False Claims Act: 2015 Year In Review

This year continued the trend of aggressive False Claims Act (FCA) enforcement by the Department of Justice (DOJ) and high volumes of qui tam lawsuits brought by whistleblowers. In fiscal year 2015, the DOJ marked the fourth year in a row that it recovered over $3.5 billion in FCA settlements and judgments. These recoveries came largely from the healthcare ($1.9 billion) and government contracting ($1.1 billion) industries. Recoveries in the financial services industry accounted for only $365 million in 2015, well below the $3 billion recovered last year, as 2015 brought fewer record-setting mortgage settlements.

While the number of qui tams filed in 2015 dipped to 632, the lowest it has been since 2010, the amount of money awarded to relators reached a record high, with a marked increase in the total relators' shares for cases in which the United States declined to intervene. Such recovery statistics make the number of whistleblower-driven FCA actions unlikely to recede in the near future.

Looking toward 2016, we expect these trends to continue and anticipate several significant developments, including an anticipated U.S. Supreme Court decision on the viability of the implied false certification theory, a Fourth Circuit decision on the much-debated topic of extrapolating liability, and an increase in statutory civil penalty amounts. FCA lawyers and their clients will also be closely watching the effect the DOJ's renewed focus on individual prosecutions will have on the FCA cases brought, parallel civil-criminal investigations, and FCA settlements. As we prepare ourselves for these developments in the coming year, we take stock of the most notable developments and decisions of interest from 2015.

Implied Certification

U.S. ex rel. Escobar v. Universal Health Services, Inc. , 780 F.3d 504 (1st Cir. 2015)

In Universal Health, the relators' daughter died after receiving treatment at a mental-health clinic from various unlicensed and unsupervised providers. They later filed an FCA complaint alleging that the clinic impliedly misrepresented that its staff was licensed, as required by state regulation, each time it submitted a claim for reimbursement under Massachusetts's Medicaid program. The district court disagreed and dismissed the complaint, finding that none of the regulations at issue were conditions of payment, which would have made the clinic's claims "legally false," but rather were merely conditions of participation that did not trigger FCA liability.

On appeal, the First Circuit reversed. It held that, even though not labeled as such, the regulations were conditions of payment and that the clinic "implicitly communicated" compliance with these regulations by submitting claims. In doing so, the Court took a broad view of what makes a claim "legally false." Specifically, it framed the question as "whether the defendant, in submitting a claim for reimbursement, knowingly misrepresented compliance with a material precondition of payment," noting that such preconditions could be found in "statutes, regulations, and contracts" and need not be "expressly designated." This theory of liability is known as "implied false certification."

There remains a circuit split regarding whether a claim is "legally false" if a party provides products or services but, in doing so, fails to comply with a statute, regulation or contractual provision that is not explicitly stated to be a condition of payment. On December 4, 2015, the U.S. Supreme Court granted certiorari to resolve this split.

U.S. ex rel. Badr v. Triple Canopy, Inc., 775 F.3d 628 (4th Cir. 2015)

In Triple Canopy, the Fourth Circuit joined several other circuits in adopting the "implied- certification" theory of falsity under the FCA. The case involved a government contract to provide security guards at an airbase in Iraq. The contractor allegedly hired guards who did not meet a marksmanship requirement contained in the contract, and allegedly created false shooting scorecards to disguise the deficiency. The relator, a Triple Canopy employee, filed an FCA complaint, and the government later intervened on one count. The district court subsequently dismissed the complaint, finding, among other deficiencies, the government failed to plead a demand for payment containing an objectively false statement.

On appeal, the Fourth Circuit held that the government adequately pleads a false claim when it alleges that the government contractor "made a request for payment under a contract and 'withheld information about its noncompliance with material contractual requirements'." Further, "[t]o establish materiality, the Government must allege the false statement had a natural tendency to influence, or [was] capable of influencing, the Government's decision to pay."

Applying those standards, the Court found the marksmanship requirement was material because "common sense strongly suggests that the Government's decision to pay a contractor for providing base security in an active combat zone would be influenced by knowledge that the guards could not, for lack of a better term, shoot straight." The Court also noted that the contractor's alleged efforts to cover up the deficiency also suggested materiality.

Similarly, the Fourth Circuit rejected Triple Canopy's argument that the government failed to establish materiality in its false records claim under § 3729(a)(1)(b). Triple Canopy argued the plaintiff failed to properly allege that the falsified scorecards were material because there was no allegation that the government official in charge of payment actually reviewed the scorecards. Rejecting this reasoning, the Court stated that "the FCA reaches government contractors who employ false records that are capable of influencing a decision, not simply those who create records that actually do influence the decision."

Triple Canopy filed a petition for certiorari that remains pending before the U.S. Supreme Court. The Supreme Court recently granted cert to address the validity of the implied-certification theory in the Universal Health Services case (discussed above), and FCA practitioners continue to watch for related developments in Triple Canopy.

United States v. Sanford-Brown, Ltd. , 788 F.3d 696 (7th Cir. 2015)

In Sanford-Brown, the Seventh Circuit declined to adopt the theory of implied false certification, instead explicitly aligning itself with the Fifth Circuit's decision in United States ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 270 (5th Cir. 2010). The defendant, a for-profit educational institution, received Title IV federal subsidies from the Department of Education. In order to receive such subsidies, the defendant entered a statutorily mandated Program Participation Agreement (PPA) in which it agreed to comply with a host of statutory and regulatory requirements. The relator argued that entry into the PPA created a continuing obligation on the part of Sanford-Brown to comply with all of these requirements, and that such continued compliance was a condition of payment for receipt of any Title IV subsidies.

The court roundly rejected this theory, stating that it would be "unreasonable for us to hold that an institution's continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference into the PPA are conditions of payment for purposes of liability under the FCA." The court went on to explicitly reject the implied false certification theory, noting that, "under the FCA, evidence that an entity has violated conditions of participation after a good-faith entry into its agreement with the agency is for the agency—not a court—to evaluate and adjudicate."

First-to-File

Kellogg Brown & Root Services, Inc. v. U.S. ex rel. Carter, 135 S. Ct. 1970 (2015)

In May, the Supreme Court issued its much-anticipated decision in Kellogg Brown & Root v. U.S. ex rel. Carter, holding that (1) the Wartime Suspension of Limitations Act (WSLA), 18 U.S.C. § 3287, suspends the statute of limitations only for criminal offenses involving fraud against the federal government and not for civil claims like those under the FCA, and (2) for purposes of the first-to-file rule, a qui tam FCA suit ceases to be "pending" after it is dismissed.

The first holding is significant in rejecting a theory recently embraced by relators and prosecutors that the WSLA tolls the FCA statute of limitations whenever the United States is at war or Congress has authorized use of the Armed Forces (such as the United States military presence in Iraq and Afghanistan) until five years after termination of hostilities. After examining the history of the statute, the Court concluded that the term "offense" in the WSLA "applies solely to crimes."

The Carter Court's second holding is equally significant in clarifying that the first-to-file rule (found in the FCA at 31 U.S.C. § 3730(b)(5)) only bars a relator from bringing an FCA suit based on the same underlying facts as a currently pending suit. An FCA action that has been dismissed does not forever bar subsequent suits based on the same facts.

U.S. ex rel. Heath v. AT&T, Inc., 791 F.3d 112 (D.C. Cir. 2015)

In Heath, the relator alleged that AT&T, Inc. and 19 subsidiaries falsely billed the Universal Service Administrative Company for Internet and telephone services provided to schools and libraries through the "E-Rate" program. Heath alleged that AT&T failed to offer schools and libraries the lowest price charged to similarly situated, non-residential customers as required by the program. Heath had previously made similar allegations in a separate qui tam action brought against Wisconsin Bell, Inc., a wholly owned subsidiary of AT&T. In the earlier case, Heath alleged that Wisconsin Bell charged certain E-Rate-eligible schools higher rates than others and failed to give school districts the same favorable pricing that it offered to state agencies.

Based on that earlier lawsuit, the district court dismissed...