A False Claims Act Litigation Primer
So often we read news stories about big businesses scamming the federal government. Occasionally we read about big dollar recoveries by the federal government against banks, hospital corporations, or defense contractors. What is the legal basis for the government’s fraud claim? Under what statute can these businesses be forced to pay damages? The False Claims Act (“FCA”), also known as the “qui tam” statute, passed by Congress in 1863 to stop the fraud of certain suppliers of the Union Army, allows a private individual, acting on behalf of the U.S. and with knowledge of past or present fraud on the federal government, to sue the defrauder for compensatory damages, civil penalties, and treble damages. That private individual is known as a “relator.”
An in-depth review of the FCA and the extensive body of law that has grown up around its provisions is beyond the scope of this article. This article will provide an overview of the FCA and how to bring a false claim action. Because of the types of defendants in FCA actions, as well as the potential damages alleged, these cases are extremely document-heavy and fiercely defended. However, they can correct significant wrongs, lead to changes in the way a big business does its business, in many instances protect the general public, and be extremely lucrative for the whistleblower and counsel, if successful.
I. ELEMENTS OF A FALSE CLAIM
In order to sustain an action under the False Claims Act, “…Plaintiffs must prove each of the following elements by a preponderance of the evidence: (1) that Defendant made a claim, or made a statement in order to get the Government to pay money on a claim; (2) that the claim or statement was false or fraudulent; and (3) that Defendant knew that the claim or statement was false or fraudulent.” United States v. The Boeing Company, 100 F.Supp.2d 619, 625-626 (S.D.Oh. 2000).
“An untrue statement, however, is not sufficient by itself to warrant liability under the FCA, the Act also “requires a showing of knowing fraud.” What is prohibited is “cheating” the government. Thus, “statements of claims which are false within the meaning of the FCA must be more than objectively untrue, they must betray or suggest intentional deceit.” U.S. ex rel Lamers v. City of Green Bay, 998 F.Supp. 971, 986 (E.D.Wisc. 1998). Courts have consistently recognized that “innocent” mistakes or negligence are not actionable under the FCA. “In short, the claim must be a lie.” Hindo v. Univ. of Health Sciences/The Chicago Med. Sch., 65 F.3d 608, 613 (7th Cir. 1995). Several federal courts have recognized that summary judgment is properly granted to a defendant in an FCA case where the plaintiff fails to present enough evidence from which a reasonable jury could find that the claim was objectively false. The Boeing Company at 626.
II. THE FCA STATUTE OF LIMITATIONS
The FCA’s statute of limitations is a three-part formula: the action cannot be brought after the later of (a) more than six years after the date on which the false claim is made, or (b) more than three years after the date on which facts material to the cause of action are known or reasonably should have been known to the U.S. official charged with responsibility to act under the circumstances, but (c) in no event more than 10 years after the date on which the false claim was made by the alleged defendant. 31 U.S.C. § 3731(b).
III. ACTIONABLE CLAIMS
The FCA recognizes two types of actionable claims-factually false claims and legally false claims. In a factually false claims case, proving falsehood is relatively straightforward: a relator must generally show that the government payee has submitted “an incorrect description of goods or services provided or a request for reimbursement for goods or services never provided. When a claim is based on an alleged legal falsehood, the relator must demonstrate that the defendant has ‘certifie[d] compliance with a statute or regulation as a condition to government payment,’ yet knowingly failed to comply with such statute or regulation.” United States ex rel Conner v. Salina Regional Health Center, 543 F.3d 1211, 1217 (10th Cir. 2008).
Legally false claims include express false certification and implied false certification.
An express false certification theory applies when a government payee falsely certifies compliance with a particular statute, regulation or contractual term, where compliance is a prerequisite to payment.’ This promise may be any false statement that relates to a claim, whether made through certifications on invoices or any other express means. Under an implied false certification theory, courts do not look to the contractor’s actual statements; rather, the analysis focuses on the underlying contracts, statutes, or regulations themselves to ascertain whether they make compliance a prerequisite to the government’s payment. If a contractor knowingly violates such a condition while attempting to collect remuneration from the government, he may have submitted an impliedly false claim. Id. at 1217-1218 (internal citations omitted).
IV. COMMON TYPES OF FCA CASES
The large majority of FCA cases are rooted in health care fraud. Examples include charging for medical services that were not provided; using a physician identifier number to bill for services that were provided by a nurse practitioner (whose services would be reimbursed at a lower rate that those of the doctor); using false diagnostic codes to obtain reimbursement for services not otherwise covered; seeking reimbursement for the provision of substandard nursing home care; and falsely certifying that certain medical procedures were medically necessary.
Other types of cases include submitting false cost and pricing information to the federal government during the negotiation of a contract in order to obtain an inflated contract price; falsely certifying that the work done under a federal contract met all contractual (and statutory, if applicable) requirements in order to be paid under that contract; and, in the case of manufacturing products, falsely certifying that the product (which was substandard) met required specifications or that reliability testing had been done.
The types of false claims that can be brought are only limited by the creativity of the advocate (and the fact that the claim must meet the elements set forth in (I) above).
V. SCIENTER-THE “KNOWLEDGE” REQUIREMENT
The third element of a false claim, that the defendant “knew the claim or statement was false or fraudulent,” has been the focus of many federal court opinions. United States ex rel Sharp v. Eastern Oklahoma Orthopedic Center, 2009 WL 499375(N.D. Ok. 2009) nicely summarizes 10th Circuit FCA law. “The gravamen of a false claim focuses on the conduct of the defendant, and inquires into the defendant’s purpose and intention in filing the requests for payment or reimbursement.” Id. at *4. Knowledge, or scienter, is a requirement for all types of FCA claims and is defined under the FCA: “Knowing…mean[s] that a person, with respect to information (1) has actual knowledge of the information; (2) acts in deliberate ignorance of the truth or falsity of the information; or (3) acts in reckless disregard of the truth or falsity of the information, and no proof of specific intent to defraud is required.” (31 U.S.C.§ 3729) (emphasis supplied).
The 1986 amendments to the FCA broadened the definition of “knowledge” to include “reckless disregard” or “deliberate ignorance”. In United States v. Hercules, 929 F.Supp. 1418, 1422-23 (D.Ut. 1996), the Utah federal court looked at the legislative intent of the FCA amendments. The plaintiff alleged claims of falsification and concealment in connection with nine missile systems. The court quoted the House Judiciary Subcommittee working on these amendments:
The Committee believes that the definition of knowledge under the False Claims Act should not differ from the definition of knowledge for any administrative adjudications regarding false claims. In both bills, the constructive knowledge definition attempts to reach what has become known as the ‘ostrich’ type situation where an individual has ‘buried his head in the sand’ and failed to make simple inquiries which would alert him that false claims are being submitted. While the Committee intends that at least some inquiry be made, the inquiry need only be ‘reasonable and prudent under the circumstances’, which clearly recognizes a limited duty to inquire as opposed to a burdensome obligation. The phrase strikes a balance which was accurately described by the Department of Justice as ‘designed to assure the skeptical both that mere negligence could not be punished by an overzealous agency and that artful defense counsel could not urge that the statute actually require some form of intent as an essential ingredient of proof…This section is intended to reach the “ostrich-with-his-head-in-the-sand” problem where Government contractors hide behind the fact they were not personally aware that such overcharges may have occurred. This is not a new standard but clarifies what has always been the standard of knowledge required.’ Id.
Because the scienter requirement is fertile ground for defense dispositive motions arguing insufficient proof, it is helpful to see how several federal courts, under different fact scenarios, have determined the amount and type of evidence necessary to prove the requisite level of scienter. In United States v. Krizek, 111 F.3d 934, 941 (D.C.Cir. 1997), the court held that an “aggravated form of gross negligence, or ‘gross negligence-plus,’ is equivalent to reckless disregard for purposes of the FCA.” In that case, a psychiatrist acted “knowingly” when his wife filed Medicare claims with little or no factual basis and psychiatrist “failed utterly to review the bills submitted on his behalf…even the shoddiest recordkeeping would have revealed that false submissions were being made, [e.g.] those days on which the Krizeks’ billing approached 24 hours in a single day.” Id. at 942.
In United States ex rel Garibaldi v. Orleans Parish School Board, 21 F.Supp.2d 607 (E.D.La. 2004)(concerning rates charged to federal programs for federal unemployment insurance by the Orleans Parish School Board-OPSB), the Court explained the type of scienter required in a claim against a corporation or government body.
This scienter requirement is something less than that set out in the common law [since the 1986 amendments to the FCA]…Unlike at common law, where there need be an actual, conscious ‘trick, deceit, chicanery or over reaching,’ under the FCA even ‘reckless disregard’ for truth is sufficient to infer fraud…Since a corporation or local government body has a duty to be aware of the amount and nature of its claims to the federal government and to certify that these claims are reasonable, recklessly disregarding this duty could meet the scienter requirement of the FCA. The question before the court today is the sufficiency of the evidence suggesting that OPSB’s lack of action reached the level of “reckless disregard.” OPSB had the requisite scienter if (1) it knew it was required to use reasonable, uniform rates for federal unemployment insurance and failed to do so; (2) it knew it was required to gain federal approval before self-insuring worker’s compensation and failed to do so; (3) it knew it had to allocate moneys net of all applicable credits and yet allocated worker’s compensation costs before crediting the savings from self-insurance solely to the General Fund; and/or (4) it knew it was required to conduct actuarial studies but did not. Id. at 619.
In UMC Electronics v. United States, 45 Fed.Cl. 410 (Fed.Cl. 1999), the court held,
Therefore, at a minimum, every party filing a claim before the contracting officer and this court has a duty to examine its records to determine what amounts the government already has paid or whether payments are actually owed to subcontractors or vendors. The case law stands for the proposition that a failure to make a minimal examination of records constitutes deliberate ignorance or reckless disregard, and a contractor that deliberately ignored false information submitted as part of a claim is liable under the False Claims Act. To find otherwise would allow parties filing an action in this court to “double-bill” the government and then hide behind a posture of feigned ignorance. Id. at 434.
In United States v. Rachel, 289 F.Supp.2d 688 (D.Md. 2003), the owner of a company formed a shell corporation in order to inflate costs and issue false invoices to another company, which then billed the prime contractor, which then billed the IRS on a contract for computer maintenance and repair. Defendant’s wife acted in reckless disregard of the false claims because she served on the Board of Directors, and she was an incorporator, officer and director of the company, which gave her knowledge of the scheme. She allowed her husband to use her name and identity to conduct business. The court held that these factors were enough to prove reckless disregard.
In a case where the government claimed there were many “red flags” as warnings of fraud, the Court in United States v. Presidents and Fellows of Harvard College, 323 F.Supp.2d 151 (D.Mass. 2004) stated,
Some courts have insisted that the defendant have some role in the claim process. On the other hand, most courts agree that the FCA covers ‘indirect mulcting of the government’…Under the broader interpretation, a defendant may be liable if it operates under a policy that causes others to present false claims to the government…Of course, even under the broadest interpretation, the defendant must know that claims are being submitted to the United States…[If] the basis for the allegation that Hay ’cause[d] to be presented…a false or fraudulent claim for payment or approval’ is Hay’s approval of invoices and financial reports, then the government must show that the claims that Hay caused to be presented are the claims that were false. Id. at 186-187.
The Court went on to say that Harvard had “an obligation to take reasonable steps to determine whether the certifications properly presented that the Russia Project was operating in accordance with the Cooperative Agreements. This obligation, however, was not so far reaching as to warrant investigation and supervision of employees’ every activity, without information that would warrant such scrutiny.” Id. at 193. The theory of apparent authority was rejected because Harvard itself had submitted false claims and apparent authority only applies where a person holds himself out to a third party as an agent of a principal.
In United States v. Cabrera-Diaz, 106 F.Supp.2d 234 (D.P.R. 2000), after an audit of a doctor’s records showed Medicare overbilling in hundreds of claims, the Court held that the doctor and secretary either had actual knowledge or were so reckless as to have knowledge, and that the knowledge of the employee was imputed to the employer. The Court stated that the employer cannot escape liability by “hiding behind a shield of self-imposed ignorance” and he cannot escape liability when he “purposefully turn[s] a blind eye to conduct of his subordinate.” Id. at 238.
VI. CORPORATE VERSUS INDIVIDUAL LIABILITY
As in many plaintiffs’ cases, if you can find a target corporate defendant you are generally better off than if your defendant is an individual. In FCA cases, often the defendant corporation will claim that it had no knowledge of the individual wrongdoer’s actions and it should be dismissed from the case. The analysis with regard to holding the corporation liable for the actions or omissions of its employees is fact-intensive.
Several cases discuss the issue of whether an employee’s knowledge of false claims can be imputed to the employer or whether the theory of respondeat superior applies in FCA actions. The general rule was stated in United States ex rel Shackelford v. American Management, Inc., 484 F.Supp.2d 669 (E.D.Mich. 2007): “The Court therefore joins the majority of cases which hold that a principal is vicariously liable whenever its agents act within the scope of their employment or with apparent authority regardless of the employer’s knowledge or culpability. This holding is consistent with the purpose of the FCA to broadly protect the property of the government.” Id. at 676. Some courts require that in addition to acting within the scope of employment, the employee must be acting for the “benefit of the corporation.” In Grand Union Company v. United States, 696 F.2d 888 (11th Cir. 1983), the court held that a corporation can be liable under the FCA even if the certifying employee was unaware of the wrongful conduct of other employees; see also United States v. Incorporated Village of Island Park, 888 F.Supp. 419 (E.D.NY. 1995): “Respondeat superior applies to violations of the False Claims Act committed by an employee of a corporation who is acting within the scope of his authority and, at least in part, for the employer’s benefit.”).
Some courts follow the “at least one” rule to find corporate liability. In the false certification case of United States ex rel Harrison v. Westinghouse Savannah River Company, 352 F.3d 908 (4th Cir. 2003), Westinghouse was DOE’s contractor at a nuclear power plant on the Savannah River in South Carolina. It was developing a training program for employees who would operate a planned facility to store radioactive waste in-tank. Westinghouse put the training program out to bid to subcontractors. James Smith was the Westinghouse employee in charge of the training program. He developed a close relationship with a fellow at one of the subcontractors, GPC. The GPC employee saw confidential Westinghouse information that helped the GPC employee craft GPC’s bid. Westinghouse awarded the bid to GPC and then certified to the DOE that there were no organizational conflicts of interest (OCI) in the bidding process. The Fourth Circuit affirmed the district court’s jury instruction as to scienter, which “appropriately focused on the issue of material importance, i.e., whether there was at least one Westinghouse employee [Smith] who knew or should have known that GPC was submitting a bid seeking government funds and that this bid was tainted by an OCI,” and that the person at Westinghouse submitting the bid to DOE did NOT have to be the one with such knowledge. Id. at 919.
The District Court of Colorado in United States ex rel Maxwell v. Kerr-McGee Oil & Gas Corporation, 2009 WL 3161828, *5 (D.Colo. 2009)(oil royalties paid to U.S. under leases) agreed with the proposition that if “at least one” employee knew of the filing of false claims, the scienter requirement was met.
“Deliberate ignorance” or “reckless disregard” will be found when corporate owners or upper management are determined by a court to know, or be obligated to know, the terms of a federal contract, or in a case concerning Medicare or other federal programs, the governing federal regulations. In the event that there is evidence that their employees violate the contract or the regulations, and then the corporation submits requests for payment which certify that the work done, or product manufactured, has been done in compliance with the contract, or the regulations, or both, courts have found the corporation to be vicariously liable for the wrongdoing and that the scienter requirement of deliberate ignorance or reckless disregard has been met. U.S. v. Hydroaire, Inc., 1997 WL 160761 (N.D. Ill. 1997)(president acted with reckless disregard by failing to supervise and monitor actions of employees making parts for nuclear subs contrary to express fed specs, certified them as compliant, no evidence of president’s personal knowledge of or involvement in wrongdoing-employees knew they weren’t following standards); U.S. v. Mackby, 261 F.3d 821 (9th Cir. 2001)(managing director of physical therapy clinic claimed not to know/understand Medicare regs, made false claims, ct said it was his obligation to understand Medicare regs, found reckless disregard/deliberate ignorance)
There do not appear to be any cases using the term “control group”. Some have used the phrase “lower level” or “non-managerial” employee. The majority rule is that “vicarious liability applies, regardless of the employer’s knowledge” of an employee’s wrongful acts. U.S. ex rel. Shackelford v. American Management, Inc., 484 F.Supp. 2d 669, 675 (E.D. Michigan 2007)(citing cases from around the country contra, and many more in support). In this case, AMI managers (not clear but they seem to be mid level, not high level) arranged for subcontractors to do work AMI contracted with the feds to do. However, the work was actually being done by AMI employees. The AMI managers schemed with the subs to have them provide AMI with work purchase orders, which AMI would submit to the feds, having certified them as appropriate. The feds would pay the subs directly, who would split the payments with the AMI employees. In this case AMI had no knowledge of their employees’ wrongdoing, but the court found vicarious liability anyway, attributing the requisite scienter from the AMI employees to AMI. The employer is held vicariously liable as long as the evidence shows that its agents act within the scope of their employment or with apparent authority regardless of the employer’s knowledge or culpability. Id. at 673-6.
The cases in the minority, holding contra, do so on the grounds that the employer must have some degree of knowledge of the employee’s bad acts. But see, U.S. ex rel. Fago v. M & T Mortgage Corp., 518 F.Supp. 2d 108, 125 (D.D.C. 2007)(the minority opinions go against “the great weight of authority in FCA cases”).
VII. PROCEDURAL UNIQUENESS OF FCA LITIGATION
A FCA Complaint must be filed under seal and served on the federal government, but cannot be served upon the defendant until ordered to by the court. In addition, the plaintiff must serve on the government (and not file with the court) a memorandum detailing the facts of the Complaint together with copies of all documents plaintiff believes are relevant to his claims. The government can then investigate the claims. It has 60 days to either intervene in the case or decline to do so (or seek an extension). Typically the government will request numerous extensions as it completes its investigation.
VIII. POTENTIAL DEFENSES
Given the hard-fought and document-intensive nature of these claims, it is critical for a plaintiff’s counsel to assess the potential defenses that might be asserted against her client’s claims long before filing suit. These defenses include the government’s knowledge of the allegedly wrongful acts and omissions; lack of the heightened factual specificity under FRCP 9(b); the running of the statute of limitations; lack of falsity of the claim; lack of the requisite scienter; improper relator; and lack of materiality (if the government had known of the falsity of the claim and would have paid it anyway, the falsity was not “material” and the claim fails). Each of these defenses has a plethora of caselaw interpreting it.
The general rule is that damages are measured by the “difference between what the Government actually paid out by reason of the false claim over and above what it would have paid had the Government known the true facts.” Damages must be shown with “sufficient specificity” to allow for “at least a reasonable estimate of damages,” thus avoiding an award of nominal damages. Measure and Elements of Damages Under False Claims Act, 35 A.L.R. Fed. 805 (1977). Damages are “liberally calculated to ensure that they afford the government complete indemnity for the injuries done it.” United States ex rel. Roby v. Boeing Co., 302 F.3d 637, 646 (6th Cir. 2002). Actual damages under the FCA may be doubled or tripled.
Damages are a comparatively easy calculation when the false claim concerns overbilling for services rendered, or billing for services never provided. However, when the claim is that, for example, substandard work was done under a federal contract, proof of damages becomes more difficult. How much of the work was appropriate and met the contractual requirements? Can you quantify the harm done by the substandard work? What if some work met the contractual requirements and some of the work did not? Can you seek compensation for what you argue it will take to fix the problems? Can you show the diminished value of the product, or project, built under the federal contract?
In United States ex rel Stone v. Rockwell International Corp., 282 F.3d 787 (2002), (the “Rocky Flats” cases), the jury did not award damages for repairs to faulty “pondcrete blocks,” presumably because of the wording of the jury instruction at issue in that case. But this line of cases implies that the cost of repairs, or remediation, could be included in damages.
In United States ex rel Roby v. Boeing Co., 302 F.3d 637 (Sixth Cir. 2002), the court upheld an award of damages for the lost “benefit of the bargain”, but not replacement costs, of a manufactured helicopter. In a footnote, the court said, “The Federal Circuit has observed that the diminished-value test is ‘the normal measure of damages’ in FCA cases but held that ‘[i]n the unusual case in which actual loss in value cannot be ascertained, the injured party may recover the replacement cost, but only if that cost is not clearly disproportionate to the probable loss in value caused by the defects in question. The cost of remedying defects is not regarded as disproportionate if the defects significantly affect the integrity of a structure being built. In that setting, the injured party is entitled to recover the cost of remedying the defects despite the fact that the cost may be very high.'” Id. at 649 (citing Commercial Contractors, Inc. v. United States, 154 F.3d 1357, 1372-3 (Fed. Cir. 1998). This is helpful language if you want to pressure the defendant into settlement with the potential cost of remediating what you believe is the substandard work done by the defendant.
FCA litigation is complicated. It can take years to bring to a settlement or trial, in part due to the thousands, and in some cases millions, of documents relevant to the claims and defenses of the parties, in part because the defendants (often national or multi-national companies with the money to fight these claims furiously) will defend the cases at every step of the litigation: motions to dismiss on various grounds; discovery battles; and motions for summary judgment. But if you have the fortitude and the proof, these cases are very satisfying to litigate and can significantly support and protect the public interest.