctr., Inc., No. 1:11-CV-371, 2016 WL 7030433, at *3 (E.D. Va. Nov. 30, 2016); U.S. ex rel. Garzione v. PAE Gov’t Servs., Inc., 164 F. Supp. 3d 806, 815 (E.D. Va. 2016), aff’d, No. 16-1349, 2016 WL 6518539 (4th Cir. Nov. 3, 2016) (per curiam); United States v. Crumb, No. 15-0655, 2016 WL 4480690, at *23 (S.D. Ala. Aug. 24, 2016).
3 See, e.g., United States ex rel. Landis v. Tailwind Sports Corp., No. 1:10–cv–00976, 2017 WL 573470, *11 (D.D.C. Feb. 13, 2017).
4 See, e.g., United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325, 334 (9th Cir. 2017).
5 See United States ex rel. Purcell v. MWI Corp, 807 F.3d 281 (D.C.Cir. 2015).
6 Id. at 288-289.
7 See, e.g., Olson v. Fairview Health Servs. of Minnesota, No. 15-1780, 2016 WL 4169134, at *6 (8th Cir. Aug. 8, 2016); United States v. Celgene Corp., No. CV1003165GHKSSX, 2016 WL 7626222, at *14 (C.D. Cal. Dec. 28, 2016).
8 843 F.3d 261 (4th Cir. 2016).
9 Slip op. at 12; 18-26.
10 See United States ex rel. Killingsworth v. Northrop Corp., 25 F.3d 715 (9th Cir.1994) (holding that the FCA grants the government unreviewable veto only in the initial 60-day (or extended) period in which the government must determine whether it will intervene in a qui tam action)
11 842 F.3d 125, 131 (1st Cir. 2016).
12 Id. at 130-31 (emphasis added).
13 U.S. ex rel. Michaels v. Agape Senior Cmty., Inc., No. CA 0:12-3466-JFA, 2015 WL 3903675, at *1 (D.S.C. June 25, 2015), order corrected, No. CA 0:12-3466-JFA, 2015 WL 4128919 (D.S.C. July 6, 2015).
14 United States ex rel. Michaels v. Agape Senior Cmty., Inc., No. 15-2145, 2017 WL 588356, at *8 (4th Cir. Feb. 14, 2017).