Preface Update. The 2016 Cumulative Supplement brings the Sixth Edition current through June 28, 2016.

Transcription

1 Preface The 2016 Cumulative Supplement brings the Sixth Edition current through June 28, Update For the 11th time since the 1986 amendments to the False Claims Act (FCA), the U.S. Supreme Court dissected language of the Act. In Universal Health Services, Inc. v. United States ex rel. Escobar, 1 the Court made clear something it has hinted at for several years: the FCA is only concerned with contractors actions that are so significant that the government would not have paid their claims had the government known of the violations. While Congress had added the word material to two of the seven liability provisions in 2009, the Supreme Court has now engrafted that term on all of the liability provisions. Thus, it appears that the Court has rounded off some of the square corners rule that has illuminated government contracting law for decades. Now only material violations of regulations or contracts, done knowingly by the contractor and without full knowledge by the government, run afoul of the FCA. In Escobar, the Supreme Court also determined that the implied certification theory of liability 2 is viable, although few bright lines for when it can apply are provided. All 11 of the FCA Supreme Court decisions (five authored by Justice Thomas) decided in the past 19 years were initiated by relators. In only one of them had the U.S. Department of Justice intervened to prosecute. For the first 100 years of its existence, the FCA was virtually ignored by the Supreme Court. The Court s fascination with the modern FCA will continue, as the Court has already granted certiorari to determine the consequences of a relator s violations of the seal. 3 As the Court tends S. Ct (2016). 2 See Chapter 23, III.K, Universal Health Services, Inc. v. United States ex rel. Escobar ; and Chapter 3, XII.B.1, Contract Violations and Implied Certifications. 3 State Farm Fire & Cas. Co. v. United States ex rel. Rigsby, 794 F.3d 457 (5th Cir. 2015), cert. granted, 136 S. Ct (2016). See Chapter 8, XII, Failure to Comply with Seal Requirements. vii

2 viii False Claims Act 2016 Cumulative Supplement to travel far afield from the issues(s) on which it grants certiorari, we can expect that the Rigsby decision may also delve into matters beyond the consequences of a seal failure. The FCA has made headlines since the 2015 cumulative supplement in other ways. A nonintervened case involving highway guardrails proceeded to trial by jury in Texas and resulted in a verdict, with trebled and statutory penalties of $663,360,750. The court in United States ex rel. Harman v. Trinity Industries Inc. 4 also awarded a 30 percent relator s share as well as $19,012, in statutory attorneys fees and costs. While the guardrail case is currently on appeal, it demonstrates the severe consequences that can result even when the Department of Justice remains on the sidelines and allows a relator and his or her private counsel to pursue these cases. With the help of the Freedom of Information Act, this cumulative supplement now sheds light on the maximum relator share recoveries obtained in the past 30 years. 5 Historically, such recoveries appear in less than 1 percent of all qui tam cases and usually only in cases producing trifling sums. The Trinity case may signal that other relators will eschew settlements and instead proceed to trial. We have included in this cumulative supplement a comprehensive set of jury instructions along with special interrogatories and a sample verdict form for use in FCA cases. Among the covered issues are scienter, claims under the seven FCA prongs, materiality, obligations, damages, joint and several liability, retaliation, and several state false claims statutory provisions. Among the notable U.S. Courts of Appeals decisions discussed in this cumulative supplement are the Ninth Circuit s determination that Freddie Mac and Fannie Mae are not instrumentalities of the federal government under 31 U.S.C. 3731(b)(2)(A)(i); the Sixth Circuit s interpretation of remuneration and induce for purposes of the Anti-Kickback Act; the First Circuit finding that fraud on the Food and Drug Administration, in seeking approval to market a medical device, is not an appropriate claim under the FCA; the Seventh Circuit s clarification that claims in 31 U.S.C. 3730(a)(1)(B) means cases, not requests for payment, and its finding that Pharmacy Benefit Managers and Plan Sponsors are not officers or employees of the United States for purposes of the FCA; the Seventh Circuit s determination that the 2010 amendment to the definition of original source only clarified the provision and can thus be applied retroactively; the Sixth and Eleventh Circuit finding that the public disclosure bar is no longer jurisdictional; the Ninth Circuit s adoption of the Seventh Circuit test for substantially similar allegations and its adoption of the Third Circuit distinction between public disclosure allegations and transactions ; the Third, Eighth, and Eleventh Circuit interpretations of the public disclosure materially adds provision ; the Sixth Circuit s clarification of the original source direct and independent provision; the Fourth Circuit s determination of the consequences WL (E.D. Tex. June 9, 2015). 5 See Chapter 16, XII, Thirty Percent Relator s Share Awards Over Thirty Years.

3 Preface ix when the seal is breached; the Eighth Circuit s retreat from its earlier Joshi 6 opinion in which it required the pleading of representative examples; the Fifth Circuit s adoption of the McDonnell-Douglas test for assessing FCA retaliation claims; the Sixth Circuit s adoption of the objective/subjective reasonableness test for assessing whether a relator s conduct is protected under the FCA retaliation provision; and the Fourth Circuit s interpretation of other efforts to stop for purposes of FCA retaliation. On May 2, 2016, an interim rule was issued by the Railroad Retirement Board that increased the minimum and maximum civil penalties under the FCA to $10,781 and $21,563, respectively. These new penalties went into effect on August 1, 2016, but will relate back to claims made after November 2, On March 5, 2016, Vermont s false claims statute became retroactive. Washington s false claims statute was renewed in 2016, eliminating a sunset provision that would have resulted in a June 30, 2016, expiration. The Washington statute is now extended to Bucking the trend of states enacting or strengthening false claims statutes, Wisconsin repealed its false claims statute in July 2015 in an omnibus motion without any hearings or public discussion. Also included in this cumulative supplement is an update of the success the various states have had in prosecuting Medicaid and other fraud under their respective false claims statutes. In addition to the Rigsby case in which the Supreme Court granted certiorari, there are two pending certiorari petitions before the Supreme Court. In Pennsylvania Higher Education Assistance Agency v. United States ex rel. Oberg 7 and United States ex rel. Kreipke v. Wayne State University, 8 the same issue is presented: What is the proper arm-of-the-state test to be employed in the context of the FCA? It is quite possible that the Supreme Court may grant certiorari in those cases, given the divergent approaches taken by the Courts of Appeals as to the test. On May 16, 2016, the Supreme Court invited the Solicitor General to file an amicus brief in the Oberg case. In the Kreipke case, the relator filed his certiorari petition on May 19, The defendant in Pharmerica Corp. v. United States ex el. Gadbois 9 also filed a certiorari petition on the issue of whether the approach of the Fourth, Seventh, and Tenth Circuits is proper in applying the first-to-file bar as of the time the follow-on case is filed and dismissing a copycat qui tam action brought when the related action is pending; or whether the First Circuit approach of finding subsequent events can cure the first-to-file defect, so that a later-filed case may not be subject to the first-to-file bar by remaining on the docket until the first-filed action ends. That petition was denied on June 27, My associate Jennifer L. Lambert continues her excellent work in reviewing the numerous new published legal opinions and organizing them for this cumulative supplement. I also wish to express my gratitude to Erin 6 United States ex rel. Joshi v. St. Luke s Hosp., 441 F.3d 552 (8th Cir. 2006) F. Supp. 3d 493 (E.D. Va. 2015), vacated & remanded, 804 F.3d 646 (4th Cir. 2015), petition for cert. filed, No (U.S. Feb. 16, 2016) F.3d 768 (6th Cir. 2015), petition for cert. filed, No (U.S. May 19, 2016) F.3d 1 (1st Cir. 2015) S. Ct (2016).

4 x False Claims Act 2016 Cumulative Supplement Campbell for her work on the jury instructions and to Dayna Boatright for tracking down the 30 percent relator s share cases. Finally, we continue to enjoy an excellent relationship with Bloomberg BNA Acquisition Manager Rob Anderson and our clear-eyed and studious editor Joanne Nobile. Scheduling and updating a work of this size is no small task and they are both skilled and dedicated professionals. James B. Helmer, Jr. July 7, 2016 Cincinnati, Ohio 2015 Update The False Claims Act (FCA) continues to be heavily litigated and continues to produce conflicting decisions. Since publication of the last Cumulative Supplement, there have been several important developments in FCA jurisprudence. Following are the highlights of those developments. In May 2015, the largest settlement ever in a nonintervened case was obtained against DaVita, a dialysis provider. The United States investigated the case for two years but then opted to not intervene. The case settled for $495 million, and the two relators who were former employees of DaVita may receive up to $135 million as their relators share. This settlement is significant for several reasons. First, there were only five years in the history of the FCA in which nonintervened case settlements or judgments in total exceeded $100 million. Second, since 1987, none of the annual totals of such cases exceeded $200 million. Third, such a settlement demonstrates the fallacy of the often-argued claim by defendants that the government s refusal to intervene means the case is weak and/or lacks merit. Fourth, it should also put an end to the requests for Congress to amend the statute to eliminate qui tam cases when the government opts not to intervene. Such requests make the erroneous claim that nonintervened qui tam cases produce little benefit to the taxpayers and are often supported by citation to the fraud statistics maintained by the U.S. Department of Justice (DOJ). In Chapter 21, Section II.D, Use of Inaccurate Statistics to Attack Qui Tam Provisions, we highlight why the DOJ statistics are misleading regarding the real impact of nonintervened qui tam cases. Whether the DOJ mischaracterizes the DaVita settlement will be determined when it next releases its fraud statistics in late What is worth noting is that the June 24, 2015 press release from the DOJ characterized the settlement as an example of what can be accomplished as a result of the successful cooperation between the government and whistleblowers in protecting our vital health care program. 11 Yet nowhere in the release did the DOJ give any credit to the relators counsel, who put in years of work to obtain the judgment. 11 Press Release, U.S. Dep t of Justice, DaVita to Pay $450 Million to Resolve Allegations That it Sought Reimbursement for Unnecessary Drug Wastage (June 24, 2015), available at

5 Preface xi On May 26, 2015, the U.S. Supreme Court issued its latest ruling on the FCA in Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter. 12 Not surprisingly, the Supreme Court reversed the Fourth Circuit ruling that the Wartime Suspension of Limitations Act (WSLA) applies to civil offenses, such as violations of the FCA. Looking to the legislative history of the WSLA, the Court found that the statute only tolls the statute of limitations for criminal offenses. The Court also addressed the reach of the first-to-file bar and found that the bar only serves to bar later-filed actions when an earlier filed FCA action is pending. Thus, a dismissed FCA case, although it may raise public disclosure issues, cannot bar a later-filed case on first-to-file grounds. Numerous decisions were rendered on the issue of what type of obligation is required of the defendant when alleging a reverse FCA violation. The courts are not in agreement on this issue. The Eleventh Circuit and a Fifth Circuit district court found that failure to comply with a corporate integrity agreement that requires a defendant to identify, report, and remit excess government payment is an obligation. On the other hand, a First Circuit district court found that a defendant s failure to comply with a corporate integrity agreement was not such an obligation. In January 2015, the Fourth Circuit adopted the implied certification theory of liability. In March 2015, the Eleventh Circuit formally adopted implied certification. As such, the only courts that have yet to adopt that theory are the Fifth, Seventh, and Eighth Circuits. A new theory of liability based on violations of Food & Drug Administration regulations has been advanced in several cases. Not surprisingly, courts are not in agreement regarding whether such violations can serve as the basis of an FCA action. A district court in the Third Circuit found that such violations can be the basis of an FCA action. However, the First Circuit found that such a violation was not actionable under the FCA. A Ninth Circuit district court also found no liability when a defendant made false certifications during the drug approval process. In June 2015, Vermont became the latest state to enact a false claims statute. Also, Maryland amended its false claims statute in April In July 2015, Wisconsin repealed its false claims statute. There have also been several decisions addressing various state FCAs. Given that there are usually about 10 new false claims decisions per week, it is not surprising that there have been so many developments in such a short time span. In this latest Cumulative Supplement I again want to note the contributions of my associate Jennifer Lambert in tracking and compiling the hundreds of decisions that have been handed down since the 2014 Cumulative Supplement. James B. Helmer, Jr. July 14, 2015 Cincinnati, Ohio S. Ct (2015).

6 xii False Claims Act 2016 Cumulative Supplement 2014 Update Thirty years ago, Marine veteran Jack Gravitt sought my help when he was terminated by General Electric for refusing to misvoucher time spent on fixed-price commercial jet engine projects to the cost-plus B-1B bomber program. At that time, no statutes, no cases, and no public policy protected Jack s job. Instead, we suggested that the 1943 version of the federal FCA which had been virtually unused for 40 years could provide a path to stop General Electric s unpatriotic activities. United States ex rel. Gravitt v. General Electric Co. revitalized the use of the Abraham Lincoln era qui tam suit to allow private citizens to prosecute civil actions seeking to recover federal funds stolen by government contractors. This rare case was the cornerstone on which Congress relied to enact numerous changes to the FCA signed into law by President Ronald Reagan in October The 1986 Amendments have proven to be wildly successful in recovering billions of dollars in misapplied funds by government contractors. Jack Gravitt s qui tam case ultimately set a record for recovering funds under the 1943 version of the FCA. But more important, it started an avalanche that continues to gain strength to this day and has led to thousands of other qui tam cases. The U.S. Supreme Court has reviewed nine such cases, and there are thousands of published decisions by lower federal courts. Laws now protect those brave whistleblowers who are willing to try to redress fraud against the federal government. More than two dozen copycat statutes have been enacted by the states. Congress has passed other amendments to prevent the slowing down of the avalanche and has championed the use of whistleblower protections to assist several other federal agencies in protecting their portion of the federal fisc. Having actively litigated FCA cases longer than anyone, it was my intent that False Claims Act: Whistleblower Litigation address all major issues that arise in this unique area of the law. The treatise is dedicated, of course, to Jack Gravitt. The 2014 Cumulative Supplement is designed to present fresh authority for the matters covered in the treatise as courts continue to dig through the Gravitt avalanche. I am indebted to my associate Jennifer Lambert for her work in collecting the authorities that follow and to my longtime assistant Dayna Boatright for both her editing skills and her assistance in preparing our cases for trial. I also want to thank University of Cincinnati College of Law third-year student Elizabeth M. Thoman for proofreading this manuscript and for her helpful suggestions. James B. Helmer, Jr. May 29, 2014 Cincinnati, Ohio 2013 Update America regularly entrusts hundreds of billions of dollars to private contractors to provide the weapons to defend the nation and for the health care of its citizens. But far too often government contractors provide far

7 Preface xiii less than what they were paid to do. The FCA remains the primary device for safeguarding the treasury. The FCA reached another milestone in 2013 when it turned 150 years old from its original passage during the depths of America s Civil War. The year 2013 marked the ninth consecutive year in which annual recoveries pursuant to the Act greatly exceeded $1 billion. The importance of the FCA continues to be recognized. Two of the nation s leading law schools, Michigan and Cornell, offered courses covering the FCA that were well-attended by law students. The substantial clarifications to the 1986 Amendments that were enacted in 2009 and 2010 caused a flurry of activity across the country. Several state legislatures raced to make their state false claims provisions consistent with federal law so as to qualify for the Deficit Reduction Act bonus paid to the states on FCA recoveries. The U.S. Supreme Court took a well-deserved rest from reviewing FCA issues in But the lower courts continued to issue numerous decisions. Familiar topics included the public disclosure bar, the firstto-file bar, kickback violations, materiality questions, retaliation against whistleblowers, and Federal Rule of Civil Procedure 9(b) s requirement for pleading fraud with particularity. Such decisions are discussed in this supplement. There were also rulings on more novel issues that bear discussion. Has the Wartime Suspension of Limitations Act effectively eliminated any statute of limitations problem for FCA cases? Or does such suspension apply only in government-driven or intervened cases? A challenge to the constitutionality of the 2009 Amendments was soundly rejected by the U.S. Court of Appeals for the Sixth Circuit, and certiorari was denied on the thorough consideration of the issue. Several rulings were also issued concerning the applicability of the FCA to violations of the Davis-Bacon Act. That Act requires certain contracts financed by the federal government for work to be performed on public buildings or works to contain a provision setting forth the minimum wages to be paid to certain classes of laborers and mechanics. Courts faced with alleged violations of the Davis-Bacon Act have focused on whether the claimed violation involves a misclassification of workers or misrepresentation of the wages paid to workers. Both types of violations have been found to be actionable under the FCA. Our law firm continues actively to prosecute qui tam cases. We are currently preparing for the second trial in the soon-to-be 19-year-old United States ex rel. Sanders v. Allison Engine Co. case, a case that has already had significant impact on the FCA. The U.S. Supreme Court s 2008 decision in Allison became the catalyst for action by a heretofore dysfunctional U.S. Congress. By overwhelming margins, both houses of Congress overturned the Supreme Court s Allison ruling and then addressed several areas of FCA jurisprudence that needed to be clarified. The Allison trial court refused on constitutional grounds to apply the new FCA provisions retroactively to the very case that led to the changes in the law. That decision was quickly reversed. And in 2013, the U.S. Supreme Court refused the

8 xiv False Claims Act 2016 Cumulative Supplement Allison defendants second attempt at high court review of the case on the determination that the 2009 Amendments retroactively applied to the case and were constitutional. I am grateful to the members of my law firm for their continued assistance and scholarship, and particularly to Jennifer L. Lambert for her work on this supplement and to Dayna Boatright for her editing. James B. Helmer, Jr. December 2013 Cincinnati, Ohio