False Claims Act: 2012 Year-In-Review

INTRODUCTION

The upward trends in False Claims Act (FCA) enforcement that we described in our 2011 Year in Review continued in 2012. In the fiscal year that ended on September 30, 2012, the U.S. Department of Justice (DOJ) secured $4.9 billion in FCA settlements and civil judgments, beating the previous record by more than $1.7 billion. Federal FCA recoveries since January 2009 add up to $13.3 billion, which is the largest four-year total in DOJ history.1 Large settlements came not only in the healthcare sector as in past years but also from financial institutions in areas such as mortgage fraud. Qui tam relators and the DOJ continued the push to expand FCA liability by arguing that claims become false if the company submitting them violated a regulatory or contract requirement connected with the goods or services that are being reimbursed by the government, since the claims carry a false "implied certification" of regulatory and contract compliance, thereby converting regulatory and contract terms into major punishments. There was also a high level of state FCA activity this year, including an Arkansas case in which a pharmaceutical company was ordered to pay $1.19 billion for violating the state's Medicaid FCA, as well as a number of states amending their FCAs to make them hew more closely to the federal statute.2

This ongoing growth means that companies doing business with the government must remain vigilant in their efforts to avoid liability. The boundaries of the FCA will continue to be tested. As recently as December 4, Attorney General Eric Holder and other DOJ top officials reiterated the Obama Administration's ongoing commitment to vigorous enforcement of the FCA.3 And, as we describe in our section on Trends in 2012 and Tips for 2013, whistleblower activity is at an all-time high.

Companies should pay attention to these developments and strengthen their internal compliance programs to resolve potential problems early and internally—before they lead to protracted litigation and potentially hefty damages awards and penalties. To help our clients stay ahead of the curve, WilmerHale provides updates about significant changes in FCA law, analyzing what these developments mean as a practical matter, and suggesting compliance tips to avoid potential liability. At the end of each year, we look back, identify major developments over the past 12 months, and translate these into compliance tips and other recommendations for the coming year.

Here is our False Claims Act 2012 Year-In-Review. First, we summarize the key provisions of the FCA that every company working with the government should know. Next, we discuss federal legislative and regulatory developments, and then noteworthy federal settlements, judgments, and complaints in key business sectors. From there, we analyze the most important federal FCA decisions of 2012. Then we turn to state and local developments. Finally, we synthesize all of this information to identify some key trends in the FCA arena and offer some practical recommendations for clients for 2013.

OVERVIEW OF THE FALSE CLAIMS ACT

The False Claims Act was passed during the Civil War to combat fraud against the government. The Act imposes liability on any person or corporation who "knowingly presents, or causes to be presented, a false or fraudulent claim for payment" to the federal government.4 The FCA's scope is remarkably broad. Any company that does business with the government—even indirectly—may face FCA damages and penalties.

Traditionally, a company violates the FCA when it knowingly and materially misrepresents the nature of a good or service that it provides to the government, and that misrepresentation—either in contractual language or other communications—leads to a government payment. A company also can be liable for conspiring to present a false claim to the government or causing a third party to submit a false claim.5 In addition, companies can incur "reverse" false claims liability if they improperly conceal, avoid or decrease an obligation to pay the government.6

An FCA case can originate in two ways. First, the United States itself can bring a case. Second, a private litigant (called a "relator") can bring an action on behalf of the United States under the FCA's qui tam provision.7 Relators can receive between 15 and 30 percent of any judgment or settlement in the government's favor.8 When a relator files a qui tam case, the case remains under seal while the DOJ investigates the claim. Following the investigation, the DOJ can intervene as a plaintiff, settle with the defendant, decline to intervene but allow the relator to pursue the case, or move to dismiss the case.9

FCA damages and penalties can be enormous. Standard damages are treble the loss suffered by the government. However, if the company voluntarily discloses a violation as described in the Act, damages are reduced from treble to double.10 Not only do companies face treble damages, but they also face a civil penalty of $5,500 to $11,000 per "false claim"11—which can become numerous if, for example, companies submit regular invoices to the government for ongoing services. Due to the damages and penalties at stake, FCA claims are most commonly filed against companies that receive substantial and regular government payments, such as health care and defense companies.

In 2009, the Fraud Enforcement and Recovery Act (FERA) amended several FCA provisions, including: (1) expanding liability for "reverse" false claims by imposing liability for knowingly or recklessly retaining overpayments from the government, even in the absence of any false statement; (2) creating liability for claims presented to entities administering government funds; (3) permitting the government's complaint to relate back to the filing of the relator's complaint, which allows the DOJ to conduct longer investigations; and (4) expanding the anti-retaliation provisions to cover contractors and agents in addition to employees.12

The March 2010 healthcare reform legislation, the Patient Protection and Affordable Care Act (PPACA), also made important changes to the FCA, primarily by significantly narrowing the public-disclosure bar against relators' qui tam actions. Because of the PPACA: (1) defendants can no longer use certain types of public sources (such as state and local administrative reports) to demonstrate that a relator's claim was publicly disclosed prior to the complaint; (2) public disclosure is now an affirmative defense (rather than a jurisdictional bar) and dismissal is forbidden if the government opposes it; (3) the definition of "original source" allows the relator to have "independent knowledge that materially adds to the publicly disclosed allegations" (instead of "direct knowledge"); and (4) a company must report and return a Medicare or Medicaid overpayment within 60 days of discovery to avoid FCA liability.13

Also in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act strengthened the FCA provisions prohibiting retaliation against whistleblowers, expanding protected conduct to include employees' lawful efforts to investigate or stop FCA violations.14

FEDERAL LEGISLATIVE AND REGULATORY UPDATE

In a year of little bipartisan agreement and legislative activity, legislators came together to pass legislation expanding protection for federal whistleblowers. On November 27, President Obama signed the Whistleblower Protection Enhancement Act of 2012 into law, strengthening existing protections for federal workers who disclose evidence of fraud, abuse, or waste encountered in the course of their employment.15 The new law clarifies the scope of protected disclosures, expands the class of persons protected, and alters the process of seeking relief for violations. Among the more significant provisions are: the Act extends protection beyond the first government worker to make a disclosure, protects employees who disclose evidence that scientific or technical data has been censored, and brings Transportation Security Administration employees under federal whistleblower protection. The Act creates Whistleblower Protection Ombudsmen in federal agencies and codifies a requirement that agencies notify their employees that their non-disclosure policies are superseded by whistleblower rights and other statutory rights. It also broadens the penalties for retaliation against whistleblowers, provides compensatory damages in administrative hearings, and expands appellate jurisdiction (for a two-year trial period) over whistleblower administrative actions beyond the United States Court of Appeals for the Federal Circuit.16 Beyond this legislation, the FCA and healthcare fraud continued to generate discussion in Congress. A bipartisan group of six senators from the Senate Finance Committee wrote an open letter, dated May 2, soliciting ideas from the healthcare community on how best to combat Medicare and Medicaid fraud.17 The American Hospital Association (AHA) response stated that the FCA is an "extremely punitive" tool that should not be relied upon to prevent mistakes.18 Instead, the AHA suggested eliminating overlap in existing integrity oversight, limiting the access of the DOJ and government auditors to treatment decisions, and improving the process for returning overpayments that resulted from mistakes. In the regulatory realm, the U.S. Department of Health and Human Services (HHS) proposed two new regulations as it prepared to implement the PPACA. On February 16, HHS's Center for Medicare and Medicaid Service proposed a regulation governing overpayments.19 The proposed rule would require that an overpayment be reported and returned within sixty days of discovery, or by the date a cost report is due, if that date is later. Under the PPACA, a person retaining an overpayment past this deadline faces FCA liability. The comment period has expired, but a final rule has not yet been enacted. On June 18, the HHS Office of...