False Claims Act: 2014 Year In Review

In what is becoming an annual refrain, 2014 marked another year of robust False Claims Act (FCA) enforcement by the U.S. Department of Justice (DOJ) and mushrooming qui tam lawsuits by whistleblowers. Indeed, fiscal year 2014 surpassed the significant growth of the last two years, setting a new record of $5.69 billion in settlements and judgments from civil cases. Since 2009, total recoveries under the FCA have exceeded $22.75 billion.

Several factors contributed to the record-setting recoveries in 2014. The foremost difference from recent years was the significant settlements involving the mortgage and banking industries. While health care had been the leading industry affected in 2013 and 2012, the mortgage and banking industries led the way in 2014 with over $3 billion in recoveries. That figure was composed of a few massive, well-publicized awards, including the $1.85 billion settlement involving Bank of America Corporation and large settlements involving JPMorgan Chase & Co. ($614 million), SunTrust Mortgage, Inc. ($428 million), and U.S. Bank ($200 million).

Notwithstanding the surge of banking settlements, the health-care industry continued to be a prime target for FCA enforcement. The $2.3 billion in health-care-related recoveries in 2014 was only slightly off the $2.6 billion in recoveries in 2013 and marks the third straight year in which recoveries exceeded $2 billion. As in the banking recoveries, one particularly notable settlement—$1.1 billion paid by Janssen Pharmaceuticals and Scios—accounted for a large portion of the overall amount. Government contracting, another traditional area of FCA enforcement, also continued to be targeted by DOJ, resulting in noteworthy lawsuits brought against Kellogg Brown & Root (KBR), CA Technologies, Inc., and BNP Paribas.

The upward trend of whistleblower lawsuits also continued. For the second straight year, more than 700 such complaints were filed, over double the average of such lawsuits between 2000 and 2009. The increased lawsuits have led to increased whistleblower awards ($2.47 billion since 2009) and an emboldened the plaintiffs' qui tam bar. Aside from financial awards, DOJ has also signaled an increased willingness to consider FCA complaints as potential criminal cases, especially when there may be individual liability. While parallel civil-criminal investigations have long been government policy, DOJ has expressed—most notably in Assistant Attorney General Leslie Caldwell's September 2014 remarks—its renewed emphasis on sharing qui tam complaints with criminal fraud prosecutors and seeking to hold individuals accountable.

In sum, while 2014 saw some courts limit attenuated FCA theories and some commentators call for FCA reform, those largely remained voices in the wilderness. With expanding government regulation in the financial services, health care, and other industries that receive federal funds, FCA enforcement is unlikely to slow in the near future. Likewise, the increased success of whistleblowers (and their attorneys) to reap large awards—and the reduction of traditional tort litigation due to tort reform—makes the FCA an increasingly attractive vehicle for the plaintiffs' bar.

The year 2015 will likely see these trends continue along with further FCA developments, including an anticipated U.S. Supreme Court decision on the applicability of the Wartime Suspension of Limitations Act to the FCA in Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter. As we ready for those and other issues in 2015, we look back at the key developments and decisions from 2014.

Fed. Rule Civ. P. 9(b)

U.S. ex rel. Foglia v. Renal Ventures Mgmt., LLC, 754 F.3d 153 (3d Cir. 2014)

The appropriate pleading standard under Rule 9(b) continues to be an area of significant debate in FCA jurisprudence. Rule 9(b) states that "in alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." But the circuit courts have differed on the requirements of Rule 9(b)'s particularity standard—whether especially actual representative claims must be pleaded or whether allegations leading to an inference of false claims are sufficient.

In June 2014, in Foglia, the Third Circuit joined the First, Fifth, and Ninth Circuits by adopting a flexible standard that allows claims to go forward on the basis of "reliable indicia" that leads to a "strong inference" of false claims. In doing so, the Third Circuit rejected the stricter standard adopted by the Fourth, Sixth, Eighth, and Eleventh Circuits, which requires at least representative claims to have been pleaded to survive a motion to dismiss. For a related analysis of Rule 9(b), see United States v. Bollinger Shipyards, Inc., – F.3d – , 2014 WL 7335007 (5th Cir. Dec. 23, 2014), discussed below in the "Government Knowledge" section.

The consistent split among the circuits on this key FCA issue would appear to make it ripe for Supreme Court resolution in the coming years.

Damages

U.S. ex rel. Purcell v. MWI Corp., 15 F. Supp. 3d 18 (D.D.C. 2014)

In Purcell, a jury found MWI Corporation liable under the FCA for false statements MWI made to support the issuance of loans from the Export-Import Bank of the United States (Ex-Im Bank) to the Federal Republic of Nigeria. The parties did not dispute the treble damages amount of $22.5 million. They did, however, disagree on whether the $108 million that Nigeria had paid the Ex-Im Bank in principal and interest throughout the lives of the fraudulently obtained loans should be applied as an offset against the $22.5 million in damages.

In considering the issue, the district court reviewed United States v. Bornstein, 423 U.S. 303 (1976), in which the Supreme Court addressed offsets for compensatory payments. The Purcell court declined to read Bornstein narrowly to mean that an FCA defendant is only entitled to offsets for amounts paid to the government by another "tortfeasor," or culpable participant, in the FCA violation. "Rather," the court noted, "the cases have applied the Supreme Court's statement in Bornstein that the offset encompasses 'compensatory payments previously received from any source' literally." Purcell, 15 F. Supp. 3d at 27 (emphasis in original). For that reason, Purcell found that the $108 million paid by Nigeria to the Ex-Im Bank should entirely offset the $22.5 million in damages because the government was made completely whole by those payments. The offset was not applied against MWI's civil penalties, nor did MWI argue that it was entitled to any such offset.

Extrapolating Liability

U.S. ex rel. Martin v. Life Care Ctrs. of Am., No. 08-cv-251, 2014 U.S. Dist. LEXIS 142660 (E.D. Tenn. Sept. 29, 2014)

In Life Care, the Eastern District of Tennessee rejected a motion for summary judgment on claims for which liability was supported only by statistical extrapolation. The government's complaint alleged that a chain of skilled-nursing service providers submitted fraudulent claims to Medicare as part of a nationwide scheme to provide medically unnecessary services. Life Care moved for partial summary judgment based on the government's plan to present specific evidence only on a sample of 400 patient admissions and then extrapolate both liability and damages to an additional 54,396 unidentified patient admissions, resulting in 154,621 claims total. Life Care argued that the government could not satisfy its burden of proving knowing falsity as to the unidentified claims merely by extrapolation and that allowing it to do so would violate Life Care's right to due process. The court reviewed the voluminous case law on extrapolation cited by both sides and found no dispositive case law in the Medicare overpayment context. It noted that "using extrapolation to establish damages when liability has been proven is different than using extrapolation to establish liability." Id. at *39.

Nonetheless, the court ultimately rejected Life Care's motion, allowing extrapolation analysis to be used as evidence in this instance and noting that "the Government could specify in detail the specific claims" it alleges are false, but doing so would require "more time and resources than would be practicable for any single case." Id. at *45. While the court acknowledged that unique factors will determine the individual type and amount of therapy received by a patient, it found that such factors did not necessarily preclude using extrapolation evidence. Instead, the court noted that defendant could challenge the extrapolation through cross examination and competing witness testimony at trial and the jury would ultimately decide the weight of such evidence.

Government Knowledge

Gonzales v. Planned Parenthood, 759 F.3d 1112 (9th Cir. 2014)

In Gonzales, the relator alleged that the defendant knowingly submitted false claims for reimbursement to the California Department of Health Care Services (California DHS) in violation of the FCA and included, as exhibits, letters between the defendant and California DHS to support the allegations. The district court dismissed the complaint based on the government's knowledge of the allegedly improper practice.

On appeal, the Ninth Circuit affirmed. It found that the plaintiff's claims were "compellingly contradicted" by the exhibits that showed that the defendant explained its billing practices to California DHS and that California DHS acknowledged its concern that "conflicting, unclear, or ambiguous misrepresentations have been made to providers" about the proper billing practices. Id. at 1115. In light of the letters, the Ninth Circuit held "[t]hat these attachments fatally undercut Gonzalez's allegations of knowing falsity to the point where he cannot state a plausible claim under the FCA." The Court continued: "Stated simply, even if bills sent by [defendant] were false in portraying its costs, one cannot plausibly conclude that there was knowing falsity on the part of [defendant] given the...