Wednesday, June 20, 2012

First Reported Case in Which the Government Declines to Exercise its Veto of Public Disclosure Dismissal

Readers, I commend to you the recent article on US ex rel Sanchez v. Abuabara, No. 10-61673 (June 4, 2012, S.D. Fla.), "Government Declines to Exercise New Authority Over Public Disclosure Motion", by Scott Stein of Sidley Austin's "Original Source" False Claims Act Blog.

I heard about this case at the recent Qui Tam and False Claims Act Enforcement Conference, and it was referred to by one speaker as the first reported case to reference the government's new authority under the False Claims Act to oppose and prevent the dismissal of a relator's claim on the grounds that it had already been publicly disclosed. 31 U.S.C. 3730(e)(4)(A).   I would not describe the opinion itself as a page turner, but Mr. Stein does a good job explaining the significance of this recent case.

A. Brian Albritton

Does Receiving a Tax Benefit Make You a Grantee for False Claims Act Liability?

False Claims Act liability arises not simply for false claims presented to the federal government, but also false claims presented to "a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government's behalf or to advance a Government program or interest." 31 U.S.C. 3729(b)(2)(A)(i)-(ii).  So who is a "grantee" of government funds?  It can be an organization that has received some form of subsidy by the federal government.  But, does that mean that any so called false claim for payment presented to that organization which receives a federal benefit or subsidy gives rise to a false claim? The Third Circuit recently applied common sense when it refused to the extend the False Claims Act to every person or organization who enjoyed a federal tax benefit.

The Third Circuit Court of Appeals recently addressed whether a grantee can be an organization that enjoys tax benefits from the federal government, and it found that the False Claims Act simply did not stretch that far.  See U.S. ex rel Garg v. Covanta Holding Corporation et al., (3rd Cir. May 8, 2012).   In the Covanta case, the Court considered whether a state sponsored Utility Authority that issued tax exempt bonds qualified as a "grantee" under the False Claims Act ("FCA") because the tax exemption it enjoyed essentially functioned as a direct "financial subsidy" from federal government.   Faced with the Relator's argument that urged it to apply the FCA to "anyone who happens to receive money from the federal government," the Court balked, holding that the Utility Authority did not qualify as a grantee.

In Covanta, the Utility Authority had issued $280 million in tax exempt bonds to finance construction of a solid waste disposal facility, and it leased the facility to Covanta to control and operate the business and facility.  The Relator, the former executive director of the Utility Authority, alleged that Covanta failed to make two different types of payments that it owed to the Utility Authority and that it issued invoices to the Utility Authority containing false certifications.  The Relator argued that the Utility Authority qualified as a federal grantee under the FCA by "virtue of the fact that it receives a financial benefit from the deductibility of interest on the tax-exempt bonds it issued to finance the facility.  In other words, [the Relator] asserted that the federal government contributes tax revenue it otherwise would collect on interest paid to bondholders directly to the [Utility Authority]."

The Court found that the Covanta's alleged false claims and statements to the Utility Authority could not support a claim under the FCA. Citing cases that hold that tax exemptions are the functional equivalent of direct cash grants from the government, the Relator argued that the "grant of tax-exempt status to [Utility Authority's] bonds means the entity has more money in its proverbial pocket . . . than it would if it had to issue non-tax-exempt bonds at a regular rate" thereby making it a "federal grantee."   Acknowledging the Relator's point that tax exempt status may essentially qualify as a direct subsidy, the Third Circuit observed:

"In the tax realm alone, every taxpaying American receives some form of exemption or deduction, such as the home mortgage interest deduction, the charitable contributions deduction, or even simply the standard deduction.  Just like the tax-exempt bonds, the government's decision to grant these deductions is a matter of grace, and the money saved by these deductions goes straight to the bottom line of the American-taxpayer.  . . . . That does not mean, however, that every fraud against a government employee or taxpayer supports a claim under the FCA."

The False Claims Act, observed the Court, "only prohibits fraudulent claims that cause or would cause economic loss to government."  Covanta's alleged false claims, however, did not cause loss to the federal government but established only that the Utility Authority "had to pay money out of its general operating funds that it should not have had to pay."  The Court went on, "The fact that some unknown portion of those general operating funds might be tangentially attributable to a tax break from the federal government is irrelevant."

In contrast to this clear opinion by the Third Circuit, what is not clear is why the Court marked this opinion as "Not Precedential."

A. Brian Albritton

Sunday, June 10, 2012

Ninth National Institute on the Civil False Claims Act and Qui Tam Enforcement

Last week, I attended the ABA's National Institute on Civil False Claims Act and Qui Tam Enforcement in Washington, D.C..  It was well attended and a worthwhile event overall.  A few observations:

  • The conference was attended by a great mix of people:  lots of plaintiff's counsel (a/k/a relators' counsel), defense counsel, a number of attorneys from state attorneys' general or state Medicaid Fraud Control Units, and a number of federal investigators and counsel from federal agencies.  Unlike conferences such as the ABA's White Collar Crime which are huge with nearly a 1,000 attendees, this conference is still quite small (I would estimate around 200+) and there was a very collegial atmosphere.
  •  As with the attendees, so too with the panels as they were always had a mix of defense counsel, relators' counsel, and various government representatives usually from the a U.S. Attorney's Office or Department of Justice.  Most panels provided a very broad perspective.
  • Joyce Branda, now Acting Deputy Attorney General for the Civil Division and chair of the first panel, noted that 600 False Claims Act/Qui Tam cases were being filed each year, 2/3 of them health care related, though she said that "other areas were developing."  Branda further observed that the government intervenes in 22% of qui tam cases and that percentage has "held steady over the years."
  •  Dan Anderson, co-chair of the Institute and Deputy Director of the Commercial Litigation  Branch of DOJ's Civil Division, told the conference "we are doing much more with much less.  We are doing the best we can  and are stretched very thin."
  • More than one speaker discussed the increased use  of Civil Investigative Demands ("CIDs"):  a very effective investigative tool that allows the government prior to intervening in a qui tam case to conduct depositions and obtain interrogatories and the production of documents.  Prior to the recent amendments of the False Claims Act, the Attorney General had to personally approve the issuance of a CID, but their use has now been liberalized and they are now being issued by DOJ-Civil as well as U.S. Attorneys.
  •  29 states have passed False Claims Act statutes.  The panel on State Qui Tam Enforcement was one of the best.
  •  John Boese, conference co-chair and author of a leading treatise on the False Claims Act, observed rather critically that the False Claims Act has become not just a statute to sanction those making false claims, but with the False Claims Act "jurisprudence being dominated by false certification claims," it is increasingly used as an "enforcement mechanism" for compelling compliance with governmental regulations.  He gave the example of a bid protest.  In the past, he explained, a losing bidder might challenge the legitimacy of a competitor's bid; now, they file an FCA/qui tam claim.
  • Panelist Peter Hutt II of Akin Gump noted that  non-intervened qui tam cases impose very real and substantial costs on the businesses as a result of the discovery that stems from such suits.  Invited to say what he would change about the False Claims Act, he argued that there was too many meritless qui tam suits and that such suits resulted from the "over-incentive" of damages presently allowed under the FCA.  To discourage meritless suits, Hutt argued that real fee shifting should be introduced and that it should apply not just to the relator but to a relator's counsel as well.  He also argued for a cap on relators' recoveries. Hutt's comments about meritless suits brought an interesting reaction from other panelists. The relators' counsel on the panel did not believe meritless qui cases were a problem, but they also discussed that they carefully review potential qui tam cases and only file a handful of the cases they review.  Speaking for herself, an Assistant U.S. Attorney from the Northern District of California who handles FCA/qui tam cases argued that if qui tam cases had been investigated and found to be without merit, then they should be dismissed by the government as permitted by the statute --though she did not cite any instances of that occurring.  Boese argued that since dismissals of qui tam required hearings and that such hearings had often been hotly contested by relators, DOJ rarely exercised its authority to dismiss.
A. Brian Albritton
June 10, 2012