Late last month, in a closely watched False Claims Act case (about which we have previously written here, here, and here), a federal judge in the Eastern District of Virginia rejected the government’s argument that Government Logistics NV (“GovLog”) should be held liable for a $100 million FCA judgment against Belgian shipping company Gosselin World Wide Moving NV (“Gosselin”) under a theory of successor liability.
On August 4, 2014, a jury levied a verdict of $100.6 million in damages and $24 million in civil penalties against Gosselin based on a finding that its repeated submissions of false invoices for moving services amounted to thousands of individual violations of the federal False Claims Act. After the verdict, and DOJ’s ensuing difficulties collecting a judgment from Gosselin, which had sold its US business assets to GovLog, the government sought to hold GovLog liable for the verdict against Gosselin on the theory that GovLog was Gosselin’s successor in interest.
In September 2014, Judge Anthony Trenga ruled that GovLog could be Gosselin’s successor in interest only if the government could establish the elements of successor liability under the more-demanding common law rule instead of the more-lenient “substantial continuity” rule. Under the common law (or “traditional”) rule of successor liability, a corporation that acquires the assets of another corporation does not also assume its liabilities under the FCA unless either: (1) the successor agrees to assume liability; (2) the transaction is a de facto merger; (3) the successor is a “mere continuation” of the predecessor; or (4) the transaction is fraudulent. Judge Trenga ordered the parties to brief the question of successor liability, requesting that the parties devote particular attention to whether GovLog’s acquisition of Gosselin would satisfy the fraudulent transfer prong.
On December 23, 2014, Judge Trenga granted summary judgment in favor of GovLog, holding that the plaintiffs had neither adequately pleaded nor submitted sufficient evidence to establish that GovLog was a successor to Gosselin. On the court’s invitation, Plaintiffs had pursued the “fraudulent transaction” prong of establishing successor liability, contending that Gosselin had transferred its US business to GovLog fraudulently for the purpose of avoiding paying a judgment in this or other cases. The court noted that there was insufficient evidence to prove that Gosselin intended through its transaction with GovLog to avoid or delay payment judgment creditors. But, the court went on, even if there had been sufficient evidence to prove the plaintiffs’ contentions, “alleged intent, restructuring [to avoid liability], and knowledge [that judgment creditors would have difficulty collecting a judgment], standing alone, would not be sufficient to impose successor liability.” Otherwise, the court reasoned, “imposing liability under a fraudulent transaction theory without a fraudulent transaction, solely because of the incidental effects of that transaction, turns that theory, in effect, into a theory of strict liability.” Thus, the court concluded, GovLog could not be held liable for Gosselin’s FCA judgment. A copy of the court’s ruling on the successor liability issue in the combined cases U.S. ex rel. Bunk v. Gosselin World Wide Moving, No. 1:02-cv-01168 (E.D. Va.), and U.S. ex rel. Ammons v. Gosselin World Wide Moving NV, No. 1:07-cv-01198 (E.D. Va.) can be found here.
On January 8, 2015, in United States ex rel. Badr v. Triple Canopy, Inc., No. 13-2190, — F.3d — (4th Cir. 2015), the U.S. Court of Appeals for the Fourth Circuit revived a False Claims Act suit brought by the U.S. Government and a qui tam relator against security firm Triple Canopy, Inc., explicitly recognizing for the first time the implied certification theory of FCA liability.
The case arose out of a contract between Triple Canopy and the government under which Triple Canopy was to provide security services at an airbase in Iraq. Among several provisions in the contract, each of the security officers that Triple Canopy hired would have to obtain a passing score on a qualifying U.S. Army-grade rifle marksmanship course. In fact, according to the relator, very few guards were capable of meeting this requirement. Nevertheless, Triple Canopy continued to submit monthly invoices to the government for the guards’ services. Triple Canopy allegedly ordered one of its medics, relator Omar Badr, to retroactively falsify marksmanship scorecards for 40 guards. Badr subsequently filed a qui tam suit against Triple Canopy. The government then intervened as to certain counts.
The district court granted Triple Canopy’s motion to dismiss the case, largely on the ground that the defendants had never submitted a demand for payment that contained an objectively false statement. The court reasoned that the Government never alleged that Triple Canopy “invoiced a fraudulent number of guards or billed for a fraudulent sum of money.” Rather, citing Fourth Circuit precedent regarding the “crucial distinction between punitive FCA liability and ordinary breaches of contract,” the court reasoned that the defendant’s actions amounted at most to a breach of contract, not an FCA suit.
Although it affirmed the district court’s dismissal of certain claims, the Fourth Circuit reversed as to the bulk of the plaintiffs’ claims, holding that the district court’s interpretation of the distinction between breach-of-contract suits and FCA suits was too rigid. Instead, after reviewing the relevant circuit opinion and distinguishing its prior precedents, the Fourth Circuit held, “the Government pleads a false claim when it alleges that the contractor, with the requisite scienter, made a request for payment under a contract and withheld information about its noncompliance with material contractual requirements. The pertinent inquiry is whether, through the act of submitting a claim, a payee knowingly and falsely implied that it was entitled to payment.”
In so holding, the Fourth Circuit, for the first time, has expressly endorsed the implied certification of FCA liability, at least in certain circumstances. The Court noted that, since its 1999 opinion in U.S. ex rel. Harrison v. Westinghouse Savannah River Co., 176 F.3d 776 (4th Cir. 1999), “the weight of authority has shifted significantly in favor of recognizing this category of claims at least in some instances. Thus, the opinion states, “[c]ourts [may] infer implied certifications from silence where certification was a prerequisite to the government action sought.” The court noted its awareness of the fact “that this theory is prone to abuse by parties seeking to turn the violation of minor contractual provisions into an FCA action,” and took pains to highlight the “several key distinctions between this case and . . . garden-variety breaches of contract,” including the government’s active intervention and the clear falsehood at issue here (as opposed to vague contract provisions in other cases promising “diligence” or the like). It also clarified its view that the best way to prevent most contract suits from morphing into FCA suits is “strict enforcement of the Act’s materiality and scienter requirements,” which it concluded were readily met in this case.
A copy of the Fourth Circuit’s opinion can be found here.
On August 4, 2014, a federal jury in the Eastern District of Virginia levied a verdict of $100.6 million in damages and $24 million in civil penalties against Belgian shipping company Gosselin World Wide Moving NV (“Gosselin”), based on a finding that Gosselin’s repeated submissions of false invoices for moving services amounted to thousands of individual violations of the federal False Claims Act (a case we previously wrote about here and here). However, the government is seeking to hold a third-party, Government Logistics NV (“GovLog”), liable for the verdict against Gosselin under the theory of successor liability.
Whether and how successor liability can be assessed is a critical issue underlying many False Claims Act cases, especially given the magnitude of the potential exposure FCA cases routinely involve. Courts around the country have split on which rule to apply in the False Claims Act context. As Judge Trenga explained, under the common law (or “traditional”) rule of successor liability, a corporation that acquires the assets of another corporation does not also assume its liabilities unless either: (1) the successor agrees to assume liability; (2) the transaction is a de facto merger; (3) the successor is a “mere continuation” of the predecessor; or (4) the transaction is fraudulent. More recently, some courts in assessing successor liability under the FCA have turned to what is known as the “substantial continuity” test, which had previously been confined mostly to the labor context. Under that approach, successor liability is established based on a flexible, easier-to-satisfy, multi-factor analysis that considers: (a) whether the business of both companies is essentially the same; (b) whether the employees of the new business are doing the same jobs; and (c) whether the new entity has the same production processes and customers.
U.S. District Judge Anthony Trenga ruled on September 12, 2014, that relator may recover from GovLog only if plaintiffs can establish that GovLog is Gosselin’s successor in interest using the more-demanding common law rule instead of the more-lenient “substantial continuity” rule. Although noting that many courts have used the substantial continuity test in contexts beyond labor cases, and even in FCA cases, Judge Trenga reasoned that the Supreme Court’s decision in United States v. Bestfoods, 524 U.S. 51 (1998), states that a federal statute may abrogate common-law corporate-liability precepts only if the statute does so in express terms. Because the False Claims Act contains no provisions that would modify the common law of successor liability, the court held, there is no justification for imposing a less-stringent standard. In the court’s order, Judge Trenga requested that the parties pay particular attention in their arguments to whether GovLog’s acquisition of Gosselin would satisfy the fraudulent transfer prong.
The cases are U.S. ex rel. Bunk v. Gosselin World Wide Moving, No. 1:02-cv-01168 (E.D. Va.), and U.S. ex rel. Ammons v. Gosselin World Wide Moving NV, No. 1:07-cv-01198 (E.D. Va.).
On May 13, a district court in the Eastern District of Virginia dismissed a healthcare fraud action under the Virginia Fraud Against Taxpayers Act (“VFATA”) against Laboratory Corporation of America (“LabCorp”) alleging that LabCorp routinely charged Medicaid more than its “usual and customary charge” for laboratory services. The district court held that the relators’ allegations about Medicaid overcharges and improper kickbacks for Medicaid referrals could not proceed because relators (i) failed to specify the particulars of a single false claim under Rule 9(b), and (ii) failed to articulate any particular certification defendants made that was false, in violation of Rule 8(a).
The relators—competitors of LabCorp—alleged that each of LabCorp’s Medicaid reimbursement claims was actionably “false” in two ways. First, LabCorp’s charges to Medicaid prices for laboratory services were higher than the lower prices that LabCorp routinely negotiated with individual insurers and physicians, which relators alleged violated Virginia regulations requiring LabCorp to charge Medicaid its “usual and customary” rates. Second, relators alleged that these lower charges offered to individual physicians constituted impermissible kickbacks meant to induce referral of Medicaid business. Relators alleged that these violations had rendered 2,730,814 claims submitted by LabCorp “false.”
With regard to Rule 9(b), the court acknowledged a split between the circuits about whether relators must identify all of the particulars—e.g., the who, what, when, where, how—of at least one representative claim, and noted that the Fourth Circuit had not addressed that issue. Nonetheless, relying heavily on the Fourth Circuit’s decision in U.S. ex rel. Nathan v. Takeda Pharm. N. Am., 707 F.3d 451, 456 (4th Cir. 2013), cert. denied, 134 S. Ct. 1759 (2014) (a decision we previously wrote about here), the court held that relators must allege with particularity the submission of at least one specific claim for payment. The court found that the relators failed to do so.
On an alternative but related ground, the court also dismissed the complaint under Rule 8(a), relying heavily on the difference between certifying legal compliance in order to participate in a program versus to be paid under that program. The court, distinguishing between legal and factual falsity, held that, in this complaint alleging factual falsity, no liability for fraud under a false certification theory can exist unless relators plead the details of what statement defendants made that was actually false. In Hunter, the relators argued that LabCorp could not have participated in the Medicaid program without agreeing to be bound by Virginia regulations, which mandate that providers cannot charge higher prices for Medicaid patients than for non-Medicaid patients. Under this theory, each overpriced claim was made false because LabCorp would not have been able to submit those overpriced claims were it not for its prior agreement to abide by the regulations. The court, however, held that LabCorp’s general agreement to abide by the law in exchange for participating in Medicaid was not an agreement in exchange for Medicaid payment; its agreement was not false when it was made; and, most notably, “a general representation of compliance with all laws lacks the requisite nexus between the subject matter of the certification and the event triggering the loss—i.e., the kickback and overcharge schemes.”
Although this case arose under the VFATA, rather than the federal False Claims Act, the court’s grounding of its opinion in Rules 8(a) and 9(b) offers guidance to companies seeking to defend against similarly allegations of fraud in the Fourth Circuit. This ruling further strengthens the Fourth Circuit’s already stringent pleading standards under Rules 8(a) and 9(b).