Welcome to Original Source: The Sidley Austin False Claims Act Blog

The False Claims Act (FCA) has long been a key enforcement tool for the federal government in matters involving government contracts or other expenditures of government funds. FCA enforcement has traditionally focused primarily on two industries receiving a substantial amount of government funds: healthcare and defense and other government contractors. Recently, however, FCA enforcement has expanded to other industries, including financial services. Through the False Claims Act Blog, lawyers in Sidley’s White Collar, Healthcare, FDA, Government Contracting, Financial Services, Appellate, and other practices will provide timely updates on new and interesting developments relating to FCA enforcement and litigation.

Litigating Fraud And Other Counterclaim Cases Before the U.S. Court of Federal Claims

“When you strike at a King, you must kill him.”

           — Ralph Waldo Emerson

FCA cases are not limited to qui tam actions and federal district courts. Some of the leading procurement fraud jurisprudence arises from cases decided by the United States Court of Federal Claims (COFC) and its appellate court, the Court of Appeals for the Federal Circuit. See, e.g., Daewoo Eng’g & Constr. Co. v. United States, 557 F.3d 1332 (Fed. Cir. 2009); Commercial Contractors, Inc. v. United States, 154 F.3d 1357 (Fed. Cir. 1998). The COFC possesses exclusive jurisdiction over claims in excess of $10,000 “founded . . . upon any express or implied contract with the United States.” 28 U.S.C. §§ 1346, 1491(a)(1). In such a case, however, the government may pursue monetary counterclaims against a plaintiff contractor based upon just about any cause of action, including fraud-related claims, such as the FCA, 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). The COFC has jurisdiction over CDA cases pursuant to 28 U.S.C. § 1491(a)(2).

Together, the aforementioned fraud remedies are a powerful weapon in the arsenal of the Department of Justice in defending against contractor claims. In that regard – and consistent with Emerson’s aphorism and the old proverb that when dancing with a bear, you don’t decide when to stop – the government’s assertion of fraud counterclaims may radically alter the settlement position of both parties, if not entirely eliminate any motivation on the part of the government to settle a case. For that reason, contractors and their counsel seeking to sue the government in the COFC must be aware not only of the most salient substantive and procedural issues surrounding fraud counterclaims, but also of the government’s settlement calculus, generally, and in counterclaim cases.

A recently published Briefing Paper authored by Sidley Austin attorney Matthew Solomson – entitled When the Government’s Best Defense is A Good Offense: Litigating Fraud And Other Counterclaim Cases Before the U.S. Court of Federal Claims – addresses basic counterclaim issues with which plaintiffs in the COFC need to be familiar, including, but not limited to: counterclaim initiation and pleading requirements; discovery issues; significant substantive legal issues involving the FCA, the CDA’s fraud provision, and the special plea in fraud; scienter issues; parallel proceeding considerations; and settlement negotiations. The Briefing Paper may be accessed here.

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Relator Attempting to Avoid The Scope of A Release Pleads Himself Out of Court

Posted by Brad Robertson and Scott Stein

A recent decision explains how one relator, in an effort to plead around a release of FCA claims in favor of his former employer, managed to plead himself right out of court. U.S. ex rel. McNulty v. Reddy Ice Holdings, Inc., No. 08-cv-12728 (E.D. Mich.), December 7, 2011 Slip Op. The relator alleged that his former employer, Arctic Glacier, and two other manufacturers of packaged ice, overcharged the government. These same companies are also currently defending a series of antitrust lawsuits alleging that they conspired to allocate markets. The increased prices resulting from the alleged market allocation form the basis of the relator’s FCA claims in this action.

The plaintiff alleged that he discovered the market allocation conspiracy while employed with Arctic Glacier, and that he was terminated after refusing to participate in the conspiracy. As part of his severance package, he signed a broad release waiving any and all claims against the company for the time period prior to the release.

The defendants moved to dismiss on public disclosure/original source grounds and for failure to plead with sufficient particularity. The relator filed a cross-motion to dismiss Arctic Glacier’s counterclaim that he breached his release agreement. In an attempt to plead around the scope of release, the relator alleged that he learned that the alleged market allocation scheme resulted in overcharges to the United States government from a discussion with a former co-worker only after his termination from Arctic Glacier and after signing the release. Accordingly, he contended that his FCA claims were outside the scope of the release. Ruling on the defendants’ motion to dismiss, the court found the allegations of the discussion with his former co-worker particularly crucial to its 12(b)(6) analysis, as “the only allegations that relate in any way to the FCA claim itself” as opposed to the market allocation conspiracy. The court dismissed the complaint, finding that the allegations of market allocation had been publicly disclosed through the antitrust lawsuits, and that the relator was not an original source of the FCA allegations, as he “was no longer employed by Arctic Glacier at the time and could not possibly have ‘observed’ or ‘learned’ this information firsthand.”

Adding insult to the relator’s injury, the court then proceeded to declare the release that the relator had been attempting to plead around unenforceable, dismissing Arctic Glacier’s counterclaim. Without evidence that the government knew of the claims prior to the execution of the release, the court held, public policy concerns barred enforcement of the agreement as to the FCA claims.

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District Court Dismisses False Certification Claim For Failure to Adequately Plead “Condition of Payment”

By Scott Stein and Erik Ives

In the first in-depth application of the Third Circuit’s decision in United States ex rel. Wilkins v. United Health Group, Inc., No. 10-2747, 2011 WL 2573390 (3d Cir. June 30, 2011)adopting the implied certification theory of liability, the United States District Court for the District of New Jersey dismissed at the pleading stage a relator’s claims under the federal False Claims Act (FCA) for failure adequately to plead that the defendant had violated a condition of payment. See Foglia v. Renal Ventures Management, LLC, No. 09-1552, Slip Op. (D.N.J. Nov. 23, 2011).

The Relator alleged that the Defendant (a dialysis care services company) failed to comply with New Jersey regulations concerning quality of patient care and facility staffing, and Center for Disease Control (CDC) standards concerning reuse of vials of the drug Zemplar. The Relator contended that these violations rendered each claim for payment of the drug legally false under a theory of express and/or implied false certification. The United States declined to intervene in the matter, and after the case was unsealed the defendant filed a motion for partial judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c).

The Court began its analysis by describing the false certification theory, as recently outlined by the Third Circuit in United States ex rel. Wilkins v. United Health Group, Inc., No. 10-2747, 2011 WL 2573390 (3d Cir. June 30, 2011). In doing so, the Court focused on the Third Circuit’s holding that:

‘[T]o plead a claim upon which relief could be granted under a false certification theory, either express or implied, a plaintiff must show that compliance with the regulation which the defendant allegedly violated was a condition of payment from the Government.”

<em&ggt;Foglia, Slip Op. at 24-25 (quoting Wilkins, 2011 WL 2573390 at *11). Applying this condition of payment requirement to Relator’s pleadings under Fed. R. Civ. P. 8(a)(2) (requiring a “short and plain statement” of the claim entitling pleader to relief) and Fed. R. Civ. P. 9(b) (establishing heightened pleading requirements for claims implicating fraud), the Court held that Relator’s “merely conclusory” assertion that compliance with the federal and state regulations in question was a precondition of payment was legally insufficient. The Court explained that Relator’s failure to “cite any rule, regulation, contract, or other facts to demonstrate” this contention required dismissal of Relator’s claim on the pleadings. Foglia, Slip Op. at 25-29.

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Recent DOD Regulations Increase FCA Liability Risk

The Department of Defense (DoD) recently issued a final regulation, requiring prospective government contractors to represent, as part of their offers, that certain former DOD officials employed by the offeror are in compliance with the post-employment restrictions contained in 18 § U.S.C. 207, 41 U.S.C. §§ 2101–07, 5 CFR parts 2637 and 2641, as well as FAR § 3.104–2. See Defense Federal Acquisition Regulation Supplement: Representation Relating to Compensation of Former DoD Officials (DFARS Case 2010–D020), Final Rule, 76 Fed. Reg. 71,826 (Nov. 18, 2011). Those statutes and regulations are designed to combat the so-called “revolving door” problem of contractors hiring former government employees in order to do business with their former agencies.

Although the new requirement does not change the underlying post-employment restrictions, the new required “representation” opens contractors to greater penalties should they fail to comply. Of course, the point is that should a contractor’s representation prove to be false, the contractor is looking at a possible False Claims Act violation, assuming the requisite scienter is also present. U.S. ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 376 (4th Cir. 2008) (quoting Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 788 (4th Cir. 1999), for the proposition that “the term ‘false or fraudulent claim’ includes those instances ‘when the contract or extension of government benefit was obtained originally through false statements or fraudulent conduct'”); United States ex rel. Willard v. Humana Health Plan of Texas, Inc., 336 F.3d 375, 384 (5th Cir. 2003) (explaining that FCA liability may be imposed “when the contract under which payment is made was procured by fraud”).

DOD, on the other hand, specifically indicated that it “elected to employ a representation rather than a certification.” 76 Fed. Reg. 71826. In that regard, one comment that DOD received argued that the Clinger-Cohen Act prohibits the creation of contractor certifications that are not required by law. In response, DOD acknowledged that “[t]he Clinger/Cohen Act prohibited the creation of contractor certifications that are not required by law,” but asserted that “[t]he FAR and DFARS regularly employ the distinction between a representation and a certification, and representations have regularly been deemed not subject to the Clinger/Cohen Act ban.” Id. at 71828. Indeed, DOD went so far as to say that the new rule does not require the creation of new compliance systems and additional costs should not be incurred.

There are a number of problems with DOD’s explanations.

First, section 4301(b)(1) of the Clinger-Cohen Act of 1996, P.L. 104-106, amended 41 USC § 425 to restrict the inclusion of nonstatutory certification requirements in the FAR. Federal Acquisition Circular 97-11 explained that this statutory provision “apparently” responded to an industry perception that a “certification” requires a high level of attention within the company, may entail personal accountability of the signing official, and is more likely to be subject to criminal prosecution. 64 Fed. Reg. 10530, 10531 (Mar. 4, 1999). Indeed, prior to the enactment of Public Law 104-106, there were over 100 certifications required by law. See 40 No. 14 Gov’t Contractor ¶ 172. Some of the certifications that were specifically eliminated by the Act include the certification of procurement integrity (§ 4304) and the certification regarding a drug-free workplace (§ 4301(a)). Id.

Contractors, however, may well argue that the representation is, in effect, an invalid certification. There do not appear to be any cases addressing when a representation is really nothing more than a prohibited certification, although the GAO has held, in a bid protest decision, that “[a] certification is ‘the formal assertion in writing of some fact.'” Sea-Land Service, Inc., B- 278404 (February 09, 1998). In that regard, the new representation is made pursuant “to the best of its [i.e., the contractor’s] knowledge or belief.” 76 Fed. Feg. 71827. One comment complained about the vagueness of that phrase. In response, DOD asserted that the meaning of the phrase “is a recognized legal term of art,” but the example DOD cited for that assertion is, ironically, the certification required by the Truth in Negotiations Act. 10 U.S.C. § 2306a(a)(2). And, similar language is found in the Contract Disputes Act’s certification requirement. 41 U.S.C. § 7103(b).

Second, DOD does not even attempt to explain what the practical distinction is between a representation and a certification, which is particularly troubling given DOD’s assertion that “[b]y the terms of the representation, an offeror is prohibited from submitting an offer if it cannot make the representation.” 76 Fed. Feg. 71829 (emphasis added). That statement, of course, is an attempt to use the representation as a hook for False Claim Act liability.

In sum, the entire point of the new regulation is to require offerors to verify their employees’ compliance with existing laws and regulations in order to deter non-compliance. The DOD cannot have it both ways. Either the new the new rule is designed to force contractors to be extra careful regarding how they employ and monitor the employment of former DOD officials, or the rule imposes no particular additional duties or costs – but those possibilities are mutually exclusive.

The bottom line is that a representation employing standard certification language is a distinction without a difference for the purposes of the FCA and, notwithstanding any DOD disclaimers to the contrary, contractors should not be lulled into a false sense of security by the “representation” label.

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DOJ Announces Record FCA Recoveries in 2011

On December 19, the Department of Justice announced that during the fiscal year ended September 30, 2011, it obtained over $3 billion in settlements and judgments under the False Claims Act. A few items of note:

  • Over 90% of the amount recovered resulted from whistleblower suits. According to DOJ, a record 638 qui tam suits were filed in FY2011.
  • 80% of the total recoveries involved alleged healthcare fraud, with the bulk ($2.2 billion) directed toward the pharmaceutical industry.
  • DOJ obtained $358 million from “non-war related procurement and consumer-related financial fraud” cases, a category that includes grant, housing and mortgage fraud that emerged in the wake of the financial crisis.
  • In addition to FCA recoveries, DOJ secured $1.3 billion in criminal fines, forfeitures, restitution, and disgorgement under the federal Food, Drug and Cosmetic Act (FDCA).
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Tennessee Prosecutors Ramping Up FCA Enforcement

A December 3 article in the Daily News Journal (Murfreesboro, TN) reporting on the recent indictment of the owners of an ambulance company for Medicare fraud discusses the increasing focus on healthcare fraud cases by the U.S. Attorney’s Office in the Middle District of Tennessee. According to the article, Jerry Martin, the current U.S. Attorney, said in a recent speech that his office is “absolutely looking for [FCA} business,” and recently has doubled the number of prosecutors working on FCA cases. While the U.S. Attorney’s Office for the Middle District of Tennessee is not as well-known as its counterparts in other locales (such as Boston and Philadelphia) for its FCA work, it has announced a number of healthcare FCA verdicts or settlements in 2011 relating to medical devices, diagnostic testing, and nursing homes.

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DOJ Intervenes in FCA Suit Against Hospice Company

Posted by Scott Stein and Allison Reimann

On December 6, 2011, the Department of Justice intervened in an FCA suit against AseraCare Hospice, a hospice provider with facilities in nineteen states. The lawsuit, filed in 2009 by two former AseraCare employees, alleges that AseraCare knowingly filed false claims to Medicare for hospice care for patients who were not terminally ill. The DOJ’s complaint alleges that AseraCare, by pressuring employees to reach aggressive Medicare targets, admitted and retained individuals who were ineligible for Medicare hospice benefits—even after being alerted to problems by an internal auditor.

The case is United States ex rel. Richardson v. Golden Gate Ancillary LLC d/b/a AseraCare Hospice, No. 09-CV-00627, and is pending before Judge Abdul Kallon in the Northern District of Alabama. As reported by Bloomberg News, the DOJ’s complaint in intervention is part of a wider federal crackdown of suspected fraud by hospice providers.

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