Spectre at the feast: Post-Crash False Claims Act Enforcement Looms Over Large Banks and the Paycheck Protection Program

Recently, I was reading the Washington Post’s Finance 202 Newsletter about the Small Business Administration’s Paycheck Protection Program (PPP). Right next to the article was an ad from a plaintiff’s law firm soliciting whistleblowers to report fraud. Such advertisements are just a small reminder that whistleblower firms are looking for opportunities to bring False Claims Act cases in connection with the more than $2 trillion in government aid being dispersed in the Coronavirus Aid, Relief, and Economic Security Act.

While banks are making most of the PPP loans, some large banks are especially sensitive to the down-the-road threat from False Claims Act (FCA) and Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) suits. The Washington Post reports that several large banks were concerned that they may later face lawsuits for their loans from whistleblowers or the U.S. Department of Justice (DOJ). As a result, these banks were either not participating in the program or were being “extra diligent,” which delayed the dispersal of the loans. Sen. Marco Rubio, one of the chief sponsors of the program, complained on Twitter that “some banks were putting crazy restrictions on who could apply for a loan through the program.”

The reluctance of some large banks to participate in the PPP or to quickly process these loans stems from the numerous FCA and FIRREA suits brought against them after the 2008 financial crash. According to the Washington Post, large banks remember all too well how the DOJ sued numerous large banks for allegedly failing to strictly enforce standards for mortgage loans either insured by the Federal Housing Administration (FHA) or which were later bought by Fannie Mae or Freddie Mac. Those suits led to settlements in the billions of dollars. Bank of America, for example, settled for $9.65 billion and provided an additional $7 billion in consumer relief. Citibank and JP Morgan Chase settled for $7 billion and $13 billion, respectively, in combined payments and consumer relief. Many of these suits turned on a “false certification” theory of liability, whereby the banks were accused of falsely certifying their compliance with mortgage loan underwriting standards.

The present-day reluctance of lenders to issue federally backed loans or to participate in federal loan programs due to FCA and FIRREA exposure should not be a surprise. Secretary of U.S. Department of Housing and Urban Development (HUD), Ben Carson, noted last year that depository banks previously issued almost 50 percent of all FHA loans, but “that number is down to less than 15 percent.” The DOJ, Carson explained, was “so vigorous” in its pursuit of banks who issued FHA loans for alleged fraud that “they basically drove them away because, in many cases, the banks had been involved in some version minor, non-material defect in the process and were slammed with enormous fines and suspension.” To entice these lenders to return to the FHA lending program, HUD recently entered into a “memorandum of understanding” with the DOJ that provides for “prudential guidance on the appropriate use” of the FCA for violations by lenders. Along with the agreement, HUD recently unveiled a new certification that “limits the banks’ liabilities for some loan errors.”

Like the broad certifications of compliance formerly required by banks for FHA loans, lenders issuing PPP loans also make broad certifications and representations, including:

·     For purpose of making covered loans, the lender is responsible, to the extent set forth in the PPP loan requirements, for all decisions concerning the eligibility (including size) of a borrower for a covered loan.

·    By making any demand that SBA purchase the guaranteed portion of a loan, the lender will be deemed thereby to certify that the covered loan has been made, closed, serviced and liquidated in compliance with the PPP.

·     The lender consents to all rights and remedies available to the SBA under the Small Business Act, the PPP and its Loan Program Requirements, as each of those are amended from time to time, and any other applicable law.

·     To the best of its knowledge, the lender certifies that it is in compliance and will maintain compliance with all applicable requirements of the PPP and its Loan Program Requirements.

·     Certification that “all representations made are true and correct” that “any false statements made to the U.S. Small Business Administration and the Department of Treasury can result in . . . imposition of civil monetary penalties under 31 USC 3729 [of the FCA].

The Washington Post quoted a senior SBA official who was frustrated with how slow the banks had been to help small businesses as saying, “There really is no risk to the banks.” Also, the SBA and U.S. Department of the Treasury issued an Interim Final Rule as well as a set of answers to Frequently Asked Questions, in which they state that the “U.S. government will not challenge lender PPP actions that conform to this guidance.” But as a recent Wall Street Journal editorial pointed out, “This [statement]was followed with a footnote: ‘This document does not carry the force and effect of law independent of the statute and regulations on which it is based.’ In other words, trust Treasury guidance at your own risk.” Such skepticism is well taken. The DOJ’s own Brand Memo prohibits converting “agency guidance documents into binding rules.” Perhaps in the short term as the country wrestles with the COVID-19 crisis, the DOJ will follow Treasury’s guidance, which claims to apply to all U.S. departments and agencies. But does that apply to regulators who may seek to bring FCA suits against banks for alleged fraudulent certifications of PPP loans? What about for DOJ down the road a year or two?

The FCA and FIRREA are both akin to legal thermonuclear weapons. Their widespread use by DOJ against banks and other commercial lenders after the 2008 crash has caused some of these institutions to be understandably cautious about dispersing large amounts of government loans and funding. If Congress wants to encourage participation in its relief programs and the rapid dispersal of funds, it may wish to consider other means to enforce compliance with these desperately needed funding programs. 

A. Brian Albritton

April 22, 2020

Fifth Circuit Applies Escobar’s “Demanding” Materiality Standard: Abbott v. BP Exploration and Production

The Fifth Circuit recently provided insight into how to apply the Supreme Court’s Escobar materiality standard in False Claims Act (FCA) cases based on a defendant’s alleged false certification of compliance with underlying regulations. Abbott v. BP Exploration and Production, Inc., 2017 WL 992506 (5th Cir. March 14, 2017).

BP, the defendant in Abbott, built and maintained the Atlantis Platform, a semi-submersible oil production facility in the Gulf of Mexico. The Relator worked for BP in Atlantis’s administrative offices. During his employment, Relator grew suspicious that BP had falsely certified compliance with certain safety regulations, and had, therefore, submitted false claims. Relator filed a qui tam complaint against BP and sought over $200 billion in FCA damages. The government declined to intervene.

Prompted by Relator’s FCA complaint, the U.S. Department of the Interior (DOI) launched an investigation into BP’s management of Atlantis. That investigation coincided with the high-profile explosion at BP’s Deepwater Horizon, a similar oil production facility, generating negative press and attention for BP. Nevertheless, the DOI's investigation cleared BP of any wrongdoing in connection with Atlantis, and its detailed report called Relator’s claims “unfounded” and “without merit.”

Despite the DOI’s findings, Relator persisted with his FCA lawsuit. Ultimately, in a scathing 10-page order, the District Court granted BP summary judgment on all counts, calling BP’s alleged errors “paperwork wrinkles,” which could not have influenced the government’s decision to pay. See U.S. ex rel. Abbott v. BP Exploration and Production, Inc., Case No. 4:09-CV-01193 (S.D. Tx. 8/21/14)(ECF 431).

In affirming the District Court's decision, the Fifth Circuit honed in on the materiality issue and the Supreme Court’s Universal Health Servs., Inc. v. Escobar, 136 S. Ct. 1989 (2016) decision. Focusing on the “demanding” materiality standard, the Court highlighted one of Escobar’s central points: a governmental designation of compliance as a condition of payment does not alone prove materiality. Instead, courts must consider evidence to determine whether the government's payment of a claim truly hinges on a contractor's regulatory compliance, such as whether the government paid the claim with knowledge of the regulatory violation. Escobar, the Court noted, "debunked the notion that a Governmental designation of compliance as a condition of payment by itself is sufficient to prove materiality."

Although the Government apparently did not know of BP's alleged regulatory violations when it paid BP’s claims, the DOI’s subsequent report suggested to the Fifth Circuit that compliance with the referenced regulations was not material to the government’s decision to pay. As the Court observed: "As recognized in Escobar, when the DOI decided to allow the Atlantis to continue drilling after a substantial investigation into Plaintiffs' allegations, that decision represents 'strong evidence' that the requirements in those regulations are not material." Having nothing to rebut these "strong facts," the Court affirmed summary judgment for BP.

FCA defendants can use Abbott to defend against allegations that they falsely certified compliance with Government regulations. To show that their alleged noncompliance was not material to the Government's decision to pay claims, a defendant could highlight any post-payment evidence suggesting that the Government would not have deemed the alleged regulatory violations material. For example, a defendant could cite to government audit reports that approved the payment on claims with the same alleged deficiency, or to post-payment correspondence establishing the government’s knowledge of the alleged regulatory issue. The facts and types of evidence will vary, but Abbott’s reliance on post-payment materiality evidence could apply broadly as courts continue to craft materiality case law in Escobar’s wake.

Author: Scott Terry

Editor: A. Brian Albritton

March 29, 2017 

The Supreme Court Resets How False Claims Act Liability Should Be Determined for False Certification Claims: Universal Health Services Inc. v. United States ex rel. Escobar

Dear Readers:

Yesterday the Supreme Court issued its long-awaited opinion in the False Claims Act case, Universal Health Services, Inc., v. United States ex rel. Julio Escobar and Carmen Correa, 579 U.S. __ (2016), often referred to as the "Escobar case." The Court's unanimous opinion resets how False Claims Act ("FCA") liability is determined for legally false claims, i.e., those claims based on false certifications, express or implied, made by a provider or contractor in conjunction with submitting claims for payment to the Government. Essentially, Escobar seeks to anchor the FCA's prohibition against "false or fraudulent" claims in the common law definition of fraud. Common law fraud encompasses either affirmative misrepresentations or misleading omissions. For fraud to occur, however, the Court stressed that misrepresentations or omissions relating to a statutory, regulatory, or contractual requirement must be material to the Government's payment decision. At the same time, the Supreme Court "clarified" that materiality is a "rigorous" requirement, and determining what is or is not material does not "depend on what label the Government attaches to a requirement."  

The Supreme Court initially affirmed that FCA liability can be based on an "implied false certification" based on dramatic facts relating to counseling and medical treatment provided by a mental health care facility to a teenage patient which led to her death. In Escobar, the facility represented in its claims to Medicaid that it had provided specified therapies and other types of treatment to the beneficiary. In reality, the facility had not provided the therapies and treatment it billed for because many of its personnel were neither licensed or qualified to provide these services and in fact had misrepresented their qualifications and licensing status to the government to obtain provider numbers that permitted them to submit claims to Medicaid. The Court found that the facility's Medicaid claims "do more than merely demand payment."  Rather, the claims were "actionable misrepresentations" because they contained "half truths" while "omitting critical qualifying information." Escobar held that the implied certification theory could be a basis for FCA liability "at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant's failure to disclose noncompliance with material statutory, regulatory or contractual requirements makes those representations misleading half-truths."

In the second half of its opinion, the Supreme Court addressed whether FCA liability can be based only where a defendant fails to disclose that it has violated an "expressly designated condition of payment." Escobar essentially rejected the express condition of payment/condition of participation dichotomy developed by the appellate courts in false certification cases, finding instead that FCA liability arises only if the defendant fails to disclose in submitting a claim that it has violated a material condition of payment. And then it threw a curve ball: "statutory, regulatory, and contractual requirements are not automatically material, even if they are labeled conditions of payment." In fact, the Court noted that if FCA liability depended only on violating express conditions of payment,"[t]he Government might respond by designating every legal requirement an express condition of payment. But billing parties are often subject to thousands of complex statutory and regulatory provisions. Facing [FCA] liability for violating any of them would hardly help would-be-defendants anticipate and prioritize compliance obligations."  

The FCA's "materiality standard," the Supreme Court pointed out, is "demanding." The Court explained further: "[t]he [FCA] is not an all-purpose anti-fraud statute or a vehicle for punishing garden-variety breaches of contract or regulatory violations. A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory regulatory, or contractual requirement as a condition of payment. Nor is it sufficient for finding of materiality that the Government would have the option to decline to pay if it knew of the defendant's noncompliance. Materiality . . . cannot be found where noncompliance is minor or insubstantial." (internal quotes/citations omitted).

Noting that the FCA's definition of materiality "descends from common-law antecedents," the Supreme Court then looked to common-law characterization of materiality to define it. Citing Williston on Contracts, Escobar explained that "[u]nder any understanding of the concept, materiality looks[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation." Looking to the Restatements on Torts and Contracts, the Court identified two key criteria for determining materiality: "(1) if a reasonable man would attach importance to [it] in determining his choice of action in the transaction; or (2) if the defendant knew or had reason to know that the recipient of the representation attaches importance to the specific matter in determining his choice of action, even though a reasonable man would not." (internal quotes/citations omitted). 

In a footnote, Escobar rejected the appellant's assertion that "materiality is too fact intensive for courts to dismiss [FCA] cases on a motion to dismiss or summary judgment." The Court explained further that "[FCA] plaintiffs must also plead their claims with plausibility and particularity under Federal Rules of Civil Procedure 8 and 9(b) by, for instance, pleading facts to support allegations of materiality."

The Court's opinion ended with a reminder that the FCA "is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations.  This case centers on allegations of fraud, not medial malpractice."

Overall, Escobar contains something for relators, defendants, and the government. By rooting FCA liability to the common law definition of fraud, the Supreme Court seeks to apply the FCA to serious frauds and effectively prevent it being used as a weapon to police technical violations and contractual disputes. Having given broad guidance and repeated injunctions as to the "rigorous" standard for materiality, it is up to the courts below to further expand and apply these principles.

A. Brian Albritton
June 17, 2016

Worth The Read: Interpreting Unclear Medicare Regulations and FCA Liability - U.S. ex rel Parker v. Space Coast Medical Associates, L.L.P.

Dear Readers:

I commend to you the analysis of the Middle District of Florida opinion, U.S. ex rel Space Coast Medical Associates, LLP, 2015 WL 1456122 (M.D. Fla. Feb. 6, 2015), by Arnold and Porter attorneys Mark D. Colley, Alan E. Reider, and Murad Hussain. Space Coast is another example wherein a court refused to find that a defendant "knowingly" submitted false claims when the Medicare regulations at issue were unclear and the defendant's interpretation of the regulations was not unreasonable.

In this qui tam case, the relators alleged that physicians in an oncology practice failed to provide the proper level of supervision required by "Medicare guidelines." In its order granting the motion to dismiss filed by Messrs. Colley, Reider, and Hussain, the Court conducted a thorough analysis of these so called "guidelines" only to find after analyzing the regulations, the Medicare Benefit Policy Manual, and Local Coverage Determinations that they did not actually require "that radiation oncologists be the physicians who supervised the radiation therapists at issue" and that the regulatory authorities relied on by relators were not preconditions for payment of Medicare claims. Following cases such as U.S. ex rel Hixson v. Health Mgmt. System, Inc., 613 F.3d 1186, 1190 (8th Cir. 2010), the Court then went a step further and found that the Defendants did not knowingly submit a false claim because relators had not shown that "Defendants' interpretations of the regulations were unreasonable."

A. Brian Albritton

August 26, 2015

The False Claims Act Is Not a Remedy for Technical Regulatory Violations

Dear Readers:

I recently came across another interesting example of a court refusing to permit the False Claims Act ("FCA") to be used as remedy for a technical regulatory violation that was unrelated to a claim for payment submitted to the government: US ex rel. Rostholder et al. v. Omnicare International, et al., (4th Cir., February 21, 2014).

In Omnicare, the 4th Circuit sustained the lower court's dismissal of False Claims Act claims due to the complaint's failure "to allege that the defendants made a false statement or acted with the necessary scienter." The Relator had alleged that the defendant, a drug manufacturer, violated a series of Food and Drug Administration ("FDA") safety regulations relating to the packaging of penicillin together with other drugs, the result of which caused the drugs to be "adulterated." Since federal law prohibits adulterated drugs from being sold in interstate commerce, Relator alleged that such mispacked drugs were no longer eligible for reimbursement by Medicare or Medicaid. For a drug to be eligible for reimbursement by Medicare and Medicaid, the FDA must have "approved [it]for safety and effectiveness" when it was submitted as a new drug.

Essentially, the Court found that the Relator did not state an FCA claim because complying with FDA safety regulations for a previously approved drug is not an express condition of reimbursement by Medicare or Medicaid. That is, defendants did not have to expressly certify compliance with the FDA in order to obtain payment for such a mispacked drug under Medicare and Medicaid. As a result, Relator was unable to identify "any false statement or other fraudulent misrepresentation that Omnicare made to the government," i.e., there was no "false claim" for payment under the FCA. The Court explained: "FCA liability based on a false certification to the government will lie only if compliance with the statues or regulations was a prerequisite to gaining a benefit, and the defendant affirmatively certified such compliance."

The Court observed that the FCA was not meant as a mechanism to promote "regulatory compliance," especially when in the case of the FDA, the government had established a "very remedial process" to enforce FDA regulations. The FDA's "significant remedial powers . . . buttresses our conclusion that Congress did not intend that the FCA be used as regulatory-compliance mechanism in the absence of a false statement or fraudulent conducted directed at the government."

Interestingly, the Court went further and found not only had the Relator not alleged a false statement or fraudulent conduct, but it also found as a matter of law that the Relator had not "plausibly" alleged that Omnicare knowingly submitted a false claim to the government. Since the Medicare and Medicaid statutes did not expressly prohibit reimbursement for "drugs packed in violation" of federal law, the Court essentially found that Omnicare could not have known that it was submitting a false claim.

While a welcome result, the Court made an easy call here. There is simply no connection between a claim for reimbursement under Medicare Part D and these technical FDA violations.

A. Brian Albritton

March 3, 2014

The Sixth Circuit Limits FCA Liability Arising Under Express and Implied Certifications: US ex rel Hobbs v. Medquest Associates

In United States ex rel Hobbs v. Medquest Associates, Inc., 2013 WL 1285590 (6th Cir. April 1, 2013), the Sixth Circuit reversed an $11 million False Claims Act judgment and rejected the Government's attempt to turn a health care provider's breach of its Medicare enrollment agreement into a False Claims Act violation. In so doing, the Sixth Circuit limits False Claims Act liability arising from violations of "express and implied certifications" in Medicare contracts. Rather, the Medquest Court reaffirmed that the "False Claims Act is not a vehicle to police technical compliance with complex federal regulations" and that the statute's "hefty fines and penalties make them an inappropriate tool for ensuring compliance with technical and local program requirements."

In Medquest, the relator and later the Government alleged that Medquest, a diagnostic testing company that operated testing facilities, violated the False Claims Act ("FCA") by (1) "using supervising physicians who had not been approved by the Medicare program and the local Medicare carrier to supervise the range of tests offered" at testing sites; and (2) after acquiring a physician's practice in Charlotte, "fail[ing] to properly re-register the facility to reflect the change [in Medquest's] ownership and to enroll the facility in the Medicare program" and instead "continue to use the former owner's payee ID number." On the "supervising physician" issue, the District Court found that Medquest had expressly certified to Medicare that the "physicians listed in its [enrollment] application [to Medicare] would supervise" diagnostic testing and had implicitly certified that in billing Medicare, the "tests were provided in accordance with applicable Medicare regulations and by physicians approved by Medicare." By using "non-supervising personnel" to monitor diagnostic tests and by billing for such tests, the District Court found that Medquest violated these certifications, thus giving rise to FCA liability. According to the District Court, Medquest's failure to re-register the practice it acquired also constituted a "false certification" which together with Medquest's continued use of the former practice's billing number qualified as an FCA violation as well. The District Court entered summary judgment against Medquest.

Though it expressed "little sympathy" for Medquest, the Sixth Circuit overturned the summary judgments, finding that the regulations underlying the certifications were "not conditions of payment" and did "not mandate the extraordinary remedies of the FCA." Rather, such violations, the Court observed, were "instead addressable by the administrative sanctions available." The Court found that Medquest's Enrollment Application statement that it was "in compliance with supervising-physician requirements" did not "constitute certifications that would support an FCA action." Moreover, the Court noted, "the certification does not contain language conditioning payment with any particular law or regulation." As for Medquest's failure to transfer the practice into its own name and its continued use of the prior physician's billing number, the Court rejected the Government's claim that this represented a "failure to enroll problem," stating that "[t]his case, at most, represents a failure to update enrollment information, which we have held is not a violation of a condition of payment."

The Medquest decision is a powerful antidote to those decisions that seek to characterize every enrollment agreement breach or violation of a Medicare regulation as a violation of an express or implied condition of payment that gives rise to FCA liability. Rather, in the absence of specific contractual or regulatory language making Medicare payments contingent on fulfilling Medicare enrollment or participation conditions, the Sixth Circuit clearly applies a common sense approach, reserving the FCA's "extraordinary penalties" for more egregious regulatory violations.

A. Brian Albritton
April 9, 2013

DOJ Officials Reportedly Recommended Intervening in Qui Tam Against Lance Armstrong

The Wall Street Journal reports that U.S. Department of Justice "officials recommended joining" the sealed qui tam False Claims Act filed against former cyclist Lance Armstrong by his former teammate, Floyd Landis. Mr. Landis was the Tour de France winner in 2006, but was stripped of his title due to doping charges.

Though widely discussed in the press, the qui tam suit has not been unsealed, and neither DOJ nor Landis have confirmed its existence. The Wall Street Journal reports that a source who has seen the suit states that Landis alleges that Armstrong and team managers of the U.S. Postal Cycling Team "defrauded the U.S. government when they accepted money from the U.S. Postal Service." From what can be gleaned, the suit appears to be based on a false certification theory because the U.S. Postal Team contract "required that the team refrain from using performance enhancing drugs." Landis and other former team members are alleged to have testified that "Armstrong was at the center of a sophisticated doping ring and knowingly flouted the contract." The Journal reports further that the U.S. Postal Team received $30.6 million in sponsorship funds from the Postal Service, and the contract is reported to have provided that "negative publicity due to alleged possession, use or sale of banned substances by riders or team personnel would constitute an event of default as would a failure to take action if a rider violates a morals or drug clause."

According to the Wall Street Journal, Armstrong's legal team has been in settlement negotiations" with DOJ, but have been unable to reach an agreement thus far. Along with Armstrong, Landis also allegedly sued Johan Bruyneel, the U.S. Postal Team's director, and Thom Weisel, the former chair of the management company that owned the U.S. Postal Cycling Team.

This is an interesting suit. On the one hand, DOJ purportedly alleges that the Postal Service was defrauded because the Team promised not to let cyclists dope and failed to do so, while continuing to collect sponsorship money. On the other hand, the events at issue occurred many years ago -- the Postal Service sponsorship of the team ended in 2004 -- and given the success of the Team at the time, the Postal Service reaped the benefits and good will of its sponsorship during that period. According to U.S. ex rel Davis v. District of Columbia, did the government in fact receive the benefit of its bargain at the time?

A. Brian Albritton
January 17, 2013

False Claims Act Complaint Against Armstrong Unsealed

Kudos to the Pietragallo firm blog that first posted the Landis qui tam/False Claims Act Complaint against Lance Armstrong:  US ex rel Floyd Landis v. Tailwind Sports Corporation, et al, Case 1:0-cv-976 (D. D.C.).  Here is the complaint.  The complaint does not reflect that the U.S. Department of Justice has intervened.    Along with Lance Armstrong, the complaint lists 8 other defendants, including unidentified defendants, "Does 1 -50."

A. Brian Albritton
January 18, 2013

Using the False Claims Act to Enforce Antidiscrimination Laws Against Local Governments

Relator counsel are continuing to find creative applications for the False Claims Act and to expand its reach. A recent Note by University of Texas law student Ralph C. Mayrell, Blowing the Whistle on Civil Rights: Analysing the False Claims Act as an Alternative Enforcement Method for Civil Rights Laws, 91 Tex. L. Rev. 449 (2012), advocates the use of the False Claims Act (FCA) to enhance the enforcement of antidiscrimination laws against local governments. In this thoughtful Note, the author asserts that the "FCA provides civil rights litigators with another avenue for enforcing antidiscrimination laws," and he sets out to "explain the legal theory through which civil rights litigators can effectively litigate claims against local government discriminators using the FCA." The author explains that civil rights laws frequently limit damages from local governments and require that a litigant be injured by a discriminatory practice in order to obtain standing. The FCA, he notes, is not hampered by such limitations.

It should come as no surprise that the article advocates basing FCA liability against local governments on the certifications of compliance with antidiscrimination laws that are commonly found in federal grants to local governments. As a concrete example, the Note focuses on "Community Oriented Policing Services" (COPS) grants that are given by the U.S. Department of Justice to local governments for the hiring of police officers and the creation of crime prevention programs. As is common with most federal grants, the COPS grants require that the grantee will not deny benefits or employment or discriminate against any person based on "race, color, religion, national original, gender, disability, or age" and make compliance with this condition a basis for termination of the grant or suspending funding. The grantee's failure to adhere to these conditions serves as the basis for the false claim, i.e., the relator alleges that the grantee defrauded the federal government of grant funds when it falsely certified that it was in compliance with the grant's antidiscrimination provision. 

The Note observes that in a "few limited situations, litigators have attempted to use the FCA, with varying degress of success" to enforce civil rights and antidiscrimination laws. The largest settlement to date appears to be a $52 million Fair Housing Act case against a local municipality, but that appears to be the high point thus far in these cases. Still, the author argues that "FCA liability based on violations of antidiscrimination laws gives another tool to litigators both for individually injured plaintiffs as well as groups interested in institutional-change litigation."

Overall, the Note rightfully points out that the FCA may be employed in the fight against discrimination by local governments. At the same time, it also illustates the common complaint by the defense bar that the FCA is becoming an heavy handed enforcement mechanism for compelling compliance with governmental regulations.

A. Brian Albritton
January 3, 2013

Court Refuses to Impose FCA Civil Penalty in False Certification Case On Grounds That $50.2 Million Penalty Violates Excessive Fines Clause

The Blog of Legal Times recently featured an interesting case where a District Court Judge refused after the trial of a False Claims Act ("FCA") case to impose the minimum $50.2 million Civil False Claims Act penalty on the grounds that the penalty was unconstitutionally excessive in violation of the 8th Amendment:  United States ex rel Kurt Bunk & Daniel Heuser v. Birkart Globistics GmbH & Co et al., Case No. 1:02 cv 1168 (AJT/TRJ)(E. D. VA.  2/14/12).  As reported in The BLT, Judge Trenga refused to impose the statutorily mandated fine based on the number of invoices submitted to the government on the grounds that the fine was "grossly disproportional" to harm --more precisely, the lack of harm-- caused by the defendant, Gosselin Worldwide Moving N.V. 

The FCA claim against Gosselin was based on a false certification theory.  Gosselin had submitted a bid to the Department of Defense Contracting to pack and move military household goods owned by service personnel and their families between the United States and various countries in Europe. In submitting their bid, Gosselin met with two of its competitors about one subcontracting portion of their overall bid.  They agreed "as to the prices each would charge and the territories they would service as subcontractors to the winning bidder, regardless of who actually was awarded" the contract.  Gosselin was the winning bidder, and in performing its contract with the government it had to submit a "certificate of independent pricing" wherein it falsely affirmed that "the prices in the offer have been arrived at independently, without . . . agreement with any other offferor or competitor."  Gosselin lost at trial, and the relators sought a civil penalty of an amount between $5,500 and $11,000 based on the 9,136 invoices that Gosselin had submitted for payment.  Calculated, the minimum civil penalty provided by the FCA was $50,248,000.

The Court found that the statutory penalty violated the Excessive Fines Clause on the grounds that it was grossly disproportionate to the offense.  The Court identified several factors that demonstrated the lack of proportion between the harm and the offense, including: (1) there was no evidence of any cognizable financial harm to the United States as a result of the bid and neither the Relator nor the government sought to prove any damages at trial; (2) there was no evidence that the fixed price as to the subcontractor resulted in higher prices, and in fact there was evidence that the contract price was less than Gosselin had agreed to in previous years; and  (3) there was no evidence that the government could have obtained a lower bid or obtained the "subcontractor" services at issue at a lower cost absent the subcontractor pricing conspiracy.  The Court pointed out further that there was no evidence that Gosselin's services were deficient in any way, and noting that Gosselin's "profit" for the disputed subcontracting portion of the overall contract was $150,000, the Court observed:  "there is nothing about this level of gain that would justify the minimum mandated civil penalty of over $50 million."

In the end, the Court concluded that having founded the statutorily mandated penalty constitutionally excessive, it could "not substitute its own fashioned penalty due to the language and structure of the FCA itself."  The Court explained suggested an alternative construction of the FCA statute that would avoid the application of an unconstitutional fine: based on the plain language of the statute, an alternative reasonable interpretation is that a civil penalty should be applied for each act that violated the prohibition, ie., "each factually false statement, not each claim paid as a result of that false statement." Gosselin, the Court noted, had only made one false certification, and thus should be subject to a fine of between $5,500 and $11,000.

The incredible fines faced by Gosselin are calculated based on the number of invoices it submitted to the government for payment.  Health care providers facing False Claim Act litigation face this same dilemma: the false claims alleged against them are most often based on the number of bills submitted.  They too can face incredible penalties as there can be thousands of individual bills, and as a result, it is very rare to see health care providers contest liability at trial.  There is just too much exposure if they should lose.