Historical government payment practices have gained new importance following the Supreme Court’s guidance in Escobar that such practices can preclude a finding that regulatory compliance was material to the payment of an allegedly false claim. Evidence regarding the government’s prior knowledge of regulatory violations and continued payment can also bear on the mens rea element of an FCA claim. Perhaps not surprisingly in light of the importance of this evidence, DOJ recently tried—unsuccessfully—to block a defendant’s efforts to discover information relating to historical payment determinations by CMS Medicare Administrative Contractors (“MACs”). See United States ex rel. Ribik v. HCR ManorCare, Inc., No. 09-cv-13 (E.D. Va. Feb. 3, 2017).
The Fourth Circuit will soon have the opportunity to clarify the circumstances under which successor liability may be imposed against an entity for False Claims Act judgments against its predecessor. Previously covered here, here, here, here, here, and here, the district court in United States ex rel. Bunk v. Birkart Globistics GmbH & Co. held that purported defendant GovLog could be defendant Gosselin’s successor in interest only if the plaintiffs – the Department of Justice and relators – 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.
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 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.).
Posted by Ellyce Cooper and Brent Nichols
It is not uncommon for courts to impose a variety of sanctions on parties who fail to comply with their discovery obligations. A court in the Eastern District of Virginia, however, took the rare step of ordering dismissal of all claims with prejudice as a sanction for a False Claims Act plaintiff’s repeated spoliation of evidence.
In Hosch v. BAE Systs. Info. Solutions, Inc., No. 1:13-cv-00825, 2014 WL 1681694 (E.D.Va. April 23, 2014), Plaintiff brought suit under the anti-retaliation provisions of the False Claims Act, alleging that his employer had punished him for making disclosures regarding its allegedly fraudulent billing practices.
Defendant served discovery requests seeking the inspection and copying of Plaintiff’s cell phones, computers, and mobile device. Plaintiff initially refused to provide them and Defendant successfully moved to compel, obtaining a court order requiring Plaintiff to turn over his devices for a forensic inspection. The forensic inspection revealed that Plaintiff had systematically wiped the data from his devices, and Defendant moved for sanctions. In recommending dismissal as a sanction, the magistrate reasoned that, “Plaintiff’s severely egregious conduct in this matter, including document theft, spoliation, possible perjury, and obstruction of discovery, mandates a proportionately severe response by this Court.”
The district court then affirmed the magistrate’s recommendations, finding that “the only remedy that can adequately address that prejudice [suffered by defendant] is dismissal with prejudice.” The Court also ordered Plaintiff to pay the attorneys’ fees that Defendant incurred in filing its motions to compel and motion for sanctions.
This decision is a noteworthy development in False Claims Act jurisprudence. The potential sanction of dismissal with prejudice should make relators more cautious when it comes to their preservation and discovery obligations.
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).
On June 19, 2013, a district court sitting in the Eastern District of Virginia held in United States ex rel. Badr v. Triple Canopy, Inc., No. 1:11-cv-288, Dkt. #55 (GBL), that “[m]ere failure to comply with all contractual conditions does not necessarily render the billing for those services so deficient or inadequate that the invoice constitutes a false claim under the FCA. Nor does it constitute an incorrect description of services provided to constitute a false statement sufficient to impose FCA liability.” Id. at 1-2. In granting the motion to dismiss of defendant Triple Canopy, Inc. (“TCI”), the court also held that a Relator cannot use allegations of a fraudulent scheme at one location to infer a false claim at another.
TCI was awarded government contracts to provide security services to various military installations overseas, including military bases located in Iraq. Given the nature of the assignment, TCI was required to ensure compliance with U.S. Army standard weapons qualification requirements. The government, as Intervenor, alleged that 332 Ugandan TCI guards arrived for duty, and failed to complete basic skills required before even attempting to qualify on a qualification course. Further, TCI allegedly began to falsify scorecards that were placed in the personnel files of the guards in the event of an inspection. The Relator, a former TCI employee, reported the allegedly fraudulent conduct to TCI’s human resources director, vice president, and general counsel. Later, Relator was allegedly instructed to alter TCI’s scorecards to reflect passing scores for all the guards. Although TCI was not awarded a contract renewal, the government alleged TCI continued to perform other government contracts in Iraq, and the Ugandan unqualified guards were allegedly transferred to other installations in Iraq to perform similar services.
In dismissing the claim, U.S. District Judge Gerald Bruce Lee concluded that because the invoices simply identified the quantity of guards, the price for each, the period of service, and the amount for the services, the invoices, without more, “[did] not contain objectively false statements sufficient to render them false claims for purposes of FCA liability.” Id. at 12. The government sought to analogize under-qualified guards to defective products, but the court dispelled the analogy, noting that “defective goods . . . are materially different from a claim for defective services.” Id. at 15 (emphasis in original). There is still some “inherent value retained in a service that is provided by an unqualified employee compared to a complete inability to use a product that is rendered defective.” Id. (citing U.S. ex rel. Sanchez-Smith v. AHS Tulsa Reg. Med. Ctr., LLC, 754 F. Supp. 2d 1270, 1287 (N.D. Okla. 2010) (rejecting a worthless services theory based upon substandard medical care because some care was provided, even if ultimately below expectations).
The “worthless services” theory did not work here because the government failed to allege “that the TCI guards were entirely deficient so as to render their services worthless.” Id. The Ugandan guards provided a service, although perhaps not fully compliant. The court held that the services must be “entirely devoid of value, or the noncompliance must have caused an injury to the Government such that the guards effectively provided no service at all.” Id. (citing In re Genesis Health Care Ventures, Inc., 112 F. App’x 140, 143 (3d Cir. 2001) (“Case law in the area of ‘worthless services’ under the FCA addresses instances in which either services are literally not provided or the service is so substandard as to be tantamount to no service at all.”). While the failure to receive proper qualification may be a breach of contract action, the government never alleged that TCI presented the qualifications in support of a demand for payment.
Judge Lee also held that a Relator cannot use allegations of a fraudulent scheme at one location involving one contract to create an inference of a false claim at other locations, without personal knowledge, as it would fail Fed. R. Civ. P. 9(b)’s requirement of specificity. The court dismissed all the FCA counts, but granted the government leave to re-plead claims of “breach of contract” and “payment by mistake.”
On July 3, 2013, TCI moved to dismiss the remaining contractual claims pursuant to Fed. R. Civ. P. 12(b)(1), contending that the court lacked subject matter jurisdiction over such disputes pursuant to the Contract Disputes Act, 41 U.S.C. §§ 7101 et seq. See Triple Canopy, Inc., No. 1:11-cv-288 (GBL), Dkt. #57 (E.D. Va. July 3, 2013). A hearing on the motion to dismiss is scheduled for July 26.
— Andrew Soler, a summer associate, provided assistance in the preparation of this post.
In a groundbreaking decision announced last week, a federal court in Virginia held that the minimum statutory civil FCA penalties were unconstitutionally excessive in light of the facts before it, and refused to impose any penalties. This case is the first in which a federal court has determined that it does not have the authority to fashion an alternative penalty under the FCA where the statutory penalty is grossly disproportionate to the government’s loss or defendant’s gain arising from fraudulent conduct. Judge Anthony Trenga’s decision in U.S. ex rel. Bunk v. Birkard Globistics GMBH (E.D. Va. Feb. 14, 2012) should give pause to those pursuing claims under the FCA when they allege the number of “false claims.”
A jury this past summer found the Bunk defendants liable under the FCA for conspiring with subcontractors to fix prices in advance of a bid for a government contract and submitting a false Certificate of Independent Pricing. The Relator did not seek damages, apparently unable to obtain the necessary evidence from the government, but only penalties under the FCA based on the parties’ stipulation that the defendant had filed 9,136 invoices under the fraudulently obtained contract. While Relator proposed a $24 million civil penalty, under the FCA’s mandatory penalty provisions the court calculated the required penalty as no less than $50,248,000 ($5,500 x 9,136).
To determine whether the mandatory minimum penalty violated the Excessive Fines Clause of the Eighth Amendment, the court considered the harm – economic and non-economic – to the government. Based in part on evidence that the defendant’s charges to the government under the fraudulently obtained contract were substantially the same as charges under other contracts as to which there had been no fraud established, and not higher than what the government had paid other contractors in prior years, the court concluded that the Relator failed to establish that the defendant’s fraud caused any economic harm to the government. Significantly with respect to the lack of evidence of non-economic harm, the court relied on evidence that the government twice renewed the defendant’s contract, even after it had received the Relator’s allegations of fraud. Noting that this evidence “does not constitute ‘government knowledge’ sufficient to preclude or estop the government from pursuing claims against the Defendants,” the court did find it probative of the value received by the government. Thus, in light of the lack of evidence of harm to the government, the court deemed the mandatory minimum penalties in excess of $50 million unconstitutionally excessive.
While other courts have concluded that FCA penalties are constitutionally excessive in certain circumstances, what sets Judge Trenga’s decision in Bunk apart is his conclusion “that [the court] must simply refuse to enforce the mandated penalty . . . and not substitute its own fashioned penalty.” The government, with Relator having elected not to seek damages, is thus left with nothing on the claim at issue.
Interestingly, Judge Trenga went on to discuss potential alternative penalties in the event that the Fourth Circuit determines the lower courts do have discretion to fashion alternative penalties under the FCA. He first considered imposing only one penalty for the submission of the false certification. Second, he considered a penalty equal to treble the amount of defendant’s financial gain, totaling approximately $1.5 million. Finally, he considered an alternative amount sufficient to sanction defendant and deter future wrongdoing, and concluded $500,000 would be an alternative penalty. Judge Trenga’s opinion suggests that if ordered to select an alternative penalty, he would impose one $11,000 penalty under the first alternative methodology.
This opinion should be a strong warning to the government and relators’ counsel carefully to consider the calculation of claims and avoid seeking the imposition of penalties that significantly exceed any measure of harm to the government.