The False Claims Act After Escobar. Assessing Risks and Avoiding Liabilities February 17, 2017

Transcription

1 The False Claims Act After Escobar Assessing Risks and Avoiding Liabilities February 17, 2017

2 Introductions Brian A. Hill, Member, Miller & Chevalier Chartered Honorable Anthony J. Trenga, U.S. District Court Judge, Eastern District of Virginia Florence A. Crisp, VP & Senior Legal Counsel, CVS Health Corporation David S. Williams, Managing Principal, Deloitte LP 2

3 Overview 1) False Claims Act Basics 2) Escobar 3) Higher Penalties 4) Damages after Escobar 3

4 False Claims Act ( FCA ) Basics Civil War era statute passed in 1863 Codified at 31 U.S.C et seq. Any person who violates the FCA is liable to the United States Government for a civil penalty... plus 3 times the amount of damages which the Government sustains because of the act of that person. 4

5 FCA Basics 31 U.S.C. 3729(a)(1) -- Any person who... (A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; (B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim; (C) conspires to commit a violation of subparagraph (A), (B), (D), (E), (F), or (G); (D) has possession, custody, or control of property or money used, or to be used, by the Government and knowingly delivers, or causes to be delivered, less than all of that money or property; (E) is authorized to make or deliver a document certifying receipt of property used, or to be used, by the Government and, intending to defraud the Government, makes or delivers the receipt without completely knowing that the information on the receipt is true; (F) knowingly buys, or receives as a pledge of an obligation or debt, public property from an officer or employee of the Government, or a member of the Armed Forces, who lawfully may not sell or pledge property; or (G) knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government. 5

6 FCA Basics DOJ can bring FCA civil action without a whistleblower (31 U.S.C. 3730(a)) Or qui tam action, brought by private party, relator, alleging that defendant defrauded the government (31 U.S.C. 3730(b)(1)) Relator may be awarded up to 30% of funds recovered (31 U.S.C. 3730(d)) First, relator files suit, under seal, in federal court (31 U.S.C. 3730(b)(2)) DOJ has 60 days to investigate the relator s claims (31 U.S.C. 3730(b)(2)) After its investigation (which can be extended), DOJ must inform relator whether it intends to intervene in the case If the government elects to intervene, it takes over the case (31 U.S.C. 3730(b)(4)(A)) If the government declines to intervene, the relator (through counsel) has the right to pursue the case (31 U.S.C. 3730(b)(4)(B)) 6

7 FCA Basics Historic Recoveries 7

8 Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct (2016) ( Escobar ) ESCOBAR 8

9 Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct (2016) ( Escobar ) Factual background Parents of daughter who died of a seizure while being treated at a mental health facility brought qui tam action against facility Alleged that facility violated the FCA by failing to comply with Medicaid regulations re staff qualifications Government declined to intervene Relators proceeded under implied certification theory: By submitting claims to Medicaid, facility impliedly certified compliance with federal regulations Facility knowingly violated important regulations re: staff qualifications Had Medicaid known of the violations, it would not have paid facility s claims Lower court holdings District Court dismissed on theory that none of the violated regulations was a condition of payment First Circuit reversed, holding that the regulations themselves constitute[d] dispositive evidence of materiality. 9

10 Escobar Holding: Implied Certification SCOTUS took the case to resolve a circuit split Some circuits had adopted the implied cert. theory, others had rejected it, and still others had accepted modified versions of the theory Escobar held that implied cert. can be a basis for FCA liability if two conditions are satisfied: 1. The claim makes specific representations about the goods or services provided 2. Defs. failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths Court left open possibility of other ways to state implied cert. claim 10

11 Escobar Holding: Materiality In implied cert. cases, misrepresentation must be material to gov t payment decision FCA always contained a materiality requirement Not all requirements are automatically material Material means having a natural tendency to influence Court clarifies: Materiality does not turn on condition of payment label (though it remains relevant) Not material simply because government has the option to decline to pay Not material where noncompliance is minor or insubstantial Materiality does look to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation Attaches great probative value to how government has responded when it had actual knowledge about similar violations 11

12 Circuit Update First Circuit: Escobar on remand from SCOTUS (2016 WL ) Applies the Supreme Court s holistic approach to materiality Finds mental health facility s misrepresentations material for three reasons: 1. Compliance with licensing req ts was labeled as a condition of payment 2. Licensing req ts went to the very essence of the bargain 3. No evidence that MassHealth paid claims despite being aware of violations Court reserved right to change ruling if discovery reveals that MassHealth continued to pay claims to facility despite becoming aware they were not in compliance 12

13 Circuit Update Seventh Circuit: U.S. ex rel. Nelson v. Sanford-Brown, 840 F.3d 445 (7 th Cir. 2016) Former employee of for-profit college alleged that college s recruitment and retention policies violated Title IV Higher Ed. Act requirements Seventh Circuit had previously rejected implied cert. theory On remand from Escobar, court found that relator had offered no evidence that the government's decision to pay SBC would likely or actually have been different had it known of SBC's alleged noncompliance with Title IV regulations Eighth Circuit: U.S. ex rel. Miller v. Weston Educational, 840 F.3d 494 (8 th Cir. 2016) Former employees of for-profit college alleged that college fraudulently induced government to provide financial aid funds by falsely promising to keep accurate student records Materiality: Court found that the college s promise to maintain accurate grade and attendance records influenced the government s decision to enter into a contractual relationship with the college Court noted that there was evidence that the government sometimes terminated otherwise eligible institutions for falsifying student attendance and grade records Ninth Circuit: U.S. ex rel. Rose v. Stephens Inst., 2016 WL (N.D. Cal. Sept. 20, 2016) Another higher ed, for-profit college Title IV funding case District Court found that Escobar did not establish a rigid two-part test for falsity that must be met [in] every single implied certification case District Court then certified three questions for interlocutory appeal, one of which was: Must the two conditions identified by the Supreme Court in Escobar always be satisfied for implied false certification liability under the FCA... 13

14 Circuit Update Fourth Circuit: U.S. ex rel. Badr v. Triple Canopy, Inc. On remand from Supreme Court in light of Escobar Involved a security contract in Iraq for which contractor hired Ugandan guards who had allegedly failed marksmanship tests Contractor allegedly had employees falsify records to indicate passage Prior to Escobar, Fourth Circuit had deemed the failure to satisfy marksmanship tests material under a common sense standard; Query whether Fourth Circuit will adopt First Circuit s approach on remand and allow for possibility that materiality could be undermined if discovery shows government knew about poor marksmanship and paid claims anyway. Eleventh Circuit: U.S. ex rel. Marsteller v. Tilton, 2016 WL (N.D. Ala. Mar. 31, 2016) Involves FCA claims surrounding contract for manufacture of helicopters and alleged gratuities provided to project manager who submitted inflated pricing info in bidding process District Court found that relator had not alleged facts demonstrating that compliance with a certain regulation was material to the government s decision to pay Briefing complete; oral argument contemplated but not yet scheduled 14

15 Open Questions Other means of proving implied certification beyond specific way endorsed in Escobar? Quantum of evidence necessary to prove materiality? What can contractors do to establish material terms at the outset? Can contractors defeat materiality test simply by submitting evidence that government knew about the unsatisfactory performance but paid anyway? 15

16 FCA Penalties Higher Penalties 16

17 FCA Penalties As of August 1, 2016 Minimum penalty rose from $5,500 to $10,781 Maximum penalty rose from $11,000 to $21, Fed. Reg But when is a penalty imposed? 17

18 FCA Penalties Different interpretations caused by two provisions under (a)(1)(A): a person is liable under the FCA who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval 3729(a)(1)(B): a person is liable under the FCA who knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim So, which is it? Does a penalty apply for each false record or statement, or each false claim? 18

19 FCA Penalties U.S. v. Bornstein, 423 U.S. 303 (1976) the number of imposable forfeitures has generally been set at the number of individual false payment demands that the contractor has made upon the government. It s the number of false payment demands, not supporting statements or records Relators and the gov t have continued to push the false statements theory post-bornstein, but courts have followed Bornstein U.S. v. Krizek, 111 F.3d 934 (D.C. Cir. 1997) Gov t sought penalties for each of 8,002 false codes submitted, not the number of false claims submitted. U.S. ex rel. Maxwell v. Kerr-McGee Oil & Gas Corp., No. 04-cv-01224, 2010 WL , at *3-6 (D. Colo. 2010) Gov t sought penalties for each of 1,403 miscalculated royalty amounts, not the 48 monthly reports containing the miscalculations. 19

20 FCA Penalties What is a claim for FCA penalty purposes? 31 U.S.C. 3729(b)(2)(A) [A]ny request or demand, whether under a contract or otherwise, for money or property... that... is presented to an officer, employee, or agent of the United States, or, if federal funds or property are at issue, to a contractor, grantee, or other recipient U.S. v. Speqtrum, Inc., 113 F. Supp. 3d 238, 246 (D.D.C. 2015) Each request for payment that [a contractor] submit[s]... qualifie[s] as an FCA claim Understanding what constitutes a claim can be critical U.S. ex rel. Drakeford v. Tuomey, 792 F.3d 364, 386 (4th Cir. 2015) 21,730 separate false claims vs. four cost reports penalties assessed on the claims But cf. U.S. ex rel. Hockett v. Columbia/HCA Healthcare Corp., 498 F. Supp. 2d 25, (D.D.C. 2007) Visiting Nurse Ass n of Brooklyn v. Thompson, 378 F. Supp. 2d 75, 99 (E.D.N.Y. 2004) In both, penalties assessed on cost reports rather than false claims 20

21 FCA Penalties Eighth Amendment: Excessive Fines Clause (EFC) Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted The [EFC]... prohibits the government from imposing excessive fines as punishment. Civil fines serving remedial purposes do not fall within the reach of the Eighth Amendment. But where a civil sanction can only be explained as serving in part to punish, then the fine is subject to the Eighth Amendment. U.S. ex rel. Drakeford v. Tuomey, 792 F.3d 364, 387 (4th Cir. 2015) (internal quotation marks and citations omitted) SCOTUS has not weighed in on whether the EFC applies to FCA cases But see U.S. v. Bajakajian, 524 U.S. 321 (1998) (held that fines are payments that are punitive in nature, and they are excessive where grossly disproportional to the gravity of the defendant s offense ) Fifth Amendment: Due Process Clause (DPC) No person shall... be deprived of life, liberty, or property, without due process of law The [DPC] imposes substantive limits beyond which penalties may not go. Like the Eighth Amendment, the [DPC] does not apply to compensatory damage awards. This is because compensatory damages redress the concrete loss the plaintiff has suffered[, whereas] punitive damages are essentially private fines intended to punish the defendant and to deter future wrongdoing. Tuomey, 792 F.3d at

22 FCA Penalties Lower Courts mostly have held that the EFC applies to FCA U.S. ex rel. Bunk v. Gosselin World Wide Moving, N.V., 741 F.3d 390, 408 (4th Cir. 2013) ( A cumulative monetary penalty such as that imposed under the FCA will violate the Eighth Amendment proscription against excessive fines in the infrequent instance that it is grossly disproportional to the gravity of a defendant's offense. ) (quoting Bajakajian) U.S. v. Mackby, 261 F.3d 821, (9th Cir. 2001) (holding that EFC analysis applies to FCA civil penalties) U.S. v. Cabrera-Diaz, 106 F. Supp. 2d 234, 242 (D.P.R. 2000) (finding civil penalty to be excessive because penalty was significantly greater than government s actual damages) U.S. v. Advance Tool Co., 902 F. Supp. 1011, (W.D. Mo. 1995) (finding civil penalty of $3.4 million to be unconstitutionally excessive when the government failed to prove actual damages, penalty reduced to $365,000) But see U.S. v. Rogan, 517 F.3d 449, (7th Cir. 2011) (noting that [i]t is far from clear that the Excessive Fines Clause applies to civil actions under the False Claims Act, and declining to rule on the issue) 22

23 FCA Penalties EFC and DPC analysis can be complex: SCOTUS has found both compensatory and punitive aspects in the FCA s treble damages provision Compensation above actual damages helps pay for: [C]osts, delays, and inconveniences occasioned by fraudulent claims. Cook Cnty., Ill. v. U.S. ex rel. Chandler, 538 U.S. 119, 130 (2003) Recovery of amounts paid to relators. Tuomey, 792 F.3d at 388 Punitive damages are analyzed under SCOTUS s 3-part State Farm test: (1) the degree of reprehensibility of the defendant s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. State Farm Mut. Auto Ins. Co v. Campbell, 538 U.S. 408, 418 (2003) [A]n award of more than four times the amount of compensatory damages might be close to the line of constitutional impropriety. Id. at 425 Fourth Circuit s decision in Tuomey takes us through this analysis in detail. Ultimately concluded that the ratio of punitive-compensatory was ($186M - $51M), safely within the 4-1 ratio Had the new statutory minimum been applied, the ratio would have been

24 FCA Damages After Escobar 24

25 FCA Damages FCA damages are compensation to the government for the harm it has suffered. Said differently, damages are designed to make the Government whole. Under the FCA, government may recover "actual damages," the difference between what it paid and what it should have paid for the goods; Courts will consider any reasonable method of calculating damages which will fairly reimburse the government for its losses and expenses, without creating a windfall for the government. 25

26 FCA Damages Escobar Takeaways 1) Implied certification cases are sanctioned and will continue 2) the materiality language will (hopefully) limit tainting damages claims - further support for damages as compensation and no windfall notion U.S. ex rel. Wall v. Circle C Construction, LLC, 813 F.3d 616 (6th Cir. 2016) Awarded damages of 763K reduced to approximately 15K - the dollar difference between value of performance promised vs obtained. U.S. v. United Technologies, 2016 WL (S.D. Ohio 2016) rejected a $657 million damage award, because despite contractor cost misstatements, the Government received the value it was promised, and therefore suffered no harm. 26

27 FCA Damages Statistical Sampling What is sampling? Sampling is the act, process, or technique of selecting a suitable sample, or a representative part of a population for the purpose of determining parameters or characteristics of the whole (Webster, 1985). Purpose - To draw inferences about a population Why sample? Efficiency - taking a sample requires fewer resources than a census Timeliness - results are faster Large Populations - the size of the population makes a census impossible Inaccessibility - access to the population makes a census impossible Destructiveness - some observations destroy the items observed, so only sampling makes sense Accuracy - samples can be more accurate than a census 27

28 FCA Damages Statistical Sampling There seems to be a growing acceptance that statistical sampling is an appropriate tool to establish damages in FCA cases. Cases reflect a continued concern regarding liability, all are distinguishable based on facts and therefore are all over the place! U.S. ex rel. Martin v. Life Care Centers of Am. Inc., No. 08- cv-251 (E.D. Tenn. Feb. 18, 2015) - ( [A]s long as the statistical sample is a valid sample that is representative of the universe of claims, the natural disparity between the claims does not preclude using sampling and extrapolation as evidence of the total number of claims for noncovered services. ) U.S. ex rel. Ruckh v. Genoa Healthcare LLC et al., No. 8:11-cv-1303 (M.D. Fla. 2015) - expert testimony based on statistical sampling was appropriate in FCA cases and could not be excluded solely due to the concern that sampling, by its nature, subverts individualized proof. Admissibility - arguments regarding admissibility of such expert testimony go to the weight or reliability of sampling results (driven by methodological choices by the expert) and are appropriate in Daubert proceedings. 28

29 FCA Damages Statistical Sampling SCOTUS case that may impact FCA statistical sampling going forward Tyson Foods, Inc. v. Bouaphakeo, 136 S.Ct (2016) The district court did not err in certifying and maintaining a class of employees who allege that the employer s failure to pay them for donning and doffing protective gear violate the Fair Labor Standards Act, notwithstanding the employees reliance on representative evidence to determine the number of additional hours that each employee worked, when the employer had failed to keep adequate records. Kennedy wrote that a representative or statistical sample, like all evidence, is a means to establish or defend against liability. It is allowed into a trial, of a class action or other type of case, depending on the degree to which the evidence is reliable in proving or disproving the elements of the legal claim at stake, the opinion added. 29

30 Contact Information Brian A. Hill Member Miller & Chevalier Chartered Honorable Anthony J. Trenga U.S. District Court Judge, Eastern District of Virginia (703) Florence Crisp VP & Senior Legal Counsel CVS Health Corp David S. Williams Managing Principal Deloitte LP (212)