In this episode, Jason Crawford, Brian Tully McLaughlin, and Agustin Orozco explore the issues before the Supreme Court in two consolidated cases involving the False Claims Act. The hosts discuss the April 18 oral argument in Schutte/Proctor where the question before the Justices is whether a defendant’s subjective knowledge about whether its conduct was legal
Fair Warning Protection or a “Free Pass to Fleece the Public Fisc”?: SCOTUS Takes Up the Safeco Objective Reasonableness Standard and Subjective Intent Under the FCA
Next Tuesday, April 18, 2023, the highest court in the land will hear arguments in what is poised to be the most influential False Claims Act (FCA) case since the landmark decision in Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). On January 13, 2023, the U.S. Supreme Court granted certiorari to hear two consolidated appeals from the U.S. Court of Appeals for the Seventh Circuit in United States ex rel. Schutte v. SuperValu Inc., 9 F.4th 455 (7th Cir. 2021) and United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022). The Court’s decision will likely have far-reaching ramifications for FCA cases involving ambiguous contractual or regulatory requirements and may also provide benchmarks for assessing the key element of scienter across all FCA cases.
In Supervalu and Safeway, the Seventh Circuit joined several of its sister circuits in applying the scienter standard articulated by the Supreme Court in Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007) to the FCA, finding that a defendant’s conduct is not reckless when (1) acting under an objectively reasonable, albeit erroneous, interpretation of an ambiguous regulation or contract provision; and (2) no authoritative guidance existed to warn the defendant away from that interpretation.
The Top FCA Developments of 2022
2022 was a busy year for the False Claims Act. While recoveries were down, new cases reached a record mark, and settlements addressed multiple important and developing enforcement areas, from cybersecurity to small business fraud, bid rigging, Trade Agreements Act compliance, pandemic fraud, and more. Of particular note, the U.S. Supreme Court held argument concerning
FCA Settlement Offers Reminder of the Importance of TAA and PRC Compliance
The Department of Justice has announced a $14 million False Claims Act (FCA) settlement with Coloplast, a medical product manufacturer, after Coloplast self-disclosed violations of the Trade Agreements Act (TAA) and Price Reduction Clause (PRC) while under contract with the Department of Veterans Affairs (VA). The TAA requires contractors to furnish end products that are U.S.-made or “substantially transformed” in designated countries. Coloplast disclosed that it misapplied the substantial-transformation standard, causing Coloplast to report incorrect countries of origin for products and to improperly retain certain products on contract after manufacturing moved to non-designated countries. Coloplast also disclosed that it overbilled the Government by failing to provide the VA with discounts pursuant to the terms of the PRC, which normally requires tracking discounts offered to designated commercial customers and offering corresponding downward price adjustments to VA customers.
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DOJ Announces First-Ever False Claims Act Settlement with PPP Lender and Creation of COVID-19 Fraud Strike Force Teams
On September 12, 2022, the Department of Justice (DOJ) announced the first-ever settlement with a Paycheck Protection Program (PPP) lender. The lender, Prosperity Bank, agreed to pay $18,673.50 to resolve allegations it improperly processed a PPP loan on behalf of an ineligible applicant. The announcement coincides with DOJ’s creation of three COVID-19 fraud “Strike Force” teams designed to enhanced DOJ’s efforts to combat and prevent COVID-19 related fraud.
Pursuant to the Coronavirus Aid, Relief and Economic Security (CARES) Act, lenders who originated PPP loans were entitled to receive a fixed fee from the Small Business Administration (SBA) ranging from 1% to 5% of the loan amount. Prosperity Bank, a regional bank with branches throughout Texas and Oklahoma, was one of those lenders.
U.S. Supreme Court Poised to Resolve Two FCA Circuit Splits
Yesterday, the U.S. Supreme Court granted certiorari in Polansky v. Executive Health Resources Inc., No. 19-3810 (3d Cir. Oct. 28, 2021), which involves the Government’s authority to dismiss a relator’s qui tam action pursuant to 31 U.S.C. § 3730(c)(2)(A) of the False Claims Act. In Polansky, the U.S. Court of Appeals for the Third Circuit held the Government must intervene in FCA suits before moving to dismiss and that, where responsive pleadings have been filed, a court has wide discretion to permit or deny the Government’s exercise of dismissal authority. This cemented two circuit splits. The first split is between the Third, Sixth, and Seventh Circuits, which require the Government to intervene before moving for dismissal of an FCA suit, and the D.C., Ninth, and Tenth Circuits, which do not require the Government to intervene before moving for dismissal of an FCA suit at any point in the litigation. The second is a three-way split among the Circuits regarding the standard of review a court must apply when determining whether the Government can dismiss a qui tam action over a relator’s objection: the Third and Seventh Circuits apply the Rule 41(b) standard, the D.C. Circuit considers the Government’s dismissal authority unfettered, and the Ninth Circuit applies a “rational relation” test requiring the Government to demonstrate a valid government purpose and a “rational relation” between the dismissal and that government purpose. The Supreme Court is now poised to resolve both of these splits.
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The Top FCA Developments of 2021
2021 was another busy year in False Claims Act enforcement and litigation. Significant decisions were issued across the circuits, spanning government dismissal authority, materiality, scienter, Rule 9(b) pleading standards, the Eighth Amendment’s Excessive Fines Clause, and more. The year also saw proposed amendments introduced by Senator Chuck Grassley aimed at strengthening the statute and overruling
A False Claims Act First: Eleventh Circuit Holds That the Excessive Fines Clause Applies to Non-Intervened Cases
In an issue of first impression, the Eleventh Circuit Court of Appeals recently held that the Excessive Fines Clause of the Eighth Amendment to the Constitution applies in non-intervened False Claims Act (FCA) qui tam lawsuits in Yates v. Pinellas Hematology & Oncology, P.A., 21 F.4th 1288 (11th Cir. 2021). While the Eleventh Circuit
Second Circuit Reinforces the Relator’s Burden to Plead Materiality
In U.S. ex rel. Foreman v. AECOM, the U.S. Court of Appeals for the Second Circuit confirmed that the materiality factors set forth by the Supreme Court in Universal Health Services, Inc. v. U.S. ex rel. Escobar apply to all types of False Claims Act claims and reinforced the relator’s heavy burden even at the pleading stage. This precedential opinion provides several key takeaways for defendants facing FCA liability where the significance of the allegations to the government’s payment decision is in doubt.
Foreman involved a contract to provide maintenance and management support services for the Army, including tactical vehicle and equipment maintenance, facilities management and maintenance, supply and inventory management, and transportation services. The alleged violations stemmed from the contractor submitting timesheets with improper labor hours, failing to properly log and track government property, and hitting a consistently low man-hour utilization (“MHU”) rate—the ratio of time personnel would spend actively engaged in maintenance projects. After the government declined to intervene, the district court dismissed the relator’s claims for failure to plausibly allege materiality.
On appeal, the Second Circuit largely affirmed the district court, while reversing only as to the allegations of labor overcharging due to the lower court’s improper reliance on a document not incorporated into the complaint. The Court’s discussion with respect to the other allegations provides important guidance as to the materiality analysis and the burdens that apply at the pleading stage.
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Tipping the Scales: Third Circuit Weighs in on Circuit Split Regarding the Government’s Dismissal Authority Over False Claims Act Qui Tams
In its recent decision Polansky v. Executive Health Resources Inc., No. 19-3810 (3d Cir. Oct. 28, 2021), the U.S. Court of Appeals for the Third Circuit became the most recent to weigh in on the circuit split regarding the Government’s authority to dismiss False Claims Act (“FCA”) qui tam actions pursuant to 31 U.S.C. § 3730(c)(2)(A). Siding with the Seventh Circuit’s recently-adopted approach, the Third Circuit held that Federal Rule of Civil Procedure 41(a) applies to government dismissals in FCA qui tam actions the same as it would in any other suit. In doing so, the Third Circuit cemented what is now a three-way split regarding the standard the Government must meet to exercise its dismissal authority, rejecting both the D.C. Circuit’s approach, that the Government’s dismissal power is unfettered, and the Ninth Circuit’s approach that the motion to dismiss must have a “rational relation” to a valid government purpose. In the same opinion, the Third Circuit also entered the fray on a second, related split, siding with the Sixth and Seventh Circuits in finding that the Government must intervene in FCA suits before moving to dismiss. In contrast, the D.C., Ninth, and Tenth Circuits do not require the Government to intervene before moving for dismissal of an FCA suit at any point in the litigation.
The qui tam action in Polansky accused Executive Health Inc. of systematically enabling its client hospitals to over-admit patients by certifying inpatient services that should have been provided on an outpatient basis and then billing those services to Medicare. The relator filed the complaint in 2012 under seal where it remained for two years until the Government declined to intervene. After the declination, the relator continued the suit until 2019 when the Government notified the parties that it intended to dismiss the action pursuant to its authority under § 3730(c). The United States District Court for the Eastern District of Pennsylvania granted the Government’s motion over the relator’s objection, and the relator subsequently appealed to the Third Circuit.
Continue Reading Tipping the Scales: Third Circuit Weighs in on Circuit Split Regarding the Government’s Dismissal Authority Over False Claims Act Qui Tams