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.
New DFARS Clauses Raise Spectre of FCA Liability For Use of Overly Broad Confidentiality Agreements
On October 29, 2015, the Department of Defense (DOD) added two new clauses to the Defense Federal Acquisition Regulation Supplement (DFARS), which raise the potential for liability under the False Claims Act. The new clauses, DFARS 252.203-7996 and 252.203-7997, were added to comply with the Consolidated and Further Continuing Appropriations Act, 2015, Pub. L. 113-235, div. E, tit. VII, § 743 (2014), and subsequent appropriations acts, which prohibit the use of appropriated funds for federal government contracts with businesses that restrict employee whistleblowing to authorities.
District Court Grants Partial Summary Judgment In Favor of Government Contractor Based on Plain Language of Commercial Warranty
On September 4, 2015, the District Court for the District of Columbia granted partial summary judgment in favor of a government contractor, finding that the plain language of an applicable commercial warranty could not render claims for defective products false under the FCA because the warranty simply required the contractor to replace any products that did not live up to the warranty. U.S. ex rel. Westrick v. Second Chance Body Armor, Inc., et al., Nos. 04-280, 07-1144 (D.D.C. Sept. 4, 2015). A copy of the court’s decision can be found here. The district court rejected partial summary judgment motions filed by both the contractors and the government for claims that concerned a revised commercial warranty that expressly included a measurable quality guarantee, finding a material fact in dispute based on multiple reasonable interpretations of the revised warranty.
Fifth Circuit Passes On Opportunity To Join Seventh Circuit in Rejecting Implied False Certification Theory
Last month, the Seventh Circuit bucked the trend of several other circuits in expressly rejecting the theory of implied false certification under the FCA. See United States v. Sanford-Brown, Limited, No. 14-2506 (7th Cir. June 8, 2015) (opinion here). The Fifth Circuit recently had an opportunity to decide whether to follow the Seventh Circuit’s lead. But acknowledging that, “[f]or over a decade, this court has avoided deciding whether to recognize the implied certification theory,” the Fifth Circuit declined – again – to decide the issue. After concluding that the relator’s allegations would fail to satisfy Rule 9(b) even if the theory was valid, the court once again declined to decide whether the theory should be recognized. Thus, the opinion provides helpful guidance on the pleading standards applicable to implied certification claims in the Fifth Circuit – assuming the theory is viable in the first instance.
Sixth Circuit Rejects Government’s $664M FCA Judgment, Remands For Second Time
Posted by Scott Stein and Jessica Rothenberg
In the latest decision in litigation that spans 17 years and relates to conduct that occurred 32 years ago, the Sixth Circuit reversed a $664 million judgment in favor of the government against United Technologies Corp. and remanded the case, for a second time, for a recalculation of damages. A copy of the Sixth Circuit’s opinion in United States v. United Techs. Corp., No. 13-4057 (6th Cir. Apr. 6, 2015) can be accessed here.
In 1999, the United States filed a lawsuit against Pratt & Whitney (“P&W”), now owned by United Technologies, alleging that Pratt violated the False Claims Act by falsely certifying that it had corrected previously misstated projected costs in a 1983 bid to supply engines for the Air Force’s F-15 and F-16 fighter jets. The Air Force ultimately chose to divide its engine orders between P&W and another manufacturer, and each year, issued a “call for improvement” that requested more favorable terms than the prior year’s “best and final offer” from P&W and the other manufacturer. The Air Force certified each year that P&W’s prices were “fair and reasonable” based on the “market test between competitors.”
In 1998, the government filed an administrative action against P&W with the Armed Services Board of Contract Appeals alleging that P&W misrepresented that it had corrected problems in its initial bid and used its most accurate cost data to develop its best and final offer prices. However, the Board rejected the government’s claim, holding that P&W alleged misstatements did not cause any damages because the Air Force had relied on competitive forces, rather than the erroneous price and cost data, in awarding its contracts. Therefore, Board concluded, the prices that the Air Force paid for the engines were not inflated by the alleged fraud. The Federal Circuit affirmed the Board’s determination.
In 1999, the government filed a separate lawsuit in federal district court alleging violations of the FCA and for common law restitution. In 2008, the district court held P&W liable under the FCA, but found that the government had suffered no actual damages and awarded the government only $7 million in statutory penalties. The district court also determined that the government’s claims for restitution were barred by claim preclusion because they should have been litigated before the Board. See United States v. United Techs. Corp., No. 3:99-cv-093, 2008 WL 3007997 (S.D. Ohio Aug. 1, 2008). The government appealed, and in 2010, the Sixth Circuit affirmed liability, but found that the government’s restitution claims were not barred by claim preclusion and remanded the case back to the district court. See United States v. United Techs. Corp., 626 F.3d 313 (6th Cir. 2010). On remand, the district court held that the Board and Federal Circuit litigation did not resolve whether P&W misstatements caused the government damages and therefore rejected P&W’s issue preclusion defense. In addition to the $7 million originally awarded, the government was awarded $657 million in treble damages, restitution, and prejudgment interest. See United States v. United Techs. Corp., 950 F. Supp. 2d 949 (S.D. Ohio 2013).
On appeal from the 2013 judgment, the Sixth Circuit affirmed the district court’s holding that issue preclusion did not bar the government’s damages claim under the FCA and common law restitution. However, the Sixth Circuit held that the district court had, mistakenly, exclusively relied on the government’s damages estimate, which failed to take into account the role that competition between P&W and the other manufacturer played in determining reasonable and fair prices, and whether that competition mitigated the damages to the government. Citing the protracted litigation and the decades that had passed since the fraud, the court was “tempted” to end the case with the government receiving the $7 million in statutory penalties under the FCA. Further, the court stated that “the government had every opportunity to put on an expert to show whether affected its damages,” but it had “refused to do so.” However, the Sixth Circuit ultimately decided that the district court, which presided over the remand litigation, was in a better position to decided whether the government should have another chance to prove its damages after taking into account the role of competition. The Sixth Circuit reversed the lower court’s judgment and remanded the case for further proceedings.
DOJ Announces Nearly $6 Billion in Fraud Recoveries During 2014
Posted by Kristin Graham Koehler and Monica Groat
On November 20, Acting Associate Attorney General Stuart F. Delery and Acting Assistant Attorney General Joyce R. Branda announced that the Department of Justice recovered a record $5.69 billion in settlements and judgments from civil cases involving alleged fraud against the Government in fiscal year 2014. This figure represents the highest annual total recovery and an increase of nearly $2 billion over the Government’s recovery in fiscal year 2013.
Recoveries from the financial industry accounted for the most significant proportion of fraud-related recoveries, representing $3.1 billion of the total $5.69 billion. This amount was more than double the previous record for recoveries from banks and other financial institutions, which paid $1.4 billion in fiscal year 2012. Healthcare fraud represented the second largest area of recovery; DOJ recovered $2.3 billion from pharmaceutical and device manufacturers, hospitals, and other healthcare providers. Fiscal year 2014 was the fifth straight year during which the Government has recovered more than $2 billion in cases involving false claims against federal healthcare programs, including Medicare and Medicaid.
Of the $5.69 billion recovered this year, nearly $3 billion related to lawsuits filed under the FCA’s qui tam provisions, and relators recovered $435 million. The number of FCA qui tam suits filed in 2014 decreased slightly: 713 suits were filed in 2014, compared with 754 in 2013. These numbers indicate that both DOJ and private relators are continuing to bring FCA cases; although the volume of cases did not increase, recoveries by both the Government and relators increased. The announcement also confirms that DOJ is continuing to aggressively pursue fraud cases, with a continuing interest in healthcare fraud and an increasing focus on the financial industry.
Third Circuit Dismisses Qui Tam Claims For Lack of Intent Due to Ambiguity in a Government Contract
A. Brian Albritton at the False Claims Act and Qui Tam Law blog recently posted “Defendant’s Breach of Ambiguous Government Contract Prevents Court from Finding the Defendant Knowingly Submitted a False Claim for Payment.” In the post, he analyzes the recent Third Circuit opinion in U.S. Department of Transportation ex rel Arnold v. CMC Engineering, Inc., et al., __ Fed. Appx.__, 2014 WL 2442945 (3rd Cir. June 2, 2014). In that case, the court dismissed an FCA action after holding that the contract defendant allegedly violated was so ambiguous that any violation could not have been “knowing.” The holding in this case is consistent with those on which we have previously reported (here and here) in which courts have held that ambiguity in allegedly violated regulations precludes a finding of a “knowing” submission of a false claim.
DOJ Announces Increase In Qui Tam Suits Filed In 2013; $3.8 Billion In Fraud Recoveries
Posted by Ellyce Cooper and Brent Nichols
In December, the Department of Justice announced that the number of False Claims Act qui tam suits filed in 2013 grew significantly. 752 were filed in 2013 — over 100 more than the prior record established last year. These numbers indicate that both DOJ and private whistleblowers, whom the statute allows to file suit on behalf of the government, are bringing FCA cases with increasing frequency.
In 2013, the Department of Justice again recovered significant settlements and judgments from civil cases involving alleged fraud against the government. In its December announcement, DOJ stated that it recovered $3.8 billion in such cases in fiscal year 2013. This figure represents the second highest annual total ever, but is lower than the nearly $5 billion recovered in 2012.
Health care fraud accounted for the most significant proportion of recoveries, representing $2.6 billion of the total $3.8 billion. Of that $2.6 billion, about $1.6 billion resulted from alleged false claims submitted by drug and device companies to federal health insurance programs.
Procurement fraud (consisting predominantly of cases brought against defense contractors) represented the second largest area of recovery, accounting for $890 million, the highest ever annual recovery in that area.
DOJ’s announcement suggests that it is continuing to aggressively pursue False Claims Act and fraud cases.
Fourth Circuit Avoids Excessive Fines Clause By Allowing Relator To Select An Alternative FCA Penalty
As we previously reported, a federal court in Virginia last year held that the minimum statutory civil FCA penalties were unconstitutionally excessive in light of the facts before it, and refused to impose any penalties. U.S. ex rel. Bunk v. Birkard Globistics GMBH (E.D. Va. Feb. 14, 2012). On December 19, the Fourth Circuit reversed and remanded the district court’s decision to enter no penalties with an instruction to award the plaintiff $24 million – the amount relator Bunk previously had expressed a willingness to accept. United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., No. 12-1369, slip op. 30 (4th Cir. Dec. 19, 2013).
At trial, the jury found 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, but only penalties 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, the court calculated the mandatory minimum penalty as no less than $50,248,000 ($5,500 x 9,136). The court determined that this penalty violated the Excessive Fines Clause of the Eighth Amendment in light of the relator’s failure to establish that the defendant’s fraud caused any economic harm to the government. As such, the district court concluded “that [it] must simply refuse to enforce the mandated penalty . . . and not substitute its own fashioned penalty.”
The Fourth Circuit reversed, rejecting the district court’s determination that it was unable to craft an alternative penalty. The court held that the government – or a relator standing in the government’s shoes – has “unbounded” discretion to pursue a lesser judgment than that to which it may be entitled and, by exercising that discretion, may avoid the application of the Excessive Fines Clause. In reaching this conclusion, the court noted that the dilemma under the Excessive Fines Clause was the result of the court’s own precedent construing the FCA penalty provisions broadly to impose penalties on each false or fraudulent claim submitted, rather than narrowly to attach only to an underlying fraud. By concluding that a relator may simply select an alternative penalty without regard to the FCA’s requirements, the Fourth Circuit avoided the Constitutional dilemma created by the law’s draconian penalty provisions and the court’s precedent. The court then concluded – without analysis – that the alternative penalty proposed by the relator was not unconstitutionally excessive in light of the “gravity” of defendant’s misconduct and the “necessary and appropriate deterrent effect” served by the FCA’s penalties provision.
Fifth Circuit Dismisses Conclusory Allegations and Rejects Implied False Certification Theory
Posted by Gordon Todd and Jeff Beelaert
The Fifth Circuit recently had good news for government contractors when, in Steury v. Cardinal Health, Inc., No 12-20314 (5th Cir. Aug. 20, 2013) (per curiam), it rejected the contention that an alleged false certification of merchantability, without more, does not support an FCA claim unless payment was specifically conditioned on the certification. “Not every breach of a federal contract is an FCA problem,” the Court held, because the FCA “is not a general enforcement device for federal statutes, regulations, and contract.” Slip op. at 5 (quoting U.S. ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 268 (5th Cir. 2010) (“Steury I“).
The relator alleged the defendant had sold medical devices to the federal government despite being aware of a potential defect. Moreover, she contended that the defendant had “expressly warranted that the [devices] were merchantable,” that the contracts “required the [devices] be merchantable,” and merchantability was “a martial contractual requirement.” The District Court dismissed the Complaint for failure to satisfy Rule 9(b), and the Fifth Circuit affirmed.
The court held the relator had failed to “set forth the who, what, when, where, and how of the alleged fraud.” Because the complaint did not identify how the devices deviated from any required specification or contractual obligation, the court held that the pleadings were insufficient to support an “implied false certification” theory. The Fifth Circuit refused to recognize the “implied certification of an implied contract provision that is an implied prerequisite to payment.”
Moreover, the relator failed to show that in the absence of the merchantability provision the government would not have paid for the devices. The court had previously held that the government “may accept (and pay) for noncompliant commercial items.” Steury I, 625 F.3d at 270. In stark contrast to the relator’s allegations, this analysis confirms that the government’s payment is not conditioned on a warranty of merchantability. Even if the relator sought to rely on an “implied warranty of merchantability,” her argument fails because she would be asking the court to find a knowingly false claim from an implied certification of an implied contract provision—something the court refused to “reckon actionable.”
The Fifth Circuit did not address the relator’s “worthless goods” theory because her complaint similarly failed to plead it with the requisite particularity. She did not point to a single device that was sold to the government over a period of nine years that was ever found to be deficient or worthless.
In his concurring opinion, Judge Higginson urged the court to restore Congress’s statutory distinction between falisity and fraud and apply the “common-sense” understanding of those terms. Because the relator failed to allege that an invoice presented by defendant “contained, on its face, a factual assertion capable of confirmation or contradiction that was untrue when made,” the claim was not “false” under the FCA. Nor was the claim “fraudulent” under the FCA because the relator failed to allege that the defendant knew about the device’s defects but, intending to deceive, sold them anyway.
