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.
As we enter 2023, we ask: What does the Supreme Court have in store for the FCA this term? Can an employer be deemed “on notice” for purposes of FCA retaliatory claims just because an employee tries to prevent an FCA violation? How is the Department of Justice (the “Department” or DOJ) planning to use the FCA to advance its Civil Cyber-Fraud Initiative, and where do we expect increased FCA enforcement in 2023? The answers to these questions and more are here in our January 2023 FCA Update.
Federal
Supreme Court Will Decide Limits of Government’s Ability to Dismiss FCA Suits. On December 6, 2022, the U.S. Supreme Court heard arguments in United States ex rel. Polansky v. Executive Health Resources Inc. to resolve a circuit split concerning whether the government can move to dismiss a qui tam case after initially declining to intervene in the suit. At issue was the Third Circuit’s finding that the government could intervene in a qui tam action under the FCA at any time and seek dismissal of the suit, even if it had previously declined to intervene in the case. During oral arguments, the justices appeared unlikely to prevent DOJ from dismissing the whistleblower lawsuits. Perhaps more significant was discussion by the justices about what, if any, standards the government must meet to dismiss these matters. Justice Samuel Alito, for example, asked whether the government could “move to dismiss because we feel like it.” DOJ stated that the government need only adhere to a “constitutional baseline” because the FCA does not provide a standard to follow. Circuit courts have embraced at least three approaches: (1) the D.C. Circuit’s Swift standard, which recognizes a virtually “unfettered right” to seek dismissal; (2) the Ninth Circuit’s Sequoia Orange burden-shifting standard, which requires that dismissal serve a valid government purpose; and (3) the Third and Seventh Circuits, which apply dismissal criteria from Rule 41’s standards for voluntary dismissals. On January 10, 2018, the Department issued guidance instructing DOJ lawyers to consider more seriously and thoroughly whether to seek affirmative dismissals of potentially meritless FCA cases (the “Granston Memo”) (incorporated into the Justice Manual). In response, federal prosecutors have dismissed at least 50 meritless actions since the Granston Memo was issued (compared with just 45 identified in the 30 years prior to the issuance of the memo). We will be keeping a close eye on this issue, as we routinely ask DOJ to intervene and dismiss meritless FCA matters for our clients.
Supreme Court Might Decide FCA Intent Standard. The Supreme Court is also mulling several certiorari petitions on the question of whether the FCA covers compliance lapses tied to regulatory interpretations that are incorrect but “objectively reasonable.” Several circuits apply the Supreme Court’s Safeco standard, under which a defendant does not have the necessary scienter, and has not acted with “reckless disregard,” if its conduct is consistent with an “objectively reasonable” interpretation of an unclear law or regulation without any available “authoritative guidance” to the contrary. In United States ex rel. Schutte v. SuperValu Inc., two pharmacists alleged that SuperValu knowingly misrepresented its pricing for generic drugs in order to overbill Medicare and Medicaid. SuperValu successfully argued before the Seventh Circuit that even if it overbilled, it did not have the intent to violate the FCA because its pricing was based on an “objectively reasonable” determination of “usual and customary” pricing. The dissent noted that this standard creates a “safe harbor for deliberate or reckless fraudsters whose lawyers can concoct a post hoc legal rationale that can pass a laugh test.” Seeking review by the Supreme Court, the pharmacists assert that other circuits apply a subjective standard to determine whether a defendant actually knew or should have known that it was committing an FCA violation. In response to a request by the Supreme Court, the Solicitor General filed a brief on December 6, 2022, supporting the pharmacists and urging the Court to reverse the Seventh Circuit’s “objectively reasonable” standard. The government stated that it is impossible to preemptively address every potential ambiguity in government programs, and that government contractors must approach ambiguities in good faith, follow what they understand to be the best interpretation, and seek clarification when necessary. If the Supreme Court takes the case, it will be the second FCA case before the Court this term.
Supreme Court Stays on the 9(b) Sidelines, Leaving Pleading Requirements Unsettled. On October 17, 2022, the Supreme Court declined to hear cases from three different circuits challenging the extent to which FCA complainants must “state with particularity the circumstances constituting fraud.” Before putting the 9(b) cases aside, the Supreme Court asked for the views of the Solicitor General on whether whistleblowers need to provide “specific details” of fraudulent billing claims to support an FCA complaint. In her amicus brief, the Solicitor General maintained that there is no circuit split, but practitioners on both sides of the question argued that the circuits vary on this requirement under Federal Rule of Civil Procedure 9(b) and generally require either the whistleblower to identify actual claims for payment from the government or presume such claims exist if allegations of misconduct are otherwise robust. With the issue unresolved, we expect creative plaintiffs’ counsel to forum shop and file complaints in jurisdictions that may be less stringent in their requirements.
Third Circuit Finds that Employer’s Knowledge of “Other Efforts” to Stop Violations of the FCA Can Form a Basis for Retaliation Claim. In a November 30, 2022 ruling in United States ex rel. Ascolese v. Shoemaker Construction Co., the Third Circuit clarified that congressional amendments made in 2009‒2010 created a new basis for supporting a retaliation claim. The court confirmed that a whistleblower can satisfy the notice standard either by showing the employer knew of the “distinct possibility” of FCA litigation or simply by showing that the employer knew that the employee made efforts to stop violations of the statute before they happened – in other words, without showing an FCA action was a distinct possibility. In Ascolese, the relator was a quality assurance manager who had concerns regarding engineering deficiencies in a public housing project that he believed could constitute fraud. He pled facts showing that his employer knew that he contacted a government agency outside his “chain of command” with these concerns, and that his employer terminated him shortly thereafter. The Court concluded that the allegations gave rise to a plausible inference that the employer was on notice of his protected activity, i.e., his efforts to stop FCA violations. Employers should take notice that whistleblower protection applies whether the communication directly contemplates an FCA action or is an effort to prevent alleged FCA violations.
DOJ Using FCA to Enforce Cyber-Fraud Initiative. When Deputy Attorney General Lisa Monaco announced a Civil Cyber-Fraud Initiative on October 6, 2021, she explained that DOJ would use the FCA to “hold accountable” entities and individuals who knowingly: (1) provide deficient cybersecurity products or services; (2) misrepresent their cybersecurity practices or protocols; or (3) fail to monitor and report cybersecurity incidents or breaches. The Department has already announced two large settlements (Aerojet and Comprehensive Health Services) under this initiative. The SEC followed DOJ’s announcement by proposing rules requiring public companies to report on policies and procedures to manage cybersecurity risks and other related requirements, and the SEC’s Strategic Plan 2022‒2026 discusses the importance of cybersecurity to protect individual investors. This activity at DOJ and the SEC should prompt companies to review their cybersecurity and risk management practices, especially if they receive government contracts/grants and thus have FCA exposure. This is particularly important for health care and life sciences companies whose business includes beneficiaries of federal health care programs and which are subject to the various security rules imposed by HIPAA. They should similarly remain aware of the need to review cybersecurity and risk management practices for consistency with standards set by the Department of Commerce’s National Institute of Standards & Technology (NIST) bureau. DOJ will likely increasingly rely on whistleblowers to report these incidents, especially given the Department’s continuing emphasis on using the FCA as its primary enforcement tool.
With 61% of DoD Assets Unaccounted For, Expect Increased Scrutiny of Government Contractors. On November 15, 2022, the Department of Defense (DoD) announced that it failed its fifth-ever audit. It seems it was not a close call: officials could not account for about 61 percent of DoD’s assets. The DoD audit follows increased scrutiny by legislators and law enforcement investigators of DoD spending over the last several years. For example, the Government Accountability Office issued a report on September 20, 2021 criticizing the Pentagon’s FY20 contracting ($420 billion in contractors for 47,000 contractors) and urging law enforcement to focus on procurement fraud. It is no surprise that DOJ, working with DoD investigators, has sought to increase its scrutiny of government contractors – looking not only at traditional fraud schemes such as cost-shifting, bid rigging, and allegations of substandard products and violations of the Truth in Negotiating Act, but also at atypical ones. For example, in December, a defense contractor settled allegations that it violated the FCA by billing for personnel who lacked a required degree or the required years of relevant professional experience as specified by the contract. DOJ alleged that the government paid more for labor than could be justified by the personnel’s qualifications. In its press release, the Defense Intelligence Agency Office of the Inspector General stated, “The Office of the Inspector General, DIA, will continue to root out fraud, waste, and abuse in DIA programs and operations as we strive to improve government funds stewardship from our civilian and contractor workforce.” The public statements may be anodyne, but we anticipate more aggressive efforts across the board by DOJ and DoD to investigate and prosecute procurement fraud.
Companies Seeking CHIPS Funds Face Scrutiny and FCA Exposure. On August 9, 2022, President Biden signed the CHIPS and Science Act of 2022. Shortly thereafter, the Department of Commerce set the tone for how these expenditures would be monitored. NIST published guidance warning that it would ensure the effective, efficient, and accountable use of taxpayer dollars in implementing the CHIPS semiconductor incentives program. There will be plenty to monitor. In order to “strengthen American manufacturing, supply chains, and national security, and invest in research and development, science and technology, and the workforce of the future to keep the United States the leader in the industries of tomorrow, including nanotechnology, clean energy, quantum computing, and artificial intelligence,” the CHIPS Act provides $52.7 billion for American semiconductor research, development, manufacturing, and workforce development. This includes $39 billion in manufacturing incentives, including $2 billion for the legacy chips used in automobiles and defense systems, $13.2 billion in research and development and workforce development, and $500 million to provide for international information communications technology security and semiconductor supply chain activities. The Act also provides a 25 percent investment tax credit for capital expenses for manufacturing semiconductors and related equipment. Significantly, NIST also announced that it will be materially relying upon the information contained in the CHIPS application forms and therefore is requiring companies to certify the accuracy of information provided on these forms. Thus, companies will be subject to both criminal and civil enforcement actions including the FCA for any false statements on these applications. In 2023, we expect to see DOJ working closely with Commerce to identify and prosecute false statements in CHIPS applications similar to efforts being made by DOJ with respect to CARES Act Paycheck Protection Plan (PPP) applications. DOJ’s Commercial Litigation Branch has identified COVID-19 related fraud schemes and grant fraud as areas of priority and will continue to rely heavily upon whistleblowers to identify false statements in government applications.
State
Colorado Joins the Trend of States Enacting False Claims Act Legislation. On June 7, 2022, the governor of Colorado signed into law the Colorado False Claims Act, which is largely based on the federal FCA. Colorado’s FCA complements the state’s Medicaid False Claims Act. There are, however, several important differences between the state and federal versions of the FCA in Colorado. The state statute excludes payments to an individual as part of a government assistance program in an amount less than $10,000 in a calendar year. It also expands the private right of action for retaliation to include not only traditional adverse actions, but also actions that cause the individual to be “intimidated, sued, defamed, blacklisted, or in any other manner retaliated against or discriminated against.” The Colorado Attorney General is also incentivized to investigate and prosecute these cases as the statute mandates that all proceeds are to be transferred to a “False Claims Recovery Cash Fund” and the Attorney General is entitled to keep a portion of these funds. Colorado is the 17th state to enact an FCA-like statute that addresses fraud committed by Medicaid providers. Another 21 states have enacted more general false claims legislation applying broadly to government expenditures, and all of those states with the exception of Oregon authorize civil lawsuits by relators. We expect to see additional FCA cases in Colorado with the law now in effect and the state AG incentivized to pursue these matters.
California Court of Appeal Expands Reach of California FCA to Include Financial Institutions. Financial institutions in California may soon face new potential suits under the state’s FCA. In a November 18, 2022 ruling, the California Court of Appeal, First District, held that a qui tam plaintiff’s case can proceed with a novel claim: failure to report and deliver millions of dollars of unclaimed cashier’s checks to the state of California as escheated property. The banks pointed to a 2005 Second District ruling and argued that the funds were escheated to the banks’ domicile in Ohio, and the California Controller should have provided prior notice that the funds were subject to escheat. The Court disagreed, holding that Ohio law gave preference to California’s claim over the funds and that prior notice from the Controller is not a prerequisite for liability under California’s FCA. The court went on to specify that the banks were under an obligation to report and deliver money owed on uncashed cashier’s checks created in California to the California government. While the ruling addresses a narrow asset group, it signals California’s willingness to expand theories of recovery under the state’s FCA. Financial institutions need to be proactive in identifying when the government may have a claim to assets to avoid FCA liability in California.
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