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.

D.C. Circuit Decision May Throw Wrench Into <i>Qui Tam</i> Settlement Efforts

We recently posted here regarding a Tenth Circuit decision affirming the government’s unilateral dismissal of a qui tam complaint – before it was served on the defendant – over the objection of the relators. In that case, the Tenth Circuit noted a circuit split regarding the standards governing dismissal pursuant to 31 U.S.C. § 3730(c)(2)(A), with the D.C. Circuit holding that the government has a virtually unfettered right to dismiss a case pursuant to that statutory provision. On April 20, 2012, the D.C. Circuit issued another decision on the subject, Océ N.V. v. Schweizer, — F.3d –, 2012 WL 1372219 (D.C. Cir. April 20, 2012), this time holding that the court’s expansive view of the government’s power pursuant to § 3730(c)(2)(A) does not extend to § 3730(c)(2)(B), which requires a district court to determine “after a hearing, [whether] the proposed settlement is fair, adequate, and reasonable under all the circumstances.”

In Océ, relator Schweizer sued her former employer for various FCA violations related to GSA contract provisions and regulations governing product pricing and country-of-origin requirements. She also sued Océ based upon the FCA’s retaliation provisions, § 3730(h). The government moved to dismiss the qui tam claims based upon a settlement agreement the government reached with Océ. The district court granted the motion over the relator’s objection.

On appeal, the relator argued that the government may not invoke § 3730(c)(2)(A) because the government never intervened in the case. The D.C. Circuit rejected that argument because the government’s intervention is necessary only if it wishes to proceed with the action. Here, however, “the government did not seek to proceed with the qui tam portion of the case; it sought to end it.” Nevertheless, the court held that “[t]he settlement agreement here falls squarely within § 3730(c)(2)(B)” because that provision covers dismissals arising from a settlement, whereas § 3730(c)(2)(A) covers unilateral dismissals. The court thus rejected the government’s position that because it may unilaterally dismiss a complaint pursuant to § 3730(c)(2)(A) – i.e., absent a hearing and judicial approval – the government may similarly dismiss a qui tam complaint without judicial approval of the settlement upon which the dismissal is based. The D.C. Circuit explained that “[t]hat the language of § 3730(c)(2)(B) leaves no space for [the government’s] interpretation” and that “allowing dismissal without judicial review of the settlement would render § 3730(c)(2)(B) a nullity and thus contravene” the canon of statutory construction disfavoring any interpretation which renders a provision meaningless or superfluous.

The D.C. Circuit also rejected Océ’s argument that § 3730(c)(2)(B) violated the separation of powers and is therefore unconstitutional, and also reversed the district court’s grant of summary judgment to Océ on the relator’s retaliation claims.

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New York Files False Claims Suit Against Sprint Alleging Tax Evasion

Posted by Matthew D. Krueger and Gordon D. Todd

Last Thursday, New York intervened into a qui tam suit against Sprint under the State’s False Claims Act alleging underpayment of sales taxes. This marks the first such case since New York amended its False Claims Act specifically to allow whistleblowers to file state tax-fraud cases.

The complaint alleges that Sprint knowingly failed to collect and pay $100 million of sales taxes over the past seven years. According to the complaint, in 2005, Sprint began attributing a portion of subscribers’ monthly charges to interstate calls and did not pay New York sales taxes on that portion. The lawsuit also alleges that Sprint concealed its practice from state tax authorities. Under New York’s law, if liable, Sprint would have to pay three times the underpaid taxes—$300 million—plus penalties. The case will be closely watched as it tests the often-murky boundary between tax-management strategies that companies may lawfully pursue and false claims that give rise to hefty liability.

In contrast to New York’s law, the federal False Claims Act does not reach tax fraud. A provision of the Tax Code does, however, reward whistleblowers with 15 to 30 percent of proceeds that they lead the IRS to collect. 26 U.S.C. § 7623.

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Prosecutors Dust off Savings & Loan Crisis Era Statute to Address Subprime Lending

Posted by Meghan Delaney Berroya and Gordon D. Todd

The Obama Administration’s subprime lending task force, as well as U.S. Attorney’s Offices, are turning to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) (12 U.S.C. § 1833a) as a complement to the False Claims Act to prosecute claims arising out of the 2007-2009 financial crisis. Congress enacted FIRREA in 1989 in response to the Savings and Loan crisis, but until recently the statute has been used only sparingly. In the past year prosecutors have begun adding FIRREA allegations to FCA cases during settlement. In addition, the twenty five billion dollar settlement resolving FCA claims against a number of banks in connection with the servicing of mortgages and processing of foreclosures included FIRREA allegations.

FIRREA’s ten year statute of limitations period and the possibility of imposing civil penalties of up to one million dollars per violation and five million dollars for continuing violations make it an attractive tool for prosecutors. FIRREA may be able to reach a wide range of fraud offenses, including mail and wire fraud, bribery and embezzlement, and requires only that the government establish the right to recovery by a preponderance of the evidence. Facing challenges in bringing criminal charges associated with the subprime mortgage crisis, prosecutors view FIRREA as a potentially useful tool.

The Defense bar is pushing back. For instance, this past November, the Southern District of New York filed a civil mortgage fraud lawsuit against Allied Home Mortgage seeking penalties under the False Claims Act and FIRREA. At the end of March, Allquest Home Mortgage Corporation (formerly known as Allied Home Mortgage Corporation) and Americus Mortgage Corporation moved to dismiss the FIRREA claims on the basis that: (1) one of the provisions of the statute plead by the government, 18 U.S.C. §1006, applies only to individuals; (2) the government failed to allege an intent to defraud, and ; (3) the statute does not prohibit false or fraudulent statements to the FHA prior to July 30, 2008. View the motions to dismiss here and here. As additional defendants are forced to respond to FIRREA actions, the scrutiny it receives by the defense bar will undoubtedly increase.

At least one aspect of FIRREA has already had had a tour through the federal courts. In United States v. Winstar Corporation, 518 U.S. 839 (1996), the Supreme Court held that the United States breached contracts with defendant financial institutions when, pursuant to FIRREA, the government stripped thrifts of the ability to book “regulatory goodwill” as an asset.

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Tenth Circuit Affirms Dismissal of Qui Tam Over Relator’s Objection

In an unpublished opinion, a panel of the Tenth Circuit has affirmed the dismissal of a qui tam before it was served on the defendant, over the objection of the relators. United States ex rel. Wickliffe v. EMC Corp., Case No. 09-4082 and 10-4174 (Order and Judgment, April 4, 2012). Relators’ complaint alleged that EMC Corporation knowingly sold defective computers to government agencies and fraudulently concealed information regarding the defect. Before the case was unsealed, the government moved to dismiss the complaint on the basis of a prior settlement with EMC. The district court dismissed the complaint pursuant to 31 U.S.C. 3730(c)(2)(A), which permits the government to dismiss a relator’s suit “notwithstanding the objections” of the relator if the relator is given notice and opportunity for a hearing. Alternatively, the district court held that the complaint was barred by the first-to-file provision, 31 U.S.C. 3730(b)(5).

On appeal, relators challenged the first-to-file dismissal on the grounds that the previously-filed complaint did not satisfy Rule 9(b)’s particularity requirement, and therefore could not act to operate subsequent complaints. The Tenth Circuit, noting that there is a circuit split on the issue of whether “first-filed” complaints must satisfy Rule 9(b), declined to take a firm position on the issue because it concluded that the case could be resolved on other grounds. However, the Panel “admit[ted] to being uneasy” with the position that Rule 9(b) applies, as that “would create a strange judicial dynamic, potentially requiring one district court to determine the sufficiency of a complaint filed in another district court.”

With respect to the dismissal under 3730(c)(2)(A), the Tenth Circuit noted that there also is a circuit split on the level of scrutiny that should be applied when the government moves to dismiss a qui tam suit, with the DC Circuit providing the government a virtually unfettered right to dismiss the action, while the Ninth Circuit requires that the government offer reasons for the dismissal that are rationally related to a legitimate government interest. The Tenth Circuit has adopted the latter, more stringent standard in cases in which the defendant has been served, but the panel declined to decide which test should apply when the government seeks dismissal before the defendant has been served because it found dismissal appropriate under either test, given that the government had already settled with the defendant.

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Fourth Circuit Vacates and Remands Jury Verdict on Stark Violations in FCA Case

Posted by Matthew Solomson and Donielle McCutcheon

The Federal Physician Self-Referral Law, commonly referred to as the Stark Law, rarely forms the basis of a False Claims Act (“FCA”) action, and FCA actions almost never go to trial. Last week, however, the Fourth Circuit reviewed such a case when the court vacated and remanded a district court judgment, predicated on alleged Stark Law violations, in favor of the government. The Fourth Circuit held that the judgment violated the defendant’s Seventh Amendment right to a jury trial. U.S. ex rel. Drakeford v. Tuomey Healthcare System, Inc., No. 10-1819, 2012 U.S. App. LEXIS 6444, at *3 (4th Cir. Mar. 30, 2012).

The qui tam action, in which the government subsequently intervened, was originally filed in September 2007, and alleged that the defendant healthcare system, Tuomey, entered into compensation arrangements with certain physicians that violated the Stark Law because the compensation paid to the physicians “took into account the volume or value of the physicians’ referrals to Tuomey.” The government further alleged that Tuomey knowingly presented false claims for payment to Medicare and Medicaid that arose out of these prohibited referrals, in violation of the FCA. In addition to the FCA claims, the government asserted claims for equitable relief.

In March 2010, a jury returned a verdict finding that Tuomey did not violate the FCA, but responded affirmatively to a special interrogatory asking whether Tuomey violated the Stark Law. Ruling on post-trial motions, the district court judge granted a motion filed by the United States and: (i) set aside the jury verdict; (ii) ordered a new trial on the FCA claim; and (iii) based on the jury’s response to the special interrogatory finding a Stark Law violation, entered a $44.9 million judgment (plus interest) in favor of the government on its equitable claims.

On appeal, the Fourth Circuit held that, because the FCA claim was based on an alleged violation of the Stark Law, the district court’s decision to grant a new trial “on the whole issue of the [FCA],” rendered the jury’s special interrogatory on the Stark Law issue a legal nullity because the court had set aside the original jury verdict, which included the special interrogatory response. As a result, when the district court granted the government equitable relief, the district court impermissibly resolved an issue on which Tuomey was entitled to (another) jury trial, thereby effectively depriving Tuomey of its Seventh Amendment right to a jury trial.

The Court of Appeals further instructed that, if on remand, the jury finds that the contracts at issue violated the Stark Law, the jury must determine the number and value of the claims Tuomey presented to Medicare for payment of the facility fee, or technical component, for the services. Notably, this instruction diverges from the Stark Law guidance which disallows payment for all services furnished pursuant to a prohibited referral.

The Fourth Circuit also addressed several issues regarding the underlying Stark Law allegations that it deemed “legal” and likely to be an issue on remand, while one judge, in a concurring opinion, criticized the court’s decision as advisory in nature. Specifically, the majority concluded that (i) there were “referrals,” as such term is defined under the Stark Law, by the physicians to Tuomey; and (ii) the Stark Law guidance clearly contemplates arrangements such as those at issue in this litigation, and, as a result, the jury must decide whether the contracts, on their face, took into account the value or volume of anticipated referrals in violation of the Stark Law fair market value standard.

From a Stark Law perspective, the “advisory” portions of this opinion provide important insight into the Fourth Circuit’s views on Stark Law violations. More broadly, the ongoing litigation may yet provide further legal developments regarding FCA liability, particularly in the context of the Stark Law.

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Sanction for Relator’s Counsel Who Engaged in “Abusive Behavior”

Posted by Lauren K. Roth and Kristin Graham Koehler

The public disclosure bar is meant to prevent or cut short the life of the “parasitic” lawsuit. In short, if a relator’s allegations are substantially the same as claims have been publicly disclosed already, and the relator is not the “original source” of the information, then a court generally must dismiss the suit. But as defendants know all too well, getting to dismissal can be a long and costly process. Moreover, enticed by the prospect of sharing in settlement proceeds, relators—and relators’ counsel—have an incentive to reprocess public allegations and “see what sticks.” Last week, however, a district court in Indiana sent a strong message by penalizing such conduct and demonstrating that it, too, may be costly for relators and their lawyers.

In U.S. ex rel. Leveski v. ITT Educational Services, Inc., the court—having earlier dismissed relator’s case—granted (in part) ITT’s Motion for Attorneys Fees and Sanctions and ordered relators’ counsel to pay nearly $400,000 in fees. U.S. ex rel. Leveski v. ITT Educational Services, Inc., 1:07-cv-0867 (D. Ind. March 26, 2012). Moreover, in a 30+ page opinion, the court took Leveski and her lawyers to task for filing such a contemptible, blatantly frivolous lawsuit, which reportedly cost ITT over $13 million to litigate. “Common sense,” the court opined, “suggests that Leveski is worlds apart from the type of genuine whistleblower contemplated by the FCA.”

The facts in the case were as follows: Leveski had worked at ITT for approximately 11 years, during which time she filed an unrelated employment suit against ITT that settled. In May 2007, after Ms. Leveski had ended employment with ITT, she was contacted by an investigator for Timothy Matusheski, her would-be FCA counsel. Matusheski had learned of Leveski through a public records search for former employees of for-profit educational institutions who had sued their former employer. Soon after their introduction, Leveski became convinced that ITT had violated an incentive compensation provision of Title IV of the Higher Education Act and she filed her FCA suit. (“Matusheski plucked a prospective plaintiff out of thin air and tried to manufacture a lucrative case,” the court wrote.) She was, apparently, not alone. The court’s decision cites to four other lawsuits against for-profit educational institutions that were filed by plaintiffs who had been recruited by Matusheski. All of the suits had been dismissed. Indeed, in one instance, Matusheski—”in consultation with his client, who was fearful of the potentially devastating financial impact of an attorney’s fees award” formally apologized to the court, the Department of Justice, and the Defendant after the dismissal.

In Leveski’s case, the court dismissed her suit for lack of subject matter jurisdiction, based on a public disclosure bar analysis. In support of its subsequent Motion for Attorney’s Fees and Sanctions, ITT identified several significant events in the case and argued that it was entitled to attorney’s fees incurred from the date of those events. Ultimately, the court found the triggering event to be Leveski’s deposition, in which she had revealed an extensive lack of knowledge about the substance of her allegations, undermining any argument that she was original source of the information. Although ITT reported having incurred approximately $2.6 million in legal expenses since the deposition, the court decreased its award to $394,998.33 for two reasons: (i) ITT’s delay in deposing Leveski, and (ii) the court’s application of Rule 11’s instruction that sanctions be limited to “what suffices to deter repetition of the same conduct or comparable conduct by others similarly situated.” See Fed. R. Civ. P. 11(c)(4). “In light of these considerations, the Court finds that 15 percent of the amount of attorney’s fees actually spent [from the date of the deposition onward] is an appropriate figure.”

Ultimately, ITT recovered only a tiny fraction of the attorney’s fees that it incurred defending a wholly unmeritorious lawsuit. Nevertheless, the mere fact of the award should provide a stronger deterrent effect to specious FCA suits than the public disclosure bar alone.

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