In a case of first impression in the Ninth Circuit, the court held in United States ex rel. Hooper v. Lockheed Martin Corp., __ F.3d __, 2012 WL 3124970 (9th Cir. Aug. 2, 2012) that “false estimates, defined to include fraudulent underbidding in which the bid is not what the defendant actually intends to charge, can be a source of liability under the FCA, assuming that the other elements of an FCA claim are met.” (Id. at *9).
The defendant argued that an allegedly false estimate cannot form the basis of FCA liability, because it is an opinion or prediction that cannot be false within the meaning of the FCA. In reversing the district court’s grant of summary judgment, the Ninth Circuit reasoned that an opinion or estimate “carries with it an implied assertion, not only that the speaker knows no facts which would preclude such an opinion, but that he does know facts which justify it.” (Id. (citations and internal quotations omitted)).
In a passage of the opinion somewhat in tension with its holding – that a bid lower than “what the defendant actually intends to charge” can give rise to FCA liability – the court found the district court erred by requiring evidence of the defendant’s wrongful intent. (Id. at *9). In opposing summary judgment, the relator submitted testimony that the defendants’ employees were instructed to lower their cost estimates without regard to actual costs, and that the defendant “was dishonest in the productivity rates that it used to determine the cost.” (Id.). No evidence appears to have been submitted regarding what the defendant intended to charge. Nevertheless, citing the FCA’s definition of “knowing” to include deliberate ignorance and reckless disregard, the court found this evidence sufficient to prevent summary judgment and require a trial on the merits. (Id.).
In support of its ruling, the Ninth Circuit relied on the Supreme Court’s decision in United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943), which the court interpreted as supporting a “‘fraud-in-the-inducement’ theory of FCA liability.” (2012 WL 3124970 at *8). Thus, this decision will likely be cited as support for all types of “fraud-in-the-inducement” theories of FCA liability, including fraudulent underbidding. Precisely when an ultimately inaccurate cost estimate becomes “false or fraudulent,” however, is not clearly answered by Hooper and will no doubt be the subject of further litigation.
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.
Earlier this year, we posted regarding government fraud counterclaims in Court of Federal Claims (COFC) cases (see link to that post, here, and a link to our West’s Briefing Paper on the subject, here). Soon thereafter, the COFC issued a decision once again addressing such counterclaims, see Railway Logistics International v. United States, — Fed. Cl. –, 2012 WL 171895 (Jan. 17, 2012). Railway Logistics offers contractors a powerful lesson in how not to prepare and litigate a claim submitted to the government pursuant to the Contract Disputes Act (CDA), 41 U.S.C. §§ 7101-7109.
In that case, the government awarded two contracts to Railway Logistics International (RLI) to provide materials for the rehabilitation of the Iraqi Republic Railway. After repeatedly missing contractual obligations and deadlines, the government terminated the contracts for convenience. In response to the termination, RLI submitted a certified claim for equitable adjustments and costs totaling nearly $6.5 million, approximately $2.4 million of which was based upon alleged subcontractor and vendor invoices, with the remainder due to the government’s alleged delays and changes. The sole support for RLI’s certified claim was a cost spreadsheet RLI had generated.
The government not only disclaimed responsibility for any of RLI’s damages, but also filed counterclaims against RLI, pursuant to the CDA’s fraud provision, 41 U.S.C. § 7103(c)(2), the False Claims Act, and the Special Plea in Fraud (also known as Forfeiture of Fraudulent Claims Act), 28 U.S.C.§ 2514. The government alleged that RLI knowingly submitted its CDA claim containing overstatements of costs. RLI, in response, contended that “at most, perhaps it could be charged with poor record keeping.”
The court flatly rejected RLI’s story, explaining that although RLI’s revised damages claim “totaled less than $1 million[,]” RLI presented a “certified claim to the contracting officer for over $6 million, and swore that the amount of the claim was what” the government owed RLI. In ruling for the government on all of its counterclaims, the court noted that RLI had “retreated” from the spreadsheet RLI allegedly prepared to support its claim, withdrawing, among other damages items, a claim for $3 million in lost business. Indeed, RLI seemingly was all but compelled to do so because “the spreadsheet was replete with exaggerated or fabricated figures” and costs for which “[p]laintiff provided no support.” In light of the certified claim, the court similarly rejected RLI’s proffered defense that the spreadsheet was intended to be simply “a ‘rough estimate'” of damages. Finally, the court observed that plaintiff “had no support” for many of the factual allegations and legal theories upon which plaintiff’s complaint was based.
Aside from actually possessing evidence to support a CDA claim, the lesson from this case is clear: contractors should scrub their CDA claims for factually (and legally) unsupportable items before submitting them to the contracting officer, and certainly prior to the filing of a complaint in the COFC to appeal a contracting officer’s final decision. Merely declining to pursue certain claim items in litigation may raise red flags, so ideally contractors should consult with counsel during the claim preparation process. The fact is that the government appears prepared to pursue fraud claims based upon abandoned CDA claim items, on the theory that such items likely are baseless, having been included solely for the purposes of negotiation – a particularly dangerous practice in light of Daewoo Eng’g & Constr. Co. v. United States, 557 F.3d 1332 (Fed. Cir. 2009).
Finally, despite the differences between the government’s burden of proof with respect to the Special Plea in Fraud (clear and convincing evidence), on the one hand, and the CDA’s fraud provision and the FCA (preponderance of evidence), on the other, we noted in the aforementioned Briefing Paper that “the Federal Circuit clearly has held that where the Government demonstrates a violation of the CDA’s fraud provision, the Government a fortiori, meets its burden under the FCA.” When the Government’s Best Defense Is a Good Offense: Litigating Fraud and Other Counterclaim Cases Before the U.S. Court of Federal Claims, Briefing Papers No. 11-12 (November 2011), at 9 (concluding that “the Federal Circuit implicitly has held that evidence sufficient to prove a CDA violation also is sufficient to sustain a forfeiture under the Special Plea in Fraud”). The COFC, in Railway Logistics, appears to have continued that trend. While explicitly distinguishing between the applicable burdens of proof, the court held that RLI’s “liability is clear by any standard” where the CDA “claim [was] based upon overestimations of costs” and where “[s]ubstantial parts of the claim cannot be supported.” In that regard, the court observed that the “[g]overnment limited its counterclaims to amounts that are directly contrary to invoices in evidence and costs that are obviously and grossly inflated.” The court thus ordered RLI’s claim forfeited – that is, “[a]ny amount of RLI’s claim that might have been valid” – based upon “[s]tatements contained in the spreadsheet alone[,]” which the court held to constitute clear and convincing evidence of fraud in violation of 28 U.S.C. § 2514.
Posted by Jonathan F. Cohn and Brian P. Morrissey
Earlier this month, the U.S. Department of Agriculture (USDA) withdrew a proposed rule that would have imposed liability under the False Claims Act on USDA contractors for failure to report violations or alleged violations of federal labor laws. 77 Fed. Reg. 5714 (Feb. 6, 2012); 77 Fed. Reg. 5750 (Feb. 6, 2012). It appears that the rule, if adopted, would have been the first federal regulation to assert FCA liability on this ground. The USDA withdrew the Rule in response to criticism from industry groups, although it remains uncertain whether the agency will reissue the same or a similar rule in the future.
The rule, issued in December 2011, would have required USDA contractors to certify that they were “in compliance with all applicable labor laws” and that, to the best of their knowledge, “all of [their] subcontractors of any tier, and suppliers” were similarly in compliance. See 76 Fed. Reg. 74722 (Dec. 5, 2011); 76 Fed. Reg. 74755. Separately, the Rule would have required contractors to report violations or alleged violations of labor laws to their contracting officer. (The text of the Rule was ambiguous on the question whether this reporting obligation pertained only to violations by contractors themselves, or whether it required contractors to report conduct by their subcontractors and suppliers.) The Rule further stated that contractors’ certifications, if false, could be penalized under the FCA. 76 Fed. Reg. 74722; 76 Fed. Reg. 74755. The Rule was ground-breaking in this respect—it appears to be the first federal regulation that would have called for FCA liability for federal contractors who fail to report violations or alleged violations of labor laws.
This novel application of the FCA underscores the broad reach of the Act, and highlights yet another sector of the economy that could face increased exposure to FCA suits in the future. Most federal courts agree that a claim for payment is cognizable under the Act if it falsely certifies the submitter’s compliance with a condition of Government payment imposed by statute, regulation, or contract provision. See, e.g., United States ex rel. Conner v. Salina Reg’l Health Ctr., Inc., 543 F.3d 1211, 1217 (10th Cir. 2008). In applying this standard, courts have wrestled with the question whether, and to what extent, a claim submitted by a contractor should be interpreted to certify that other parties in the supply chain have also complied with applicable federal rules. The question typically arises in pharmaceutical cases, where a healthcare provider submits a claim based on the use of a product manufactured and supplied by other entities, all of whom might have violated a federal law—such as the Food, Drug, and Cosmetics Act (“FDCA”), 21 U.S.C. § 301, et seq., and the Federal Anti-Kickback Statute (“AKS”), 42 U.S.C. § 1320a-7b(b)(2)—at some point in the course of producing or marketing the drug for which the provider seeks reimbursement. The answer typically depends on the facts—e.g., the precise certification language on the contractor’s claim form and/or the nature of the law that was violated—and has engendered a great deal of litigation. Expanding this theory of liability to violations of labor laws and to contractors in the agricultural industry could represent a new frontier in FCA exposure.
Multiple industry groups objected to the USDA’s rule, including the National Chicken Counsel, the National Turkey Federation, and the U.S. Poultry and Egg Association. See here. Their objections were numerous, but high on the list was their concern that the Rule would expose contractors to FCA liability for failing to report labor law violations already known to relevant federal law enforcement agencies, and for failing to report any allegation of labor law violations, even a patently frivolous one. The industry groups also expressed concern that the costs of their compliance with this Rule could materially increase the costs of poultry and other agricultural products provided to schools, hospitals, and the military through federal procurement programs.
The USDA withdrew the rule in response to these concerns, but this action may not end the debate. The USDA issued this proposed rule on December 1, 2011 through a Direct Final Rule, 76 Fed. Reg. 74722, and a substantively identical Proposed Rule, 76 Fed. Reg. 74755. The agency stated that the Direct Final Rule would bypass standard notice-and-comment procedures and take immediate effect on February 29, 2012 if no adverse comments were received. If adverse comments were received, however, the agency would withdraw the Direct Final Rule and proceed with standard notice-and-comment procedures on the Proposed Rule.
The USDA withdrew the Direct Final Rule on February 6, 2012 in response to the adverse comments noted above. It also withdrew the Proposed Rule, without explanation. It thus remains uncertain whether USDA plans to re-issue the same or a similar rule at a later time. But the possibility that the agency may do so warrants continued monitoring, especially for those interested in this potential expansion of the FCA.