Posted by HL Rogers and Loui Itoh
Although the federal FCA specifically exempts tax fraud, New York is one of over 30 states and four municipalities that have enacted separate FCA laws. These state FCA laws generally follow the federal FCA but vary in certain specifics. For instance, New York’s state FCA law specifically exempted tax fraud, similar to the federal FCA, when it was passed in 2007. However, it was expanded in 2010 by amendments that allowed, among other things, whistleblower claims related to tax fraud. This expanded provision had not been successfully used until this month when New York announced its first FCA tax recovery. The settlement marks the first time that an FCA has been used to penalize tax fraud. Critics and experts will be watching closely to see if this recent recovery will lead to a new national trend.
On March 5, 2013, New York Attorney General Eric T. Schneiderman announced that tailor Mohanbhai “Mohan” Ramchandani and his business corporation, Mohan’s Custom Tailors, Inc., pled guilty to a ten-year tax evasion scheme and agreed to pay a $5.5 million civil settlement for claims filed under New York State’s False Claims Act. The civil claims were first raised by a whistleblower who offered insider information and will receive a $1.1 million award under the New York FCA’s relator award provisions.
The Attorney General’s investigation concluded that since 2002, Mohan and his business had knowingly failed to pay at least $1.7 million in state and local sales taxes, and that Mohan himself owed at least $256,000 in state and local personal income taxes. Mohan confessed to these charges before the New York County Supreme Court, admitting that he and his business had knowingly failed to pay nearly $2 million in taxes. In addition to the civil settlement, Mohan faces up to three years in prison for the felony charges.
Although it specifically exempted tax fraud when it was passed in 2007, New York’s FCA was expanded in 2010 by amendments authored by Attorney General Schneiderman, who was then a state senator. Schneiderman called the newly expanded state FCA, a “False Claims Act on Steroids.” The revised FCA allows a whistleblower to bring a qui tam suit against an individual or business that makes more than $ 1 million net income and defrauds the state by more than $350,000 in taxes. The relator may keep up to 25 to 30 percent of the recovery, depending on whether the government joins the suit. The question remains whether this will become a national trend and another consistent tool in state governments’ arsenals to penalize tax fraud.
Posted by Kristin Graham Koehler and HL Rogers
The False Claims Act (FCA) provides that “no other person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5). This so-called first-to-file rule “bar[s] a later allegation if it states all the essential facts of a previously-filed claim or the same elements of a fraud described in an earlier suit.” United States ex. Rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13, 32 (1st Cir. 2009). On this, there is no disagreement among the courts of appeal. However, the question arises as to what form the first filed complaint must take to trigger the rule. The Sixth Circuit has held that in order to qualify as a first filed complaint, the complaint “must not itself be jurisdictionally or otherwise barred.” United States ex rel. Poteet v. Medtronic, Inc., 552 F.3d 503, 516-17 (6th Cir. 2009). Considering the same issue, and looking at the Sixth Circuit’s prior holding, the D.C. Circuit held “a complaint may provide the government sufficient information to launch an investigation of a fraudulent scheme even if the complaint” is not jurisdictionally sound, thereby meeting the first-to-file rule. United States ex rel. Batiste v. SLM Corp., 659 F.3d 1204, 1210 (D.C. Cir. 2011). Judge Stearns, in the U.S. District Court for the District of Massachusetts, ruled on this issue over the summer and sided with the D.C. Circuit, dismissing the plaintiffs’ complaint. United States ex rel. Heineman-Guta v. Guidant Corp., 09-11927 (D.Mass. July 5, 2012). On November 6, 2012, the plaintiff filed an appeal with the First Circuit squarely raising this issue of the first-to-file rule.
In the Guidant case, the plaintiff alleged in the District of Massachusetts that the Company was involved in a scheme to induce doctors to use Guidant pace makers. Because of the product at issue, the allegations largely relate to senior citizens and, therefore, involve Medicare. Guidant argued that plaintiff’s FCA claim was precluded because of two previously filed lawsuits that Guidant argued alleged a similar scheme. The District Court found, and plaintiff conceded, that one of the two complaints did, in fact, allege a scheme nearly identical to that alleged by plaintiff. But the complaint was voluntarily dismissed and plaintiff argued lacked the particularity required by Federal Rule of Civil Procedure 9(b). Plaintiff further argued that, for this reason, the complaint could not serve as a jurisdictional bar to her complaint under the principles espoused by the Sixth Circuit in Poteet. The District Court found this argument unpersuasive.
The District Court began by explaining the reason that underlies the first-to-file rule. “The first-to-file rule is intended to provide incentives to relators to promptly alert the government to the essential facts of a fraudulent scheme.” Guidant Corp., 09-11927 at 5 (quotation omitted). Once the government has been put on notice of a fraudulent scheme, there is little benefit to allowing another relator to come later and allege the same scheme. The District Court examined both the Sixth Circuit’s argument that if a complaint is “jurisdictionally or otherwise barred” it does not qualify as an action that would initiate the first-to-file rule, Medtronic, Inc., 552 F.3d 516-17, and the D.C. Circuit’s argument that as long as the previous filing provides notice, whether the actual action is barred in some way or not, the first-to-file rule is triggered. SLM Corp., 659 F.3d 1210. The District Court sided with the D.C. Circuit’s reasoning arguing that the “purpose of a qui tam action is to provide the government with sufficient notice that it is the potential victim of a fraud worthy of investigation.” Guidant Corp., 09-11927 at 10. The District Court saw no reason why the government would be on notice after a filing that was not jurisdictionally or otherwise barred but not on notice following a filing that included the essential elements of the fraud but was somehow barred. Because the government would be on notice regardless, the District Court could find no reason to bar an action in the first instance and not the second.
The plaintiff recently appealed this ruling to the First Circuit. She places squarely at issue the District Court’s decision to side with the D.C. Circuit and reject the reasoning and holding of the Sixth Circuit. Regardless of the way the First Circuit rules on this issue, it will deepen this circuit split. None of us should be surprised to see this decision make its way to the Supreme Court in the next several years. Stay tuned.
Posted by HL Rogers and Kristin Koehler
The Department of Justice recently filed an Amicus brief on behalf of the United States and in support of a Relator in an action originally brought in the District of Massachusetts and now on appeal to the First Circuit, United States ex rel. Rost v. Pfizer, Inc. Brief for United State of America as Amicus Curiae Supporting Plaintiff-Appellant, United States ex rel. Rost v. Pfizer, Inc., No. 10-2215 (1st Cir. January 17, 2012) (“United States Amicus Brief”). The Amicus brief is notable in demonstrating how far the First Circuit recently has moved from its previous interpretation of the False Claims Act and how far it has distanced itself from several other circuits. Additionally, the Amicus brief is notable in showing how aggressive the Department of Justice has been in expanding the reach of the False Claims Act.
The District Court ruled on Defendant’s summary judgment motion on September 14, 2010. At the time of the decision, the District Court Judge was accurate in stating that “the implied false certification theory of liability under the FCA is an evolving area of the law” – particularly in the First Circuit. United States ex rel. Rost v. Pfizer, Inc., 736 F.Supp.2d 367, 375 (D.Mass. 2010). Since that time, both United States ex rel. Hutcheson v. Blackstone Medical, Inc., 647 F.3d 377 (1st Cir. 2011) in June 2011 and New York v. Amgen, Inc., 652 F.3d 103 (1st Cir. 2011) in July 2011 were decided by the First Circuit.
Therefore, in Rost, the District Court Judge could reject two of the government’s arguments that attempted to greatly expand the FCA: (1) “[W]hen you bill Medicaid you are impliedly certifying that no kickbacks have been paid in any of the underlying transactions;” and (2) “the payment of a kickback renders subsequent claims factually false under the FCA, without regard to who submits the claim or whether there is a certification that no such kickback was accepted.” Rost, 736 F.Supp.2d at 377 (quotation marks omitted). But with the issuance of Blackstone and Amgen, the First Circuit now has embraced the government’s position and expanded the FCA in exactly the manner the government pushed in Rost and outside the bounds set by the FCA’s statutory language.
The government now argues on appeal in Rost, with the recent support of Blackstone and Amgen, that a defendant is liable under the FCA even when “the third party [submitting the claim] has no knowledge of the underlying kickbacks or makes no express certifications regarding compliance with the [Anti-Kickback Statute, 42 U.S.C. § 1320-7b].” United States Amicus Brief at 13; see Blackstone, 647 F.3d at 386-87; Amgen, 652 F.3d at 110. This argument, and the opinions in Blackstone and Amgen, read out one of the most important limitations of the FCA’s plain language—that in order to violate the FCA, a party must make a claim that is factually incorrect or certify compliance with a statute or regulation with which it failed to comply. In other words, for liability under the FCA, a party must file a claim that is false. Under the Government’s theory, a party is liable if it submitted a claim for which any underlying conduct, no matter how remote, included some form of illegality—whether or not the claim itself is false. Not only is this approach expansive, but as the Government itself admits, it is also one that has been rejected by the Second and Ninth Circuits and restrained by the Tenth and D.C. Circuits. United States Amicus Brief at 17. Stay tuned.