In Long Running Tuomey Saga, the Fourth Circuit Provides a Roadmap For Constitutional Challenges to Excessive FCA Awards

On July 2, 2015, the Fourth Circuit affirmed a $237 million verdict against Tuomey Hospital following a retrial in the government’s long-running effort to pursue alleged violations of the Stark law. (See our previous posts on the case here and here). As we previously reported, in 2013 in U.S. ex rel. Gosselin v. Bunk, the Fourth Circuit acknowledged that FCA awards are subject to Eighth Amendment scrutiny, but it rejected the constitutional challenge in that case without providing any concrete standards against which the constitutionality of an award in any particular case could be measured. In the more recent Tuomey opinion, the Fourth Circuit again rejected Eighth Amendment and Due Process challenges to the constitutionality of the award. However, the opinion provides a roadmap for future challengers that suggests that constitutional challenges could find traction in cases in which there is a significant discrepancy between per-claim damages and penalties.

The relevant facts of Tuomey are as follows: the jury concluded that Tuomey violated the Stark Act, and that as a result, 21,730 UB-92 hospital claim forms it had submitted to Medicare and Medicaid were false claims. Single damages of $39,313,065, or approximately $1,809 per claim, were trebled for a total damages award of $117,939,195. The court then awarded civil penalties of $5,500 per claim, totaling $119,515,000, resulting in a total judgment of $237,454,195. Tuomey argued that the total award was excessive under the Eighth Amendment’s “excessive fines” clause as well as the Due Process Clause of the Fifth Amendment. The Fourth Circuit held that because FCA awards contain both compensatory and punitive elements, they are subject to analysis under the Supreme Court’s jurisprudence evaluating the constitutionality of punitive damage awards, under which the reasonableness of a punitive damage award is based on analysis of the following factors: (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. Op. at 49 (quoting State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408, 418 (2003)).

To conduct the analysis under the second and third State Farm prongs, the Fourth Circuit found it necessary to characterize the various components of an FCA award as either compensatory or punitive. The court concluded that single damages and the portion of multiplied damages attributable to the relator’s share are appropriately characterized as compensatory in nature (rejecting the government’s argument that the entirety of treble damages are compensatory), while the multiplied damages (net of the relator’s share) and the entire amount of FCA penalties are appropriately characterized as punitive in nature. In Tuomey, the breakdown of the FCA award was as follows:

Single damages
Relator’s share of multiplied damages
Total Compensatory portion
$11,793,920 (assumed to be 15%)
Multiplied damages net of relator’s share
Civil penalties
Total Punitive portion

The Fourth Circuit explained that while the Supreme Court has not set a bright-line ratio that punitive damages cannot exceed under the Due Process Clause, “it has suggested that ‘an award of more than four times the amount of compensatory damages might be close to the line of constitutional impropriety.'” The ratio of punitive damages to compensatory damages in Tuomey was approximately 3.6-to-1 ($186 million punitive : $51 million compensatory), which “falls just under the ratio the Court deems constitutionally suspect.” The Court therefore concluded that the FCA award against Tuomey is constitutional under the Fifth and Eighth Amendments.

While the Fourth Circuit has, for the second time in two years, rejected a constitutional challenge to an FCA award, Tuomey is significant because the opinion effectively sets forth a formula for evaluating the constitutionality of such awards:

double damages – relator’s share + civil penalties
single damages + relator’s share

If the resulting figure is greater than 4 – reflecting a ratio of punitive to compensatory damages of at least 4 to 1, then the award is likely “constitutionally suspect” under the Supreme Court’s punitive damage jurisprudence.

In Tuomey, the ratio of compensatory damages to penalties was relatively low because the per-claim damages were relatively high, approximately $1,800. That is attributable to the fact that in Stark cases, as in cases based on violations of the Anti-Kickback Statute, courts have held that damages are the entire amount of the claims submitted when the provider was not in compliance with the statute. But in other types of cases, particularly non-certification-based cases, such as claims of off-label marketing or miscoding, the per-claim damages are a small fraction of the per-claim penalties. In such cases, the analysis in Tuomey provides a solid basis for defendants to argue that the full amount of civil penalties and damages available under the FCA would run afoul of the constitutional prohibitions on excessive damages.

A copy of the Fourth Circuit’s opinion can be accessed here.