False Claims and Qui Tam Lawsuits: From Whistleblower Protection to Litigation

False Claims and Qui Tam Lawsuits: From Whistleblower Protection to Litigation September 13, 2017 Megan Ochs, Kevin Prewitt and Cris Stevens

Overview Why Businesses Should Be Aware of the FCA History and Purpose of the FCA Current Liability Under the FCA Damages and Penalties Under the FCA Defenses to FCA Claims

FCA Recoveries: 2003 2016 The False Claims Act (FCA) creates liability for conduct involving fraud on the government. In recent years, FCA cases have been on the rise. Although certain industries have been targeted for FCA enforcement, understanding FCA liability is important for any entity or person that does business, directly or indirectly, with the government. All figures were taken from the DOJ s Fraud Statistics Overview, October 1, 1987 September 30, 2016.

health care food safety and inspection small business contracts federally insured loans and mortgages highway funds defense and national security import tariffs agricultural subsidies disaster assistance

False Claims Act Trends and Statistics In FY 2016, the Department of Justice obtained more than $4.7 billion in settlements and judgments from civil fraud and FCA cases. Of this amount, a staggering $2.9 billion was recovered under the qui tam provisions of the FCA. Over $519 million was awarded to the individuals who filed the qui tam complaints. This is the third highest annual recovery in FCA history, bringing the fiscal year average to nearly $4 billion since FY 2009, and the total recovery during that period to $31.3 billion.

Asst. Attorney General Benjamin Mizer, the head of the Justice Department s Civil Division, recently reported that although Congress amended the False Claims Act 30 years ago to give the government a more effective tool against false and fraudulent claims an astonishing 60% of all FCA recoveries [have been] obtained in the last eight years.

History and Purpose of the False Claims Act

History and Purpose of the False Claims Act The FCA, also known as Lincoln s Law, was originally enacted in 1863, during the Civil War, to address procurement fraud by suppliers to the Union troops - bullets and artillery shells filled with sawdust, rotten food, shoddy blankets, diseased and disabled animals. Senate Bill 467 - the original FCA included a qui tam clause based on the the old fashioned idea of holding out a temptation for persons to step forward to turn in thieves. The FCA s qui tam provisions allowed private citizen whistleblowers, known as relators, to sue on behalf of the United States and share in its recovery. Qui tam is short for a Latin phrase qui tam pro domino rege quam pro se ipso in hac parte sequitur, which roughly means he who brings an action for the king as well as for himself. In its original form, the law assessed wrongdoers double damages and a $2,000 civil fine for each false claim submitted, and awarded qui tam relators 50% of the amount the government recovered as a result of their cases.

The FCA remained virtually unchanged until 1943 when Congress severely curtailed the qui tam provisions in response to perceived abuses. Prior government knowledge of misconduct became grounds for dismissal. Potential rewards to relators were reduced generally, and no minimum whistleblower award was guaranteed, even for suits alleging fraud about which the government had no prior information of any kind. Qui tam actions under the FCA all but disappeared.

In 1986 Congress amended the FCA to make changes that encouraged greater use of the FCA to combat fraud against the government. The 1986 amendments eliminated the government knowledge defense and substituted limitations on qui tam actions based on public disclosures. Congress increased the statutory penalties to a minimum of $5,000 and a maximum of $10,000 for each violation, plus treble damages. Congress amended the FCA to provide that whistleblowers who brought successful cases were entitled to 15-25% of the recovery if the government intervenes, and 25-30% of the recovery if the government does not intervene. Congress added an anti-retaliation provision prohibiting companies from firing or discriminating against whistleblowers.

In 2009, President Obama signed into law the bipartisan Fraud Enforcement and Recovery Act (FERA). Section 4 of the FERA tellingly entitled Clarification to the False Claims Act to Reflect the Original Intent of the Law amended the FCA to correct erroneous judicial interpretations of the act, to preserve Congress original intent and to otherwise clarify key provisions of the FCA. Most substantive corrections and clarifications became effective as of the date of enactment of FERA. Procedural changes and clarifications applied to all cases pending as of the date of the enactment of FERA.

In 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA). The PPACA made three major changes to FCA law. The amendments passed as part of the PPACA eliminate the FCA s absolute jurisdictional bar against cases that do not pass the test of 31 U.S.C. 3730(e)(4). The amendments narrow the definition of publicly disclosed to information made public by federal proceedings only. The amendments expand the definition of original source by eliminating the requirement that the individual have direct knowledge of the underlying allegations or transactions at issue. Unlike FERA, the PPACA is not retroactive and does not apply to cases pending at the time of its enactment.

Current Liability Under the FCA The FCA, 31 U.S.C. 3729-3733, identifies seven specific types of prohibited conduct. The two liability provisions that are most often used in FCA litigation are: The false claims provision. This creates liability for knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim (31 U.S.C. 3729(a)(1)(A)). The false statement provision. This creates liability for knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim (31 U.S.C. 3729(a)(1)(B)). A person or entity may also be liable under the FCA for: A reverse false claim, which involves improper conduct to avoid paying the government or improper retention of an overpayment by the government (31 U.S.C. 3729(a)(1)(G)). Conspiring to commit a violation of any of the other provisions (31 U.S.C. 3729(a)(1)(C)). This provision is frequently used in multi-defendant FCA litigations.

While rarely invoked, other provisions impose FCA liability for: Knowingly and improperly withholding part or all of the government s money or property (31 U.S.C. 3729(a)(1)(D)). Intending to defraud the government by making or delivering (with the authority to do so) a document certifying receipt of property used or to be used by the government without completely knowing if the information on the receipt is true (31 U.S.C. 3729(a)(1)(E)). Knowingly buying, or receiving 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 is not permitted to sell or pledge the property (31 U.S.C. 3729(a)(1)(F)). The FCA also prohibits retaliatory actions against employees, contractors or agents who report or act to stop an FCA violation (31 U.S.C. 3730(h)(1)). Tax claims are specifically excluded from the FCA (31 U.S.C. 3729(d)).

The FCA imposes a broad knowledge standard. Liability under the FCA requires a defendant to act knowingly, which the statute defines broadly to include: Actual knowledge. Deliberate ignorance of the truth or falsity of the information. Reckless disregard of the truth or falsity of the information. Specific intent to defraud is not required (31 U.S.C. 3729(b)(1)).

Contractor Liability The FCA imposes liability even where a company does not directly submit a claim to the government. A company may be liable for causing a false claim to be presented or made (31 U.S.C. 3729(a)(1)(A)). Indirect liability is also supported by the FCA s definition of claim, which includes any request or demand for money or property made to a contractor, grantee or other recipient, if the money or property is: To be spent or used on the government s behalf, or to advance a government program or interest. Paid for or reimbursed by the government. (31 U.S.C. 3729(b)(2)(A)(ii)).

Who Can Bring an FCA Lawsuit? Both the U.S. Attorney General and private persons may bring a civil action under the FCA (31 U.S.C. 3730). The FCA creates incentives for private litigants, who may receive up to 30% of any recovery depending on whether or not the government intervenes.

New FCA Actions: Qui Tam vs. Non-Qui Tam Due to strong incentives offered to whistleblowers, the number of federal and state FCA cases brought by qui tam plaintiffs has increased substantially in recent years, while the number of government FCA investigations and enforcement actions has remained relatively constant. All figures were taken from the DOJ s Fraud Statistics Overview, October 1, 1987 September 30, 2016.

Private Litigants An action commenced by a private person is commenced in the name of the government. The person filing the suit is referred to as the relator or the qui tam plaintiff. Qui tam plaintiffs must: File the complaint under seal. Serve the complaint only on the government, together with a written disclosure of substantially all material evidence and information they possess. (31 U.S.C. 3730(b)(2)). The government uses the information provided by the qui tam plaintiff to investigate the claims and may elect to intervene in the case, which it must do within 60 days of receiving the complaint. However, courts routinely extend this 60-day time period for good cause shown (31 U.S.C. 3730(b)(3)). The defendant company is not served or otherwise formally made aware of the litigation while the complaint remains sealed.

Government Intervention in a Qui Tam Case When the government intervenes in a qui tam case, it takes the place of the qui tam plaintiff and assumes primary responsibility for prosecuting the action, subject to certain limitations (31 U.S.C. 3730(c)(1)). The government also has the discretion to limit the participation of the qui tam plaintiff, who still remains a party to the action. In practice, the government often continues to rely on the assistance and resources of qui tam counsel. If the government elects not to intervene, the person who initiated the action shall have the right to conduct the action (31 U.S.C. 3730(c)(3)). Whether the government intervenes or not, a case can be dismissed only with the consent of the attorney general (31 U.S.C. 3730(b)(1)).

Impact of Government Intervention on Qui Tam Recoveries Whether the government intervenes in a qui tam case is a major factor in determining the probable outcome and recovery in the case. According to the DOJ, settlements and judgments in FCA cases in which the government intervened total more than $35 billion, compared to just over $2 billion where the government declined to intervene. All figures were taken from the DOJ s Fraud Statistics Overview, October 1, 1987 September 30, 2016.

Damages and Penalties A company found in violation of the FCA is liable for: A civil penalty of $10,957 to $21,916 plus three times the amount of damages the government sustains (31 U.S.C. 3729(a)(1)). The costs of bringing the civil action to recover penalties and damages (31 U.S.C. 3729(c)(3)). But see United States ex rel. Wall v. Circle C Constr., No. 3:07-cv-00091 (6 th Cir. Aug. 18, 2017). The court may reduce the treble damages to double damages if: The company furnished the U.S. officials responsible for investigating FCA violations with all information known to the company within 30 days of the date the company first obtained the information. The company fully cooperated with any government investigation. At the time of the self-disclosure: a criminal prosecution, civil action or administrative action had not been commenced with respect to such violation; and the company did not have actual knowledge of the existence of an investigation into the violation. (31 U.S.C. 3729(a)(2)).

Award to Qui Tam Plaintiffs If an FCA case is successful, the qui tam plaintiff will collect a percentage of any judgment or settlement regardless of whether the government intervenes. The qui tam plaintiff can collect: Between 25-30% of the proceeds of any judgment or settlement if the government elects not to intervene. Between 15-25% of the proceeds of any judgment or settlement if the government elects to intervene, depending upon the extent to which the plaintiff contributed to prosecution of the action. Qui tam plaintiffs are also entitled to reasonable expenses, attorneys fees and costs (31 U.S.C. 3730(d)(1)-(2)). The court can, however, significantly reduce or completely eliminate the qui tam plaintiff s share of any recovery if either: The court determines the qui tam plaintiff planned or initiated the underlying violation. The qui tam plaintiff is convicted of criminal conduct arising from its role in the alleged FCA violation, in which case the qui tam plaintiff is dismissed from the lawsuit and does not receive any share of the proceeds. (31 U.S.C. 3730(d)(3)).

Defenses to FCA Claims Several defenses can be made by companies or individuals facing an FCA complaint. The most common grounds to dismiss FCA cases are: Failure to plead fraud with particularity pursuant to Federal Rule of Civil Procedure (FRCP) 9(b). Failure to state a claim upon which relief can be granted under FRCP 12(b)(6). Lack of knowledge. Lack of a false statement. Lack of materiality. The public disclosure bar. The first-to-file bar. The statute of limitations.

Failure to Plead with Particularity The most common and effective motion to dismiss an FCA complaint is under FRCP 9(b) for failure to plead fraud with sufficient particularity. Courts have consistently upheld the heightened pleading standard of FRCP 9(b), requiring an FCA complaint to plead, at a minimum, facts such as: The time, place and contents of the defendant s false representations. The identity of the person making the misrepresentation, the details of the defendant s fraudulent acts, including when the acts occurred and who was engaged in them, and what the defendant obtained as a result. Plausible allegations of presentment to the government for payment (courts have consistently held that there must be some indicia of reliability provided in the complaint to support the allegation that an actual false claim was submitted to the government ). A plaintiff cannot cure pleading deficiencies in his/her complaint with laterfiled supporting documentation in response to a motion to dismiss.

Failure to State a Claim Defendants may move to dismiss an FCA complaint under FRCP 12(b)(6) for failing to state a claim upon which relief can be granted, which is usually made in conjunction with an FRCP 9(b) motion. These motions are often filed in false certification cases. Common grounds for an FRCP 12(b)(6) motion include the following defenses based on the statutory requirements that qui tam plaintiffs or the government must satisfy to establish liability: Lack of knowledge. Lack of a false statement. Lack of materiality.

Lack of Knowledge The FCA requires a defendant to act knowingly, which includes actual knowledge, deliberate ignorance or reckless disregard for the truth or falsity of information on which the claim is based (31 U.S.C. 3729(b)(1)(A)). If the defendant does not possess the requisite knowledge, FCA liability cannot issue. A defense based on this provision is used in cases against corporate defendants where the government cannot prove that any one person knew of the falsity of the relevant claims. In these cases, the government often attempts to satisfy the knowledge requirement by proving collective knowledge of the company s employees. While not a statutory defense under the FCA, courts have held that prior government knowledge and approval of facts underlying a false claim can negate the government s ability to prove a knowing submission of a false claim. When the government authorizes a false claim with knowledge of the facts underlying the claim, there is an inference that the defendant has not knowingly presented a false claim.

Lack of Falsity The terms false and fraudulent are not defined in the FCA, which has allowed for various judicially constructed categories of falsity to arise. Factual falsity is a false statement of fact. For example, an invoice states that 100 widgets were sold, when in fact only 50 widgets were provided. Legal falsity arises when the claim is factually correct (100 widgets were provided) but it misrepresents compliance with underlying statutes, regulations or contract terms through an express or implied certification. A defendant can also argue lack of falsity where the alleged false claim is based on the defendant s reasonable interpretation of underlying contract terms, regulations or governmental guidance. Innocent mistakes, mere negligence, faulty math or bona fide disputes in interpretation may all be false but do not violate the FCA. See knowingly requirement.

Lack of Materiality The FCA specifically includes a materiality requirement for certain violations. Defendants are liable: Under the false statement provision of the FCA only for a false statement that is material to a false or fraudulent claim (31 U.S.C. 3729(a)(1)(B)). Under the reverse false claim provision of the FCA only for false records or statements material to an obligation to pay the government (31 U.S.C. 3729(a)(1)(G)). The FCA defines material as having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property (31 U.S.C. 3729(b)(4)).

Public Disclosure Bar The public disclosure bar was created in 1986 to thwart parasitic FCA cases. A qui tam action must be dismissed if substantially the same allegations or transactions in the complaint were publicly disclosed in any of the following: A federal criminal, civil or administrative hearing in which the government or its agent is a party. A congressional, Government Accountability Office or other federal report, hearing, audit or investigation. The news media. (31 U.S.C. 3730(e)(4)(A)). There is an exception to the public disclosure bar if the relator is an original source of the information. To be an original source, the relator must have either: Conveyed the information to the government prior to the public disclosure. Have independent knowledge that materially adds to the publicly disclosed allegation and the relator must have provided that information to the government before filing the FCA action. (31 U.S.C. 3730(e)(4)(B)).

First-to-File Bar The first-to-file bar prevents a second relator from bringing another action based on the same facts underlying the pending action (31 U.S.C. 3730(b)(5)). The first-to-file bar creates an incentive for relators to quickly file their claims in order to preserve their ability to receive part of the recovery. Notably, FRCP 9(b) s particularity requirement does not necessarily need to be met for the initially filed complaint. Courts have held that the earlier complaint must only plead the essential facts to give sufficient notice to the government to investigate the allegedly fraudulent practices. Many courts have carved exceptions to this rule. For example, a first-filed complaint which is not jurisdictionally sound is not a bar to a later case.

Statute of Limitations The statute of limitations for federal FCA claims is either: Six years after the date on which the FCA violation was committed. Three years after the date when the U.S. official responsible to act under the circumstances either knew or should have known the facts material to the right of action, but not more than 10 years after the date on which the violation is committed. (31 U.S.C. 3731(b)). The majority of courts hold that the three-year tolling provision applies only to cases in which the government intervenes. A minority of courts holds the three-year tolling provision was intended to apply to qui tam plaintiffs as well.

Overview Review of the FCA s Liability Elements Recent case law updates to: Materiality Scienter Retaliation

31 U.S.C. 3729(a) Liability (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. (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.

31 U.S.C. 3729(b) - Knowledge 1) the terms knowing and knowingly (A) mean that a person, with respect to information (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information; and (B) require no proof of specific intent to defraud (emphasis added)

In re Baycol Prod. Litig., 732 F.3d 869 (8th Cir. 2013) Traditional elements: 1) The defendant made a claim against the U.S. 2) The claim was false or fraudulent. 3) The defendant knew the claim was false or fraudulent. Claim must be material: Not concerned with regulatory noncompliance. Not concerned with underlying scheme. Concerned with claims capable of influencing payment of money (31 U.S.C. 3729(b)(4)).

United States v. Advance Tool Co., 902 F. Supp. 1011 (W.D. Mo. 1995) Classic FCA scenario (i.e. the government did not get what it paid for). General Services Administration (GSA) solicited bids for brand name hand tools. Purchase agreement required specific brand name hand tools or an equivalent preapproved by the GSA. Defendant reverse-engineered brand name hand tools for sale to the GSA. Invoices from defendant to GSA requested payment for delivery of specific brand name hand tools. This was a presentation of false claims. Rejected defenses.

Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989, 195 L. Ed. 2d 348 (2016) Significant recent guidance from U.S. Supreme Court Implied false certification theory According to this theory, when a defendant submits a claim, it impliedly certifies compliance with all conditions of payment. But if that claim fails to disclose the defendant's violation of a material statutory, regulatory, or contractual requirement, so the theory goes, the defendant has made a misrepresentation that renders the claim false or fraudulent under 3729(a)(1)(A). Emphasis on materiality

Universal Health Servs., Inc. v. United States (cont.) Implied false certification theory can be a basis for liability if: The claim does not merely request payment, but also makes specific representations about the goods or services provided. The defendant s failure to disclose noncompliance with material statutory, regulatory or contractual requirements makes those representations misleading half-truths.

Universal Health Servs., Inc. v. United States (cont.) Material standard is demanding: Whether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry. If the government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Discovery implications (e.g. How does the government handle claims for others? What does the government expect? What did the government know?) Touhy Regulations

United States ex rel. Donegan v. Anesthesia Assocs. of Kansas City, PC, 833 F.3d 874 (8th Cir. 2016) Ambiguous requirements, i.e., what did the government even want? Avoids materiality analysis Emphasis on scienter/knowledge A reasonable interpretation of an ambiguous regulation belies the scienter necessary to establish a claim of fraud under the FCA. Objective analysis. Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007).

United States ex rel. Donegan v. Anesthesia Assocs. of Kansas City, PC (cont.) Critical Factors: Is the requirement ambiguous? Is the defendant s interpretation objectively reasonable? Did the government warn the defendant away from an otherwise reasonable interpretation? Key Takeaway: There is no duty to seek independent clarification from the government, but be mindful of the government s directions. Other Examples: U.S. ex rel. Purcell v. MWI Corp., 807 F.3d 281 (D.C. Cir. 2015) U.S. ex rel. Raynor v. Nat l Rural Utilities Co-op. Fin., Corp., 690 F.3d 951, 954 (8th Cir. 2012)

United States ex rel. Miller v. Weston Educ., Inc., 840 F.3d 494 (8th Cir. 2016) FCA Retaliation, 31 U.S.C. 3730(h) Elements: The plaintiff was engaged in conduct protected by the FCA. The plaintiff's employer knew that the plaintiff engaged in the protected activity. The employer retaliated against the plaintiff. The retaliation was motivated solely by the plaintiff's protected activity. Protected Activity: Employee s conduct must be in furtherance of an FCA action. Employee s conduct must be aimed at matters which are calculated, or reasonably could lead, to a viable FCA action. Good faith belief standard. Limited Pre-emption

Overview Preventing Whistleblowers Whistleblower Protections Dealing with Whistleblowers

1. How to Prevent Whistleblowers?

Steps to Prevent a Whistleblower Action Comply with all state and federal laws!

Steps to Prevent a Whistleblower Action Policies: Establish a strong culture of regulatory and governmental compliance. Establish a strong policy of encouraging internal employee reporting of noncompliance. Establish a strong policy protecting reporting employees from any adverse job action. Establish a policy requiring all supervisors to report ALL complaints to the compliance officer or other senior official. Widely publish your compliance and anti-retaliation policy throughout the company. Insist that your policy is your practice!

Steps to Prevent a Whistleblower Action Response: Take ALL complaints seriously. If the whistleblower feels he/she is being heard and the complaint is being addressed, it may not rise to a lawsuit. Interview the complaining employee with a witness. This is a voluntary interview. No threats. No duress. If the employee does not want to be interviewed, document it. Conduct a thorough internal investigation. If the complaint has merit, then take appropriate action. If not, explain to the employee the steps you took and your conclusion. Voluntary self-disclosure to the government. If you notify first, you can eliminate any later filed action. Government action is determined in large part by voluntary self-disclosure and acceptance of responsibility. Federal penalties and sentencing guidelines are based on cooperation and acceptance of responsibility.

2. What Protections do Whistleblowers Have?

Protected from dismissal Protected from adverse action

Protections Direct actions: terminations, demotions, reductions in pay, transfers. Indirect actions: encouraging co-workers to treat the whistleblower differently, excluding from meetings or social gatherings. Some statutes: protect the whistleblower from any action. Includes identifying the whistleblower if he/she has filed under a federal statute that provides the right to do so anonymously. Remedies: reinstatement, double damages, attorneys fees, costs.

Criminal Obstruction of Justice In 2002 retaliation against whistleblowers was criminalized. 18 USC 1513(e): Whoever knowingly, with the intent to retaliate takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense, shall be fined or imprisoned not more than 10 years, or both. No reported cases of U.S. Attorneys charging a person with criminal obstruction of justice for retaliation against whistleblowers.

3. How to Deal with a Whistleblower Once You Have One?

Dealing with a Whistleblower What if you simply cannot employ the whistleblower any longer? Termination Consider timing - Are you working with the government? Notifying the government of your potential action and the basis. Must have strong facts supporting a non-retaliatory reason that is well documented. Assess whether others have been terminated for same reason (e.g. non-pretextual). Review the documentation: Is there a smoking gun? Create and follow a standard termination checklist. Collect all documents, phones, computers, hard drives, etc. Exit Interviews Have a witness for key interviews. Listen to the exiting employee; do not debate. When possible, obtain a signed release, including certification or representation that employee knows of no claims. Key positions only? No release for whistleblower/retaliation claims.

Questions

Contact Megan Ochs 816.472.3129 mochs@armstrongteasdale.com Kevin Prewitt 816.472.3146 kprewitt@armstrongteasdale.com Cris Stevens 314.342.8098 cstevens@armstrongteasdale.com