The False Claims Act: 2011 Year-In-Review

Article by David W. Ogden , Jonathan E. Paikin , Jennifer M. O'Connor , Todd R. Steggerda , Jonathan G. Cedarbaum , Carl J. Nichols , Christopher E. Babbitt , Boyd M. Johnson III , Robin L. Baker , Karen F. Green and Stephen A. Jonas INTRODUCTION

The last few years have ushered in an unprecedented wave of activity by Congress, the Obama Administration, and the courts in the False Claims Act (FCA) arena. This renewed focus by all three branches of government means that companies doing business with the federal government must remain vigilant of these changes in order to avoid liability. The 2009 and 2010 amendments to the FCA are giving rise to new and expanded legal theories. The growing number of FCA cases means that courts will continue to have numerous opportunities to redraw the boundaries of the Act. And the Obama Administration has showed no signs of backing off from its aggressive enforcement of the Act, including its efforts to increase the number and size of blockbuster settlements. Since January 2009, the Department of Justice (DOJ) has recovered $8.7 billion through FCA cases—the largest three-year recovery total in the Department of Justice's history and more than one-fourth of the total FCA recoveries over the last 25 years.1

Companies should pay attention to these developments in order to strengthen their internal compliance mechanisms to resolve potential problems early and internally—before they lead to protracted litigation and potentially hefty fines and other 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 will look back and identify major developments and translate these into compliance tips.

Here is our False Claims Act 2011 Year-In-Review. First, we summarize the FCA and the key provisions that every company working with the government should know. Next, we explain Congress's watershed FCA amendments during the last few years. Then, we discuss the Obama Administration's stepped-up enforcement activities. From there, we analyze the important decisions handed down by the US Supreme Court and other federal courts that are reshaping the contours of FCA law. Finally, we synthesize all of this information to identify some key trends in the FCA arena and suggest some tips for 2012.

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.2 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.3 In addition, companies can incur "reverse" false claims liability if they improperly conceal, avoid or decrease an obligation to pay the government.4

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.5 Relators can receive between 15 and 30 percent of any judgment or settlement in the government's favor.6 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 move to dismiss the case, settle with the defendant, intervene as a plaintiff, or decline to intervene but allow the relator to pursue the case.

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.7 Not only do companies face treble damages, but they also face a civil penalty of $5,500 to $11,000 per "false claim"—which can become numerous if, for example, companies submit regular invoices to the government for ongoing services.8 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.

CONGRESSIONAL AND REGULATORY UPDATE: EFFORTS TO STRENGTHEN THE FALSE CLAIMS ACT

False Claims Act Amendments That Remained Important in 2011

Congressional interest in the False Claims Act has increased significantly during the last few years, as evidenced by the passage of monumental FCA amendments in 2009 and 2010 after more than two decades of Congressional inaction. These recent laws continue to have important repercussions for companies doing business with the federal government because they expanded the types of cases that may be brought. The boundaries of these amendments will continue to be tested in litigation.

The uptick in legislative activity began in 2009 when Congress passed the Fraud Enforcement and Recovery Act (FERA), which amended several FCA provisions.9 In particular, FERA:

expanded 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;10 enabled liability for claims presented not only to the government but also to entities administering government funds;11 allowed the Department of Justice to conduct longer investigations by permitting the government's complaint to relate back to the filing of the relator's complaint; and12 Expanded the prohibition on retaliation against relators to cover contractors and agents in addition to employees.13 The March 2010 health care 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 qui tam actions by relators.14 Because of PPACA, defendants can no longer use information in 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.15 PPACA also changed public disclosure from a jurisdictional bar to an affirmative defense and forbade dismissal under this defense if the government opposes dismissal.16 PPACA also expanded the definition of an "original source" (allowing the relator to have "independent knowledge that materially adds to the publicly disclosed allegations" instead of "direct knowledge").17 Additionally, under PPACA, a company must report and return a Medicare or Medicaid overpayment within 60 days of discovery to avoid FCA liability.18

Also in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act strengthened the FCA provisions prohibiting retaliation against whistleblowers.19 The Dodd-Frank Act expanded the definition of protected conduct to include employees' lawful efforts to investigate or stop FCA violations.20

Relators have taken advantage of the FERA, PPACA, and Dodd-Frank amendments by filing an increasing number of qui tam cases in recent years. While the annual number of qui tam cases averaged in the double digits in the late 1980s, it reached 573 in 2010 and more than 630 in 2011.21 Relators and the federal government have collected billions of dollars in damages and penalties in settlements and judgments, and many of these settlements and judgments dwarfed the actual damages suffered by the government.

Congressional Activity in...