On Remand, District Court Dramatically Reduces False Claims Act Damages

In April 2015, we wrote about the Sixth Circuit’s decision to reverse and remand a $664 million judgment in favor of the government against United Technologies Corp., relating in part to claims that United Technologies’ predecessor, Pratt & Whitney (“P&W”), violated the False Claims Act by falsely certifying that it had corrected misstated projected costs in a 1983 bid to supply engines for the Air Force’s F-15 and F-16 fighter jets.  See United States v. United Techs. Corp., No. 13-4057 (6th Cir. Apr. 6, 2015).  The $664 million award included $7 million in statutory penalties related to the False Claims Act violation, and $657 million in damages for common law claims of payment by mistake and unjust enrichment.


Something For Everyone: The Court of Federal Claims Issues Decision in Long Running, Complex Government Contracts Fraud Case

In Veridyne Corp. v. United States, — Fed. Cl. — , 2012 WL 2673091 (July 6, 2012), the Court of Federal Claims (COFC) resolved a long running government contracts dispute involving an agency of the Department of Transportation (the Maritime Administration (MARAD)), and Veridyne, the plaintiff contractor. A must-read for anyone practicing before the COFC, the opinion deals with government counterclaims not only for common law fraud, but also pursuant to the False Claims Act, the Forfeiture of Fraudulent Claims Act (also known as the special plea in fraud), 28 U.S.C. § 2514, and the fraud provision of the Contract Dispute Act (CDA), 41 U.S.C. § 7103(c)(2).

Veridyne and MARAD executed a contract modification extending the life of Veridyne’s contract, which originally was awarded through the Small Business Administration’s 8(a) program. The modification had to satisfy a $3 million ceiling in order for MARAD to continue using Veridyne without opening the contract work to competition. Ultimately, believing that Veridyne’s proposal to obtain the modification was fraudulent, MARAD issued a stop-work order and refused to pay Veridyne’s invoices. Veridyne, in turn, submitted a certified CDA claim seeking payment for fully performed work, and the case proceeded to trial not only on Veridyne’s claims, but also on the government’s counterclaims. The government’s counterclaims sought all money paid under the contract, the forfeiture of plaintiff’s claims, statutory penalties and damages for false invoices, and for damages as a result of plaintiff’s inability to support portions of its CDA claims. In particular, the government alleged not only that that the modification was void ab initio because Veridyne obtained the modification with a fraudulent proposal (designed to stay just below the $3 million threshold, while knowing full well that the contract payments would exceed that amount), but also that Veridyne sought payment from MARAD in an amount in excess of what plaintiff knew was due to it.

Notwithstanding that the modification’s estimated costs and award fee pools totaled $2,999,948 – i.e., just under the $3 million threshold – the court rejected the government’s common law fraud claim, citing a “mountain of record evidence” in support of the finding that “it is inconceivable that MARAD justifiably relied on Veridyne’s $3 million proposal.” Holding that “[a]bsent justifiable reliance . . .[,] the record cannot support a finding that [the modification] was void ab initio[,]” the court determined that Veridyne was entitled to compensation for services rendered (to the extent of available funding in the applicable work orders).

With respect to the government’s remaining counterclaims, however, the government largely prevailed (with the exception that Veridyne was saved from a total forfeiture of its claims).

First, the court rejected Veridyne’s advice of counsel defense, finding that “Veridyne cannot escape the fact that it knew its submitted claims were false and intended to deceive MARAD into paying [plaintiff’s] claims” and invoices. Although the court explained that the amount awarded to Veridyne ordinarily would be subject to forfeiture, the court nevertheless held that, “to the extent that Veridyne performed services and is entitled to be compensated for its performance, recovery in quantum meruit is warranted” and “applies to negate the net monetary penalty represented by the statutory forfeiture.”

Second, the court rejected Veridyne’s reliance on a line of cases, including United States ex rel. Hagood v. Sonoma County Water Agency, 929 F.2d 1416 (9th Cir. 1991), that “stand for the proposition that government knowledge can vitiate FCA liability, depending on the circumstances.” The court viewed those opinions as incorrectly “engrafting on the FCA a requirement that the agency’s knowledge can vitiate the requisite knowledge of the claimant.” Although perhaps somewhat in tension with the court’s ruling on the common law fraud, the court held that “[b]ecause the proposal leading to award of [the] modification itself was fraudulent, all invoices submitted thereunder are tainted by that fraud.” The court assessed a maximum penalty for each of 127 invoices Veridyne submitted under the modification.

Finally, the court held that Veridyne was liable pursuant to the CDA’s fraud provision for failing to support nearly $600,000 in claimed amounts, which included overstated overhead and unincurred expenses.

This case illustrates that the Justice Department will continue to pursue fraud remedies against contractors aggressively and will do so even where some government officials may have been well aware of a contractor’s conduct only later characterized as fraudulent by an agency or DOJ. Contractors, particularly in the wake of Daewoo Eng’g & Constr. Co. v. United States, 557 F.3d 1332 (Fed. Cir. 2009), must continue to be extra-vigilant regarding the factual and legal bases of their CDA claims. [Note: This post’s author was involved in the early stages of this case while at the DOJ. The information contained herein, however, is based solely on publicly available information.]

Alabama Supreme Court Rejects False Claims Allegations Where State Knew or Should Have Known of Alleged Falsity

In Sandoz v. Alabama, the Supreme Court of Alabama extended its earlier opinion in AstraZeneca v. Alabama (2009) and overturned a jury verdict, holding that the State could not prevail on a fraud theory where it had actual knowledge that the defendant’s reported list prices did not reflect actual transaction prices.

Proceeding under various state law fraud theories, Alabama alleged that Sandoz had provided false “Wholesale Acquisition Cost” (“WAC”) and Average Wholesale Price (“AWP”) information to national price compendia, such as First Databank, leading Alabama’s Medicaid program to over-reimburse generic drug purchases. Specifically, Alabama alleged that Sandoz reported its list price without accounting for discounts, rebates, and other inducements, which had the effect of lowering the actual transaction prices to customers.

At trial, Alabama put on evidence that WAC data should reflect a drug manufacturer’s net price, that is the price ultimately charged to wholesalers. By reporting only its list price, exclusive of rebates, discounts, and the like, Sandoz led the compendia to overstate its prices. Alabama, in turn, relied on these allegedly inflated prices in reimbursing drug purchases covered by its Medicaid program, which, it alleges, resulted in over-reimbursements. Sandoz presented contrary evidence showing that WAC is commonly understood to reflect list, not net, prices. The jury disagreed, and found Sandoz liable for hundreds of millions of dollars in compensatory and punitive damages.

On appeal, Sandoz argued that regardless of whether WAC and AWP reflect list or net prices, Alabama could not reasonably have relied on the data it received from the compendia because it had actual knowledge that WAC and AWP pricing data routinely overstates manufacturers actual prices to wholesalers. Applying AstraZeneca, the Court agreed. “To claim reliance upon a misrepresentation, the allegedly deceived party must have believed it to be true. If it appears that he was in fact so skeptical as to its truth that he placed no confidence in it, it cannot be viewed as a substantial cause of his conduct.” Moreover, “plaintiffs alleging fraud cannot be said to have reasonably relied on alleged misrepresentations when they have been presented with information that would either alert them to any alleged fraud or would provoke inquiry that would uncover such alleged fraud.”

The Court pointed to evidence in the record showing that both federal and state officials had long been aware that AWPs routinely exceed actual transaction prices. The record also showed that Sandoz had voluntarily submitted Average Manufacturer Price (“AMP”) data to the state Medicaid agency, which should have put the agency on notice that its WAC and AWP data did not reflect its actual prices.

Although not an FCA case, this decision reflects similar considerations as the District of Massachusetts’ recent decision in United States ex rel Banigan v. Organon USA, which rejected FCA claims predicated on alleged off label promotion where the State knowingly reimbursed purchases of drugs for off label uses.

D. Minn. upholds qui tam complaint against ICD manufacturer Guidant

Posted by Sean Griffin and Kristin Graham Koehler

On March 14, 2012, Judge Donovan W. Frank of the United States District Court for the District of Minnesota upheld a relator’s complaint against Guidant Corporation (“Guidant”) based on its manufacture of certain implantable cardiac devices (“ICDs”), which had been sold to the Department of Veterans Affairs and/or reimbursed by Medicare. The relator, James Allen, alleged that Guidant had made false statements and failed to disclose known safety concerns in its post-approval reports to the Food and Drug Administration. Allen, a patient who had received one of Guidant’s ICDs, claimed that his allegations were based on his personal experience and certain adverse event reports he had reviewed. However, the safety and disclosure allegations in question had also been litigated both in prior, multi-district products liability litigation and in an earlier criminal adulteration proceeding.

After the government moved to intervene, Guidant moved to dismiss the relator’s complaint. The district court first rejected the argument that the government’s complaint in partial intervention was sufficient to supersede Allen’s complaint in its entirety. The district court also rejected the argument that the earlier litigation and related news coverage deprived the court of jurisdiction under the pre-FERA version of the FCA because it found the relator’s personal experience with Guidant’s products qualified him as an original source. Finally, the court found that Rule 9(b) had been satisfied because Relator had provided, inter alia, the names of Guidant employees allegedly involved in the purported false statements as well as the particulars of five allegedly defective devices.

While the court ultimately refused to dismiss this FCA case entirely, it did dismiss the relator’s claims for unjust enrichment and payment by mistake. Citing authority from courts in the First, Second, Eighth and D.C. Circuits, Judge Donovan ruled that qui tam relators lack standing to bring common law claims on behalf of the government.