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.
On March 26–28, 2012, the Supreme Court will hear oral argument on various challenges to the Affordable Care Act (ACA), the federal health reform legislation enacted in March 2010. Two laws comprise the ACA: the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act of 2010. While the vast bulk of the political debate surrounding the ACA involves the individual health insurance mandate and Medicaid expansion provisions, these are only two components of a law that the Eleventh Circuit Court of Appeals described in its underlying opinion as “contain[ing] hundreds of new laws about hundreds of different areas of health insurance and health care.” Florida v. DHHS, Nos. 11-11021 & 11-11067, Slip Op. at 22 (11th Cir. Aug. 12, 2011). In this light, one of the most significant issues before the Supreme Court is whether the remainder of the ACA’s provisions are severable from any provisions that may be deemed unconstitutional.
Of particular import to companies affected by the False Claims Act (FCA) and the Anti-Kickback Statute (AKS), among the ACA’s hundreds of provisions are amendments to the FCA and the AKS that expand the scope of liability and restrict the “public disclosure” defense under the FCA. For example, the ACA:
- Amends the AKS to provide that any claim submitted to a federal healthcare program for items or services “resulting from” a violation of the AKS constitutes a “false or fraudulent claim” under the FCA. PPACA § 6402(f)(1) (adding a new subsection (g) to 42 U.S.C. § 1320a-7b).
- Eliminates the need to prove specific intent and actual knowledge to establish an AKS violation. PPACA § 6402(f)(2) (adding a new subsection (h) to 42 U.S.C. § 1320a-7b).
- Limits the public disclosure bar by (a) restricting the scope of materials that qualify as public disclosure, (b) making it easier for relators to qualify as an “original source,” and (c) eliminating public disclosure as a subject-matter-jurisdictional bar and instead giving the Government veto power over any motion to dismiss based on public disclosure. PPACA § 10104(j)(2) (amending 31 U.S.C. § 3730(e)).
- Imposes an affirmative obligation on recipients of overpayments to report and return those overpayments or face liability for “reverse false claims.” PPACA § 6402(a) (adding 42 U.S.C. § 1320a-7k, including subsection (d) regarding overpayments).
- Establishes new civil monetary penalties of up to $50,000 per violation for conduct that is also actionable under the FCA. PPACA §§ 6402(d)(2) and 6408(a) (adding new CMPs under 42 U.S.C. § 1320a-7a(a)).
In the Eleventh Circuit’s 2-1 decision, the appeals court ruled that the ACA’s individual mandate is unconstitutional. Crucially, however, the court found this provision severable from the rest of the law. In so ruling, the Eleventh Circuit stated that “the lion’s share of the [ACA] has nothing to do with private insurance, much less the mandate that individuals buy insurance.” See Slip Op. at 192. Accordingly, under the Eleventh Circuit’s analysis, the rest of the ACA’s provisions could remain intact even if the individual mandate component falls.
The law’s challengers, including 26 states, do not agree; they have told the Supreme Court that the entire law must be struck if the individual mandate is held unconstitutional. Likewise, the federal government does not completely agree with the Eleventh Circuit’s view of severability, either. In its Supreme Court brief responding to the severability question, filed January 27, 2012, the federal government makes two arguments—neither of which asserts that the individual mandate provision is severable from all of the ACA’s other provisions. First, the federal government argues that the Supreme Court should not address the merits of the severability issue in this case, because the petitioners lack standing to challenge the validity of most of the law’s provisions. Should the Justices reach the merits of this issue, however, the federal government further argues that, if the individual mandate falls, so must two particular insurance reform provisions: (1) guaranteed issue, which requires insurers to provide coverage to all comers and prohibits discrimination based on preexisting medical conditions; and (2) community rating, which prohibits plans from charging higher premiums based on applicants’ experiences or characteristics, except for limited variances based on the applicant’s age, where the applicant resides, whether the applicant uses tobacco, and whether the policy covers individuals or families. Under the federal government’s position, only these two provisions—not the entire law—should be struck if the individual mandate is found unconstitutional.
To ensure that the arguments in favor of “full” severability get a full hearing, the Supreme Court appointed an attorney, who does not represent either of the parties to the case, to argue the position that the rest the ACA provisions (including guaranteed issue and community rating) can survive even if the individual mandate does not. (Another appointed attorney will address yet another question: whether the entire case is premature for judicial consideration under the Anti-Injunction Act (26 U.S.C. § 7421(a)).)
If the Supreme Court ultimately agrees with the Eleventh Circuit that the individual mandate is unconstitutional, but holds that the provision is not severable, the entire law would be struck down as unconstitutional. Such a ruling would “undo” the multitude of corollary provisions, which have received less public attention. While it also is possible that the Supreme Court will not reach the severability question in its decision later this year on the fate of the ACA, entities subject to the FCA—and, indeed, anyone affected by the ACA’s “hundreds of provisions”—should appreciate just how much is at stake in the pending decision beyond the provisions at focus in current media coverage.