Court Holds Relator’s Settlement and Release of FCA Claims Unenforceable

In a recent decision that exemplifies the difficulties in settling a qui tam in which the United States has declined to intervene, a federal district court in Florida recently held that a settlement agreement in which a relator falsely represented that she had not filed any action against the Defendant, and released her qui tam claim, was unenforceable. U.S. ex rel. Scott v Cancio, No. 8:10-cv-50-T-30TGW (M.D. Fla.), November 28, 2011 Slip Op. The plaintiff sued her former employer, a medical practice, for discrimination and retaliation. While the employment case was still pending, the plaintiff filed a qui tam under the False Claims Act (“FCA”) against the same defendant. Three weeks after filing the qui tam under seal, the plaintiff and defendant executed a settlement agreement in connection with the employment case in which the employee represented that she had not filed any “complaint, claim or charge” against the Defendant in any “state or federal court.” The agreement also contained a broad release of any and all claims the plaintiff had against the defendant.

After the qui tam was unsealed and the United States declined to intervene, the defendant moved to dismiss on the ground that the plaintiff was barred by the settlement agreement from pursuing the case. Notably, the United States took no position on the Defendant’s motion to dismiss the case. Yet the court denied the motion to dismiss and held the release unenforceable. The court noted that while in a “typical case, the release would preclude” the qui tam, the FCA provides an “action” under the FCA “may be dismissed only if the court and the Attorney General give written consent to the dismissal and their reasons for consenting,” quoting 31 U.S.C. 3730(b)(1). Acknowledging that several cases have held that pre-filing releases of qui tam actions may be enforceable, the court distinguished those cases on the ground that when the release precedes the filing of a qui tam, there is no “action,” and therefore section 3730(b)(1) is not implicated.

The defendant noted that it was seeking dismissal only of the plaintiff’s relator interest, and not any claims that could be asserted by the United States – which, as noted above, did not oppose the motion to dismiss. But the court held that “the plain language of section 3730(b)(1) requires the Attorney General’s written consent to a qui tam action’s dismissal and does not make a distinction based on whether the dismissal is without prejudice to the Government’s interest.” The court concluded with a bit of cold comfort, noting that the defendant was free to “seek appropriate relief in the separate employment action to set aside the Settlement Agreement it entered into with Scott based on any misrepresentations or fraud on the part of Scott.”

While the Cancio decision is consistent with other cases that have drawn the “pre-filing/post-filing” distinction in evaluating the enforceability of releases of FCA claims, it is a good example of why that distinction reflects both bad law and bad policy. While the statute states that the consent of the Attorney General is required for dismissal of a qui tam, when the government takes no position on – i.e., has not opposed – the motion to dismiss, it is difficult to see why such silence should not be interpreted as consent. Moreover, there are no compelling public policy reasons for linking enforcement of the release to the timing of its execution. Courts that have enforced pre-filing releases of qui tams have done so in situations in which they have emphasized that the United States was otherwise aware of the relator’s allegations, so that enforcement of the release would not raise a concern that evidence of the defendant’s alleged wrongdoing might never come to light. See, e.g., U.S. ex rel. Radcliffe v. Purdue Pharma L.P., 600 F.3d 319 (4th Cir. 2010); U.S. ex rel. Richie v. Lockheed Martin Corp., 558 F.3d 1161 (10th Cir. 2009). Yet when a relator releases a qui tam claim after filing, he already will have apprised the United States of both the specific allegations and the “material evidence” supporting them. 31 U.S.C. 3730(b)(2). Accordingly, the same public policy reasons that support enforcement of settlement agreements and releases in the pre-filing context are equally as strong, if not stronger, in the post-filing context.

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First Circuit Rewrites False Claims Act Requirements and Significantly Expands Potential Liability

In two recent decisions, the Court of Appeals for the First Circuit parted ways with well-established standards applied by other courts for assessing liability under the Federal False Claims Act (FCA) and adopted an approach that may significantly broaden the risk of FCA liability for all companies that contract with or submit claims, or cause others to submit claims, for payment to federal or state governments. These decisions raise a number of practical concerns for companies including increased risk of FCA exposure, increased litigation costs, and a need for greater attention to FCA issues in contract negotiation. The First Circuit’s decisions also create a clear split among the federal circuits, increasing the likelihood of review of these issues by the U.S. Supreme Court.

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Fraud and Abuse Changes in the New Laws Enhance Government Enforcement Power and Heighten Industry Transparency Obligations

President Obama recently signed into law two pieces of legislation that, together, represent the most comprehensive reform that the U.S. healthcare system has seen in decades.1 In addition to providing for sweeping changes to health insurance coverage, healthcare delivery, and healthcare funding mechanisms, these laws substantially expand the government’s investigative and enforcement authority in connection with healthcare fraud and abuse. Additionally, the new laws include increased penalties for fraud and abuse in several contexts, as well as heightened disclosure and compliance obligations for providers, manufacturers, and other entities as part of government efforts to reduce fraud and to increase transparency.

This update highlights the key provisions of the new laws pertaining to anti-fraud and pro-transparency initiatives. Several of these new enforcement risks and compliance obligations take effect immediately or within one year, so affected entities will need to familiarize themselves with these provisions and plan for their implementation accordingly.

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