False Claims Act Focus - November 2013

    View Authors 4 November 2013

    EDITOR’S NOTE

    Recent months have provided interesting developments in the False Claims Act (“FCA”) case law, and the future promises even more.

    Defendants in many FCA cases that proceed to litigation file motions to dismiss alleging that the plaintiff – particularly when the plaintiff is the relator, as opposed to the Department of Justice (“DOJ”) – failed to meet its burden of pleading fraud with particularity as required under Federal Rule of Civil Procedure 9(b). In many circuits, the plaintiff in an FCA case is required to identify at least a representative sample of actual false claims that were submitted for payment; while others have been more lenient and allowed the plaintiff to describe a fraudulent scheme that would be expected to lead to the submission of false claims. In a case discussed below, the Eighth Circuit recently held that such a representative sample is required when the claims are alleged to have been false or fraudulent themselves, but that specific claims need not be identified when the theory is fraud in the inducement because the claims themselves need not be false for FCA liability to attach. At least for the former category of cases, though, where the claims themselves are alleged to be false, we may soon get guidance from the Supreme Court. As also described below, the Supreme Court has asked the Department of Justice to weigh in on whether it should grant certiorari in a Rule 9(b) case raising exactly that issue of whether specific false claims must be identified.

    Another pair of cases in the energy and financial services sectors remind us of the importance of ensuring that all the settling parties not only agree on what conduct is being released, but that the actual language in the settlement agreement clearly reflects that common understanding. And defendants at least can take some comfort that the DOJ seems willing to dismiss relators who have been actually convicted of misconduct relating to the FCA allegations, even if unconvicted relators who participated in the fraud are allowed to go forward with their cases.

    And finally, along the lines of the fraud-in-the-inducement theory considered by the Eighth Circuit in the Rule 9(b) context, we examine recent changes to the Small Business Administration’s final regulations implementing changes in the Small Business Act of 2010. These new regulations impose draconian FCA consequences on contractors who misrepresent their size in order to be treated as a small business, and they should be on the must-study list for every small business contractor.



    RECENT DEVELOPMENTS

    Health Care/Life Sciences Sector

    The Supreme Court recently requested input from the U.S. Solicitor General on whether it should hear the appeal of a qui tam case dismissed by the U.S. Court of Appeals for the Fourth Circuit. In U.S. ex. Rel. Nathan v. Takeda Pharmaceuticals North America, Inc. et al., the district court unanimously dismissed the complaint for not specifically stating which false claims Takeda allegedly caused to be submitted to the government for payment. Rule 9(b) of the Federal Rules of Civil Procedure requires complainants to plead fraud with particularity, and failure to meet this procedural hurdle can result in dismissal of a complaint in its entirety. While all courts require plaintiffs to meet this burden, the Circuit Courts of Appeal differ on just how particular the allegations must be during the pleading stages of a case. The First and the Fifth Circuits appear to adopt a more lenient standard for plaintiffs in the early stages than the Fourth Circuit has in Takeda, allowing cases to move forward despite arguments by defendants that relators or plaintiffs have not sufficiently described or demonstrated the alleged fraudulent activity.

    If the Supreme Court decides to grant certiorari to hear the case and issue a ruling on these procedural requirements, the ramifications could be tremendous for qui tam relators, the government and defendants alike. A ruling that tightens the 9(b) requirements in line with the Fourth Circuit decision would require plaintiffs to include more details of alleged fraud in their complaints and not rest their claims on more speculative allegations. Should the Court relax the particularity requirements, defendants will likely face more prolonged and costly qui tam litigation with little chance of dismissal in the early stages. Either way, the impact of a Supreme Court decision on particularity requirements will have a remarkable impact on FCA litigation in the future.

    For additional information, please contact Elizabeth Gill.

    Energy Sector

    Relator’s Criminal Conviction Bars any Recovery

    In September 2013, on appeal to the Ninth Circuit, a relator argued that he should be reinstated and awarded a share of the $19 million settlement proceeds in a False Claims Act suit he filed against CH2M Hill. In June 2009, Carl Shroeder, a low-level former employee of CH2M Hill, filed a qui tam suit against CH2M Hill, alleging that CH2M Hill’s employees routinely mischarged the labor hours spent on cleanup work on stockpiled nuclear waste for the Department of Energy at a site in Hanford, Washington. United States of America ex rel Schroeder et al. v. CH2M Hill, 2:09-cv-05038 (E.D. Wash.). In November 2011, Mr. Schroeder pled guilty to felony charges stemming from the fraud alleged in his complaint. The government intervened in the suit in August 2012, and in October 2012 the Department of Justice moved to dismiss the relator from the action on the basis of 31 U.S.C. § 3730(d)(3). This provision mandates dismissal of a relator if he “is convicted of criminal conduct arising from his or her role in the violation of section 3729,” and further provides that he “shall not receive any share of the proceeds of the action.” 

    In district court filings, the Department of Justice described the investigation as having commenced as the result of an anonymous complaint (not from the relator) in April 2008, which led to multiple interviews of the relator, and admissions by him of his own misconduct, prior to his filing of the qui tam action. The relator, on the other hand, argued that he voluntary informed the OIG that the fraudulent time card scheme was far more widespread than suspected, and included managers and supervisors. In fact, he said he provided the OIG with evidence that the scheme involved not four, but four to five hundred, employees, and it was the policy and practice of CH2M Hill, not just some rogue employees. In March 2013 CH2M Hill agreed to pay $19 million to settle the labor mischarging allegations. In May 2013, the district court granted the motion to dismiss the relator for the suit.

    In his appellate briefing, the relator argues that he is entitled to the proceeds of the suit despite his participation in the scheme. His argument is that a relator who is a “planner or initiator” of the fraud is entitled to a reduced award, and that his conduct is less culpable than a “planner or initiator,” and thus should not entitle him to no award. The Department of Justice argued in the lower court that the language of Section 3730(d)(3) requires the dismissal of the relator who has been convicted of criminal conduct that is precisely the fraud alleged in his qui tam complaint.

    For additional information, please contact Larry Freedman.

    Financial Services Sector

    Financial Services Industry:  Wells Fargo Argues Government Should be Barred from Bringing Another Case Alleging FCA and FIRREA Violations After Settling a Case Covering the Same Conduct

    On September 20, 2013, Wells Fargo filed an appellant brief with the D.C. Circuit Court of Appeals, asking the appeals court to overturn the February 12, 2013 decision of the District Court for the District of Columbia denying Wells Fargo’s Motion to Enforce a Consent Judgment. Essentially, Wells Fargo argues that the government violated its express promise negotiated in an April 2012 settlement and release when the United States filed a new case in October 2012 in a different district court alleging violations of the civil False Claims Act (“FCA”) and Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”) based on the same conduct.

    On March 12, 2012, the United States, along with 49 states and the District of Columbia, filed an action in the D.C. district court against Wells Fargo and four other major banks alleging fraud under the Federal Housing Administration (“FHA”) mortgage insurance program, including violations of the FCA and FIRREA related to the origination of residential mortgages. See United States v. Bank of America Corp., No. 1:12-cv-00361 (D.D.C.). The parties resolved this action in a settlement in April 2012, including a $25 billion commitment from the five banks. Under that settlement, the United States released the banks from civil or administrative remedies or penalties under FIRREA, the FCA, and the Program Fraud Civil Remedies Act where the sole basis for such claims was that the bank submitted to the U.S. Department of Housing and Urban Development (“HUD”)-FHA a false or fraudulent annual certification that the mortgagee conformed to all HUD-FHA regulations necessary to maintain HUD-FHA approval. However, the release did not extend to false individual loan certifications if the individual loan certification contained a material violation of HUD-FHA requirements. See Federal Release, United States v. Bank of America Corp., No. 1:12-cv-00361-RMC (D.D.C. Apr. 4, 2012), ECF No. 14-1, Exhibit F (JA 127-71).

    On October 9, 2012, the United States filed a complaint against Wells Fargo in the U.S. District Court for the Southern District of New York, alleging FCA and FIRREA violations related to the origination of FHA loans that purportedly contained material violations of HUD requirements. See United States v. Wells Fargo Bank, N.A., No. 12 Civ 7527 (S.D.N.Y.). Wells Fargo argues that the S.D.N.Y. action is based on the same conduct as the D.C. district court action that was resolved – misrepresentations of compliance with the same quality control, personnel, review and self-reporting obligations that are at the core of Wells Fargo’s annual certifications. In November 2012, Wells Fargo sought from the D.C. district court (1) a declaration that the United States had violated the April 2012 settlement and release, and (2) an injunction prohibiting the United States from pursuing any of the released claims. On February 12, 2013, the D.C. district court judge denied Wells Fargo’s Motion to Enforce the Consent Judgment, holding that the release only covers claims based on false annual certifications and not the conduct underlying annual certifications. The D.C. district court said in its opinion that the language of the release governs, but it does not have the meaning that Wells Fargo argues it does – a meaning the court called a “leap of logic” not consistent with the consent judgment signed by Wells Fargo.

    In this appeal, Wells Fargo is asking the D.C. Circuit to decide (1) whether the release negotiated in the D.C. district court case bars the United States from bringing claims against Wells Fargo under the FCA and FIRREA for conduct within the scope of Wells Fargo’s annual certifications to HUD; and (2) whether the D.C. district court must determine on remand whether the release bars claims brought by the United States in the S.D.N.Y. action. Wells Fargo argues that the plain language of the release includes the conduct to which Wells Fargo certified in its annual certifications to HUD-FHA and that the United States’ artificial distinction between the annual certifications and the underlying conduct that makes up the certifications would render certain parts of the release meaningless.

    Originally, the United States was to respond by October 21, 2013, but an extension to the briefing schedule was granted due to the government shutdown. The United States’ response is due now on November 12, 2013 and Wells Fargo’s reply is due on November 26, 2013.

    For additional information, please contact Susan Baldwin Hendrix.

    Education Sector

    The Ghost of FCA Claims Past: Settlement of FCA Claims May Not Preclude New FCA Litigation Related to Those Same Claims, Even Years Later.

    A recent decision issued by the Eastern District of California has permitted relators to bring claims against an education institution related to a previously settled False Claims Act (“FCA”) case, and to claim that the school instituted new procedures to cover up and continue perpetrating the previous fraud. U.S. and State of California ex rel. Hoggett v. Univ. of Phoenix, 2013 U.S. Dist. LEXIS 31910, No. 2:10-cv-02478-MCE-KJN (March 7, 2013) (denying interlocutory appeal). In doing so, the district court overruled claims by the University of Phoenix that the relators could not bring claims related to those previously litigated and settled in United States ex rel. Hendow v. University of Phoenix, No. 2:03-cv-0457-GEB-DAD (E.D. Cal. 2004), because the relators were not the “original source of the information” about alleged FCA violations that had been publicly disclosed in the Hendow case.

    Under the FCA, § 3730(e)(4)(A), qui tam litigants cannot bring a claim “if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed . . .unless. . . the person bringing the action is an original source of the information.” When the relators in Hoggett claimed that University of Phoenix continued to perpetrate a fraud against the government even after the settlement in Hendow, which had alleged Phoenix’s violation of incentive compensation prohibitions, defendant Phoenix argued that the relators were not an original source of that information, and were therefore barred from bringing the suit. The court disagreed, and allowed the claims, because, if “as Relators contend, the new procedures cover up a continuation of the previous fraud, then Relators have provided information that is independent of and materially adds to the information publicly disclosed during the Hendow case.” Hoggett, 2013 U.S. Dist. LEXIS 31910at *13 (relying on the definition of “independent source” in § 3730(e)(4)(B)). This was because the “alleged offenses could not be based upon the prior public disclosure of the offenses in Hendow, as Relators base their claim on subsequent actions by” Phoenix.

    The Hoggett case instructs that settlement of FCA claims can continue to haunt institutions receiving government money, and further emphasizes the need to implement strong internal compliance and reporting structures.

    For additional information, please contact Alexandra Chopin.



    CASE ANALYSIS

    Eighth Circuit Refuses to Require Identification of Specific Claims in Fraud-in-the-Inducement Complaint, But Requires Specific Claims Involving Medicare and Medicaid Reimbursement

    As noted in our summary above regarding a pending request for certiorari before the Supreme Court in U.S. ex. Rel. Nathan v. Takeda Pharmaceuticals North America, Inc. et al., many federal courts interpret Federal Rule of Civil Procedure 9(b) to require plaintiffs – both relators and the government – to allege specific false or fraudulent claims in their complaints. Others take a more lenient view and construe Rule 9(b) to require only specific information about the alleged fraudulent scheme, rather than specific claims. The Eighth Circuit Court of Appeals recently issued an opinion in U.S. ex rel. Simpson v. Bayer Healthcare that aligned with both sides of the issue, depending on the theory of the alleged fraud.

    In her second amended complaint, filed after the government declined to intervene in the case, the former manager of market research at Bayer (relator) alleged that Bayer knew about but downplayed health risks associated with the statin drug Baycol, misrepresented Baycol’s efficacy as compared to competing drugs, and paid illegal kickbacks to physicians to induce them to prescribe Baycol. Her amended complaint set forth two separate theories of fraud on the government. First, she alleged that Bayer fraudulently induced the Department of Defense (“DoD”) to enter into two specific contracts for the purchase of the drug Baycol, which was prescribed to armed services members by physicians who worked at military treatment facilities. Second, she alleged that Bayer fraudulently caused the Medicare and Medicaid programs to reimburse Baycol prescriptions, which she alleged the government would not have reimbursed had it known the full truth about Baycol. The Eighth Circuit held that with respect to the first theory, Rule 9(b) did not require the relator to identify specific false claims in her complaint, but under the second theory, the relator was required to and failed to identify specific false claims.

    Fraud in the Inducement Theory

    The Eighth Circuit reversed the district court’s dismissal of the DoD-related fraud-in-the-inducement claims, holding that under such a theory, Rule 9(b) does not require the plaintiff to identify specific false or fraudulent claims. The relator had alleged that after entering into an initial contract with Bayer for the purchase of Baycol, and after physicians began reporting that patients taking Baycol were developing the rare muscle disorder rhabdomyolysis, DoD had inquired into Baycol’s safety with respect to rhabdomyolysis. She alleged that Bayer responded to DoD’s inquiries with the false statements that there was no evidence to suggest Baycol caused more rhabdomyolysis than other drugs in the same class and that there was insufficient data on which to base any dose-response relationship between the use of Baycol and the frequency or severity of rhabdomyolysis. Relying on this allegedly false information from Baycol, she further alleges, DoD renewed the original contract with Bayer and also agreed to purchase a higher dosage of the drug under a separate Blanket Purchase Agreement.

    The Eighth Circuit disagreed with the district court’s approach of requiring allegations of specific fraudulent claims because, under a fraud-in-the-inducement theory, the claims themselves need not be false or fraudulent in order to state a cause of action under the False Claims Act (“FCA”). Focusing on the Supreme Court decision in United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943) (involving collusive bidding) as well as fraud-in-the-inducement decisions from the District of Columbia and Fourth Circuits, the court concluded that FCA liability attaches when the contract is initially induced by fraud. The claims themselves need not be false or fraudulent. Thus, the Circuit Court concluded that the relator’s amended complaint adequately identified the “‘who, what, where, when, and how’ of the alleged fraud” in order to satisfy Rule 9(b)’s pleading requirements, because she identified the individuals involved in the alleged exchanges between Bayer and DoD, the misrepresentations allegedly made, the dates on which they were made, the manner in which they were made, and why those representations were alleged to have been fraudulent. The court remanded those claims to the district court for further proceedings.

    Medicare and Medicaid Reimbursement Theory

    The relator’s second theory related to reimbursements paid by the Medicare and Medicaid programs for Baycol that was prescribed to those programs’ beneficiaries. The Eighth Circuit noted that the government enters into “no direct contractual relationship” for drugs prescribed to beneficiaries and reimbursed by those programs, and thus the relator had not alleged a fraud-in-the-inducement theory with respect to those programs. Instead, the court concluded that the relator’s theory was simply that Bayer’s allegedly misleading marketing schedule caused third parties to submit false claims to the government. In such situations where the claims themselves are alleged to have been false or fraudulent, the court relied on prior Eighth Circuit precedent to hold that the relator must identify “at least some representative examples of false claims” or “show how any particular reimbursement claim was fraudulent in and of itself.” Because the relator in this case failed to do so, the district court had properly dismissed her allegations relating to Medicare and Medicaid reimbursement.

    Analysis

    In terms of what this means for providers and others who conduct business with the government, the message is mixed. At least in the Eighth Circuit, the focus in future cases will be on whether the falsity allegedly led to the contract itself – in which case, no false claims need be identified – or whether the actual claims must have been false – in which case specific claims must be identified for the relator to avoid dismissal. Applying that difference, it will be much easier for future relators to move forward with claims brought in the procurement area, where the government actually enters into contracts with those who subsequently submit claims for payment/reimbursement or cause another entity to submit a claim for payment/reimbursement. But in situations in which federal programs simply provide reimbursement to third parties, such as the Medicare and Medicaid programs, and there is no contract that could have been induced by fraud, relators will be held to a higher standard and required to set forth at least representative examples of false or fraudulent claims actually submitted.

    Note that this clarification of the pleading requirements does not affect the types of fraud that legally may be alleged under the FCA, since the court did not opine on the sufficiency of either legal theory. It does, however, make it more unlikely that whistleblowers will be able to move forward successfully with the second category of cases after the government declines to intervene, since whistleblowers often lack access to claims data.

    For additional information, please contact Laura Laemmle-Weidenfeld.



    PRACTICE ANALYSIS

    New SBA Regulations Ease FCA Recovery for False Size Representations

    The federal government’s procurement processes include several programs designed to assist small businesses. For example, the small business “set-aside” program authorizes federal agencies to forgo the normal competition process and set aside contracts for competition among small businesses only. Large contractors are expected to maintain small business subcontracting plans pursuant to which they commit to use good faith efforts to place specified percentages of their subcontract spending with small businesses.

    Small business contractors seeking to compete for set-aside contracts or to qualify as “small” for purposes of satisfying a large contractor’s small business subcontract spending goals are permitted to self certify as to their size status. It is therefore not altogether surprising that abuses of the small business set-aside programs have been reported.  The 2010 amendments to the Small Business Act reacted to some of these reports and clarified the penalties and risks to companies who misrepresent their size status. The amendments codified case law that had defined the scope of the damages caused by false certifications and the circumstances constituting false certifications.

    On June 28, 2013, the Small Business Administration (“SBA”) published final regulations implementing the 2010 amendments. Two of the final rule’s provisions directly impact application of the FCA to the small business set-aside program. First, if a company willfully seeks and receives an award by misrepresenting its small business size or status, there is a presumption of loss to the United States equal to the value of the contract. 13 C.F.R. 121.108(a). This provision applies to subcontractors as well. A business winning a contract on the basis of a size misrepresentation therefore risks liability under the FCA for three times the value of the contract.

    Notably, the proposed rule made the presumption of loss irrefutable. The final rule allows a contractor to escape liability if the size misrepresentation was the result of “unintentional errors, technical malfunctions and other similar situations that demonstrate that a misrepresentation of size was not affirmative, intentional, willful or actionable” under the FCA. 13 C.F.R. 121.108(d). In determining whether such circumstances are present, the government will examine the company’s internal management procedures, the clarity or ambiguity of the representation, and the efforts made to correct an incorrect or invalid representation in a timely manner.

    Second, the SBA’s rules define when an actionable representation occurs, writing into the regulations the notion of implied or “deemed” certifications. The submission of a bid, proposal, or application for a federal contract, subcontract, grant, or cooperative agreement that is classified as intended for award to small business concerns is deemed a certification of the concern’s size status, as is registration on a federal database for the purpose of being considered for a small business award. 13 C.F.R. 121.108(b). Moreover, the regulations require small business concerns to update their size status in the applicable government database annually or risk loss of their small business size status. 13 C.F.R. 121.109.

    The new SBA regulations ease the government’s burden of proof in an FCA case for size status misrepresentation by defining the government’s damages. They also provide that the submission of a bid or proposal for a small business set-aside contract is the equivalent of certification as to size status. These provisions will make government pursuit of FCA cases against small businesses much more streamlined and most likely signal an increase in these cases.

    For additional information, please contact Mary Beth Bosco.



    PRACTICE TIP

    When settling a False Claims Act case with the government, agreeing on a dollar figure is only the first significant hurdle. Equally important, and often equally difficult, is agreeing on the language in the settlement agreement, in particular the so-called Covered Conduct, which is the conduct being released by the United States in exchange for the settlement payment. Remember that often cases settle before the United States files its complaint, so although a relator’s case will be dismissed with prejudice, the relator’s complaint may not align well with the conduct that became the focus of the investigation and that the defendant is trying to resolve. In settlements with private parties, the parties often will exchange very broad release language, releasing conduct known and unknown, in the past, present, and even future. The Department of Justice, however, takes the position that it will release only the specific past conduct investigated, and only if the defendant pays something for it. Therefore, it is critical for defendants to focus very carefully on the language of the Covered Conduct and ensure that the conduct that the defendant believes it is paying to have released, really is being released. Also, regardless of whether the defendant believes its conduct really violated the law, it should keep in mind that the same conduct in the future is not part of the release, and not only the United States but also a whistleblower can pursue a future case relating to post-settlement conduct, even if that conduct is identical to the released past conduct.