New Developments Under the False Claims Act

Among the more controversial provisions of the False Claims Act are the "qui tam" or "whistleblower" provisions that allow private parties to bring suits on behalf of the government as "relators," i.e., private attorneys general, and grant these parties a share of any monetary recovery. Where the Government intervenes and takes over the case, the "relator" may be awarded 15 to 25 percent of any recovery. Where the Government declines to intervene, the private relator may pursue the case with minimal or no involvement by the Government, and is entitled to up to 30 percent of any recovery. 31 U.S.C. ' 3730(d). Damages under the False Claims Act can quickly mount into tens and even hundreds of millions of dollars. It is not unusual for disgruntled former employees, competitors, or even participants in wrongdoing, to bring suits on weak or non-existent grounds with the hope of crippling a business or enriching themselves.

One tactic employed by defendants who have been sued under the qui tam provisions of the FCA is trying to get cases thrown out of court by arguing that these provisions are unconstitutional. While most lower courts have upheld the constitutionality of the provisions, the U.S. Court of Appeals for the 5th Circuit recently had gone the other way, holding the qui tam provisions unconstitutional in certain circumstances. In its November, 1999 decision, a three judge panel held that the qui tam provisions that allow a relator to continue a lawsuit when the government does not intervene violate the "Take Care" clause of the constitution and the doctrine of separation of powers. Riley v. St. Luke's Episcopal Hospital, 196 F.3d 514 (5th Cir. 1999).

The "Take Care" Clause in Article II of the constitution provides that "[the President] shall take Care that the Laws be faithfully executed." The power that private individuals have to bring suit under the qui tam provisions of the False Claims Act was viewed by the Riley court as an improper usurpation of the Executive Branch's authority. Previously, the Supreme Court had upheld the constitutionality of the Independent Counsel statute, which also removes authority from the Executive Branch to execute the laws. Morrison v. Olson, 487 U.S. 654 (1988). The Riley court reasoned, however, that the qui tam provisions of the False Claims Act could not withstand the constitutional challenge mounted in Morrison because the loss of control on the part of the Executive Branch was greater than in the Independent Counsel statute. The court noted that there were fewer safeguards in place to prevent the Judicial Branch from improperly intruding on Executive functions, and the qui tam provisions were not narrowly tailored to achieve their purpose. The opinion noted that the Government may not freely dismiss a qui tam action, freely settle the case without judicial intervention, or remove the private relator from the case.

There was also a long discussion in the Riley case about the constitutionality of the qui tam provisions under Article III of the Constitution. Previously, the Supreme Court had said that to have standing under Article III, a plaintiff must have suffered an "injury in fact", i.e., the plaintiff must have personally suffered an actual, concrete injury. Lujan v. Defenders of Wildlife, 504 U.S. 555. According to this reasoning, an injury that is generalized to the population at large or that is conjectural or hypothetical is not sufficient grounds for bringing a lawsuit. The Court found that vindication of the public interest is not a private function, but rather, the function of the Congress and the Chief Executive.

The concurrence in Riley found that a qui tam relator does not have the standing required under the Lujan standard. Noting that qui tam provisions have fallen in and out of favor over their centuries of existence, it rejected the idea that a long history of a practice alone means it must be constitutional. The concurrence also rejected the so-called assignment theory and the statutory permission theory, saying that Congress itself is constrained by the constitution and cannot assign a right it does not have.

The Supreme Court in Vermont Agency of Natural Resource v. United States ex rel. Stevens, No. 98-1828, 2000 LEXIS 3428, has resolved the Article III standing issue for now, finding that qui tam relators have standing by way of a partial assignment by the government of its interest. The Supreme Court did not provide much discussion of the issue, but seemed to rely heavily on the historical usage of the practice. The Supreme Court did not address the Article II "Take Care" clause and separation of powers issue. In view of the Morrison and Stevens cases, however, it seems unlikely that this Supreme Court would strike down the qui tam provisions. Upon close examination, the separation of powers issue under Article II and the standing issue under Article III of the Constitution are closely connected. [KCC]

3. The Supreme Court Holds that a State or State Agency is not Subject to False Claims Act Liability in Qui Tam Actions Brought by Private Individuals (May 22, 2000)

In Vermont Agency of Natural Resources v. United States ex rel. Stevens, the Supreme Court also held that a state or state agency cannot be liable in a qui tam action brought by a private individual under the False Claims Act. Although the Court did not determine the validity of the defendant's contention that such qui tam liability would run afoul of the Eleventh Amendment's grant of sovereign immunity, the Court noted that there is "serious doubt" in this regard.

Instead, the Court avoided this difficult constitutional question by addressing a statutory question first. The False Claims Act provides that "any person" may be subject to liability for knowingly presenting a false or fraudulent claim for payment by the United States government. The question of statutory construction considered by the Supreme Court in Vermont was whether a state or state agency falls within the meaning of "any person," as that phrase was intended by Congress.

Relying on a "longstanding interpretive presumption" that "person" does not include states, the Court determined that Congress did not intend to subject states or state agencies to False Claims Act liability in qui tam suits brought by private individuals.

Importantly, though, the Court did not address the question of whether a state or state agency can be subject to False Claims Act liability when the suit is prosecuted by the United States, rather than by a relator standing in the shoes of the United States. In fact, Justices Ginsberg and Breyer noted in a concurring opinion that the presumption against including states in the definition of "person" has not been applied when the United States is the plaintiff.

It appears, then, that the Vermont holding may not stem the tide of qui tam suits against states or state agencies. States and state agencies may still be subject to False Claims Act liability when the government institutes the action or when the government intervenes in a relator's qui tam action. Therefore, despite the holding in Vermont, states or state agencies that defraud the federal government still face a risk of False Claims Act liability.

The Vermont case also leaves open another important question: What constitutes a state agency for purposes of the False Claims Act? In holding that state agencies are not subject to False Claims Act liability in qui tam suits brought by private individuals, the Court did not provide any guidance in determining what is a "state agency." Therefore, we can expect to see a wave of litigation focusing on the question of when an entity with ties to a state government is a "state agency" and, therefore, immune from False Claims Act suits prosecuted by qui tam relators.

Lower courts faced with the task of interpreting "state agency," as the term was used by the Supreme Court in Vermont, are likely to look to a two types of cases: (1) sovereign immunity cases and (2) Civil Rights Act (or Section 1983) cases. In both types of cases, courts must determine whether an entity with ties to the state government is a state agency and, therefore, not a proper defendant. In fact, in Section 1983 cases, the question appears to be identical to that presented by the Vermont case. In 1989, the Supreme Court held in Will v. Michigan Department of State Police that a state or state agency is not a "person" within the meaning of Section 1983. Following the Will decision, many courts have grappled with the question of what constitutes a "state agency."

Each federal circuit has developed a test for determining when an entity is sufficiently identified with the state so as to share in the state's sovereign immunity. Those tests have subsequently been adapted by courts considering whether an entity is a state agency and therefore not subject to Section 1983 liability. Although the tests vary slightly, each circuit's test is intended to address the same question: Is the state the real party in interest? If so, the entity is a state agency and is immune from liability.

It is likely that the same balancing tests will be applied by courts faced with the question of whether a particular entity with ties to the state government is a state agency and therefore not a "person" subject to False Claims Act liability in qui tam actions brought by private individuals. (LE)

4. The Supreme Court Says that False Claims Act Damages are Punitive, Potentially Opening the Door to Constitutional Challenges to Parallel Civil and Criminal Fraud Prosecutions (May 22, 2000)

The Supreme Court's opinion in Vermont Agency of Natural Resources vs. United States ex rel. Stevens has raised another interesting question about the government's common practice of attacking government contractor fraud through both civil and criminal prosecutions. Previous decisions of the Court have held that such parallel prosecutions based on the same conduct do not violate the Double Jeopardy or Excessive Fines clauses of the Constitution. Those decisions were premised, at least in part, on a determination that civil liability for violations of the False Claims Act is not punitive in nature.

The Supreme Court stated in Vermont, however, that the damages imposed by the civil False Claims Act are "essentially punitive in nature." The Court stated that prior suggestions that damages under the False Claims Act were not punitive related to a previous version of the statute which imposed only double damages and a civil penalty of $2,000 per claim. The Court noted that the current version of the False Claims Act imposes treble damages and a civil penalty of up to $10,000 per claim. Quoting a 1981 Supreme Court opinion, the Court stated that "[t]he very idea of treble damages reveals an intent to punish past, and to deter future unlawful conduct, not to ameliorate the liability of wrongdoers."

These statements of the Court are not binding and do not specifically address the Double Jeopardy or Excessive Fines implications of parallel prosecutions. However, with these statements, the Court has, perhaps, opened a door that had previously been closed tightly. (LE)

5. The U.S. Court of Appeals for the 10th Circuit Says that liability under the False Claims Act may be Premised on Implied Certification of Contractual Compliance (May 18, 2000)

In a May 2000 decision, the 10th Circuit held that a false claim may be either express or implied. Shaw v. AAA Engineering & Drafting, Inc., No. 97-6265 & 97-6266 (10th Cir. 2000). The defendant, a photographer for the Air Force, had failed to adhere to certain contract requirements for the recovery and disposal of trace silver used in film processing. The recovery of silver was a requirement of the Environmental Protection Agency, but was costly for the contractor, who allegedly decided to omit the process in an effort to make the contract more lucrative.

The defendants argued that the monthly invoices they submitted could not be false claims because the invoices only billed for the amount called for by the fixed price contract and did not contain any factual misrepresentations. The court disagreed, however, holding that the defendant had impliedly certified that it had complied with the silver recovery provisions in the contract, because the contract price included not only the photography services but also the cost of environmental compliance. The 10th Circuit found that the language of the False Claims Act itself requires only the presentation of a "false or fraudulent claim for payment or approval" without the additional element of a "false record or statement." [KCC]

6. The D.C. Circuit Holds that False Certification of Statutory or Regulatory Compliance Creates FCA Liability Only If Payment is Conditioned on that Certification (June 30, 2000)

The D.C. Circuit recently rejected a qui tam relator's assertion that a defense contractor's submission of invoices under a contract with the Department of Defense was actionable under an implied certification theory. In U.S. ex rel. Siewick v. Jamieson Science and Engineering, Inc., a two-judge panel followed the reasoning of other Circuits that have held that false certification of compliance with laws, rules or regulations creates FCA liability only when the plaintiff can establish that such certification was a prerequisite to government payment.

In Siewick, the relator alleged that accurate claims submitted in accordance with contract terms were transformed into fraudulent claims because the defendant's contract officer had violated conflict of interest laws. Specifically, the relator alleged that the contract officer had violated 18 U.S.C. ' 207, a criminal statute aimed at "revolving door" abuses by former government employees.

The Court held that because the relator had no evidence "suggesting that [the defendant] was required to certify compliance with ' 207 as a condition of its contract," the relator's claim of implied certification failed. As such, the D.C. Circuit joins the Fourth, Fifth and Ninth Circuits in requiring that a relator basing an FCA action on a certification theory allege and prove that certification was a prerequisite to payment. [LE]

7. District of Massachusetts Adopts Implied Certification Theory as to Alleged Violations of 42 U.S.C. ' 1320c-5(a)(1) and the Anti-kickback Act (July 18, 2000)

In United States ex rel. Kneepkins v. Gambro Healthcare, Inc., et al., Civil Action No. 97-10400-GAO, 2000 U.S. Dist. LEXIS 10424 (D. Mass. July 18, 2000),the District Court relied upon an implied certification theory to deny a motion to dismiss. However, the case manifests other interesting dimensions as well. The qui tam complaint was predicated upon the allegation that claims submitted by a laboratory were fraudulent because they contravened 42 U.S.C. ' 1320c-5(a)(1). This provision requires that services billed to Medicare must be "provided economically and only when, and to the extent, medically necessary." Specifically, the complaint alleged that the defendant laboratory had unnecessarily split the basic Chem 19 panel into two separate Chem 12 and Chem 7 panels which was intentionally wasteful and only done in order to maximize reimbursement.

The motion to dismiss argued that there was no certification contained on the requests for Medicare reimbursement representing compliance with this provision; hence no violation of the False Claims Act could have occurred. In rejecting this contention, the District Court reasoned that because the government can refuse to pay a claim to which the claimant is not entitled, to submit a claim that does not comport with section 1320c-5(a)(1) represents "the false pretense of entitlement," which is fraudulent. The court rejected the applicability of United States ex rel. Mikes v. Straus, 84 F. Supp. 2d 427, 436 (S.D.N.Y. 1999), predicated upon the quality-of-care standard found in section 1320c-5(a)(2), because there it had not been demonstrated that compliance was a condition precedent to Medicare reimbursement. The court also distinguished its holding as well from another laboratory case, Luckey v. Baxter Healthcare Corp., 183 F.3d. 730, 733 (7th Cir. 1999), which did not find violations of the False Claims Act where more stringent testing criteria than the government mandated were employed.

The District Court also employed an implied certification theory to hold that alleged violations of the Anti-kickback Act, 42 U.S.C. ' 1320a-7b(b), constituted viable violations of the False Claims Act. Its discussion of this point, however, was quite sketchy and not particularly illuminating. Apparently, the court concluded that the failure to disclose the alleged kickback arrangement constituted a "fraud of omission" (citing Luckey, 183 F.3d at 732) and thus resulted in a violation of the False Claims Act. Placing reliance upon United States ex rel. Pogue v. American Healthcorp. Inc., 914 F. Supp. 1507, 1513 (M.D. Tenn. 1966), the court conceded that this "position is not uncontroversial," alluding to United States ex rel. Thompson v. Columbia Healthcare Corp., Inc., 20 F. Supp. 2d 1017, 1048 n. 33 (S.D. Tex. 1998). [RHC]