I try to spare readers from too many "can you believe this happened in a case?" entries, but on occasion, I do find just such a story worth highlighting. The firm of Horwood Marcus & Berk ("HMB") recently highlighted an "opportunistic" (others might say, enterprising) relator and law firm in Illinois who, HMB reports, have brought over 200 cases under the Illinois False Claims Act against retailers operating nationwide who "allegedly have fraudulently failed to collect tax on the shipping portion of sales to Illinois customers." See "Opportunistic 'Whistleblower' Exploits Illinois False Claims Act." Though it does not list the cases, HMB claims that the relator's claims are based on tax advice provided by the Illinois Department of Revenue to retailers. Relator's "lawsuits accuse retailers of committing fraud by not collecting tax on shipping charges to Illinois customers, a position that the Department of Revenue has endorsed explicitly in the case of several tax payers, and more generally in over 30 information letters." Moreover, HMB essentially accuses the relator and the plaintiff's firm that has brought all 200 cases of being "opportunists," as the relator reportedly has no insider knowledge and bears little resemblance to the classic whistleblower. HMB complains further that taxpayers "attempting to understand Illinois law on the proper taxation of shipping charges will likely finish the exercise with more questions than answers" and that the Illinois Department of Revenue is partly responsible for creating this "muddled and confusing . . . legal landscape."
HMB predicts that another frontier for opportunistic qui tam suits will be claims over the payment of unclaimed property obligations, another area where HMB believes there is real confusion about what property is subject to unclaimed property laws and must be reported to the state.
by A. Brian Albritton
March 27, 2012
Tuesday, March 27, 2012
A Helpful Primer on the False Claims Act and the Anti-Kickback Act
I commend the PowerPoint presentation "The Evolution of the False Claims Act and Anti-Kickback Allegations and Theories of Liability in FCA Litigation" posted today by Antonia Giuliana on the FCA Alert blog. Her presentation (1) discusses how the legal standards applicable to the Anti-Kickback Act and False Claims Act ("FCA") have changed, especially as a result of the 2010 Patient Protection and Affordable Care Act amendments and the use of Anti-Kickback claims as a basis for "false certification" theories of liability; (2) how kickback allegations have evolved in FCA cases for the period of 1995 - 2009 along with a helpful chart; and (3) uses the case of US ex rel Jamison v. McKesson Corp. et al., (N.D. Miss) to illustrate the application of the Anti-Kickback Act to a False Claims Act case. This is a useful primer on the subject.
by A. Brian Albritton
March 27, 2012
by A. Brian Albritton
March 27, 2012
Friday, March 23, 2012
Court Finds FCA Retaliation Claims Subject to Arbitration
A U.S. District Court in Texas recently held that a False Claims Act ("FCA") retaliation claim brought pursuant to 31 U.S.C. 3730(h) by a sales representative against his employer was subject to the arbitration clause of his Employment Agreement and dismissed the sales representative's case in favor of arbitration. James v. Conceptus, Inc., 2012 WL 845122 (March 12, 2012, S.D. Tex).
In that case, the plaintiff, a sales representative for a medical device firm alleged that his employer, Conceptus, Inc., retaliated against by discharging him when he questioned the legality of how a sales representative marketed his employer's medical devices and how physicians billed Medicaid for such devices. The plaintiff brought a "whistleblower-retaliation action under the False Claims Act, 31 U.S.C. 3730(h), in the Southern District of Texas. His employer moved to compel arbitration under the plaintiff's employment agreement and to dismiss the suit in favor of arbitration. The employment agreement specified the application of California law as well as a California forum, and the Court spent much of its opinion evaluating whether California law permitted the arbitration of such claims, finding in the end that such claims may be subject to arbitration.
The Plaintiff also claimed that arbitration provision of his employment agreement did not apply to his FCA retaliation claim on the grounds that the Dodd-Frank Act made such arbitration clauses for whistleblower claims unenforceable. The Court observed that the Dodd-Frank Act, 7 USC 26(n) and 18 USC 1514A(e) amended the "whistleblower provisions of the Commodity Exchange Act and the Sarbanes-Oxley Act to make unenforceable any predispute arbitration clause of disputes arsing under those whistleblower sections as well as the Dodd-Frank Act itself, 12 USC 5567(d). The Court, however, found that Dodd-Frank did not apply to the False Claims Act and 31 USC 3730(h) contains no similar provision. Beyond its discussion of California law, the Court did not cite any other federal law or cases in making its determination that that the antiretaliation provisions of the False Claims Act would be made subject to arbitration.
Section 26(n) of Title 7 also provides that the "rights and remedies provided for" under the Commodities and Exchange Act qui tam provisions may not be waived. Section 1514A(e) of Title 18 provides for a similar provision as the Sarbanes-Oxley Act.
In that case, the plaintiff, a sales representative for a medical device firm alleged that his employer, Conceptus, Inc., retaliated against by discharging him when he questioned the legality of how a sales representative marketed his employer's medical devices and how physicians billed Medicaid for such devices. The plaintiff brought a "whistleblower-retaliation action under the False Claims Act, 31 U.S.C. 3730(h), in the Southern District of Texas. His employer moved to compel arbitration under the plaintiff's employment agreement and to dismiss the suit in favor of arbitration. The employment agreement specified the application of California law as well as a California forum, and the Court spent much of its opinion evaluating whether California law permitted the arbitration of such claims, finding in the end that such claims may be subject to arbitration.
The Plaintiff also claimed that arbitration provision of his employment agreement did not apply to his FCA retaliation claim on the grounds that the Dodd-Frank Act made such arbitration clauses for whistleblower claims unenforceable. The Court observed that the Dodd-Frank Act, 7 USC 26(n) and 18 USC 1514A(e) amended the "whistleblower provisions of the Commodity Exchange Act and the Sarbanes-Oxley Act to make unenforceable any predispute arbitration clause of disputes arsing under those whistleblower sections as well as the Dodd-Frank Act itself, 12 USC 5567(d). The Court, however, found that Dodd-Frank did not apply to the False Claims Act and 31 USC 3730(h) contains no similar provision. Beyond its discussion of California law, the Court did not cite any other federal law or cases in making its determination that that the antiretaliation provisions of the False Claims Act would be made subject to arbitration.
Section 26(n) of Title 7 also provides that the "rights and remedies provided for" under the Commodities and Exchange Act qui tam provisions may not be waived. Section 1514A(e) of Title 18 provides for a similar provision as the Sarbanes-Oxley Act.
Tuesday, March 13, 2012
Insights from a Qui Tam Plaintiff's Lawyer
In a recent interview with Corporate Crime Reporter, qui tam attorney Joseph E.B. "Jeb" White of the firm Nolan & Auerbach, P.A. described what kind of plaintiff/relator cases his firm is interested in and, more importantly, the kinds of cases in which the government will intervene.
White says that the government does not want "low hanging fruit. They want boxed fruit." He notes that the government intervenes in "only about 25 percent" of False Claims Act (FCA) cases, and due to "tightening budgets," the government's approach to taking FCA cases is changing. Increasingly, the government delays its decision to intervene because "sometimes the case simply isn't ready. The relator hasn't fully flushed out the allegations sufficiently for the government to intervene." Moreover, courts frequently "pressure the government to make up its mind before the government is ready to make up its mind." These pressures, he says, lead the government to often say in qui tam cases that they are "not intervening at this time" but nevertheless "signaling to the relator's lawyer" to keep the case alive because they government is "going to come back later." While it may not be able to investigate or intervene in a case due to a lack of resources, says White, the government encourages relators to "move forward" with meritorious cases, letting the relator use what may be his or her superior resources to develop the case further. In short, the government, White explains, often declines, but in doing so it frequently indicates to the relator to "pick up the ball and move it forward for us."
White's firm, Nolan & Auerbach, only does FCA cases on behalf of relators. He says the firm takes roughly one in ten FCA cases, and that they can only bring a "handful of cases in any given year." White states that when his firm brings a case to the government, they want the government to have "some level of confidence" that the case has been "fully vetted." In considering whether to take a case, White explains that the firm is looking for several things: (1) "evidence of systematic fraud" as opposed to just some "rogue employee," hopefully involving a "scheme from the top of the company;" (2) a "credible witness" who can withstand scrutiny at trial; and (3) whether there are "common road blocks," such as the public disclosure bar.
White estimates that there are 100 FCA cases every year, of which "five of them are blockbusters." He estimates that the remaining "95 settle for about $10 million each," and that the average whistleblower award is around 16.2 percent.
The entire interview is at 26 Corporate Crime Reporter 8, February 20, 2012 print edition.
A. Brian Albritton
3/13/12
White says that the government does not want "low hanging fruit. They want boxed fruit." He notes that the government intervenes in "only about 25 percent" of False Claims Act (FCA) cases, and due to "tightening budgets," the government's approach to taking FCA cases is changing. Increasingly, the government delays its decision to intervene because "sometimes the case simply isn't ready. The relator hasn't fully flushed out the allegations sufficiently for the government to intervene." Moreover, courts frequently "pressure the government to make up its mind before the government is ready to make up its mind." These pressures, he says, lead the government to often say in qui tam cases that they are "not intervening at this time" but nevertheless "signaling to the relator's lawyer" to keep the case alive because they government is "going to come back later." While it may not be able to investigate or intervene in a case due to a lack of resources, says White, the government encourages relators to "move forward" with meritorious cases, letting the relator use what may be his or her superior resources to develop the case further. In short, the government, White explains, often declines, but in doing so it frequently indicates to the relator to "pick up the ball and move it forward for us."
White's firm, Nolan & Auerbach, only does FCA cases on behalf of relators. He says the firm takes roughly one in ten FCA cases, and that they can only bring a "handful of cases in any given year." White states that when his firm brings a case to the government, they want the government to have "some level of confidence" that the case has been "fully vetted." In considering whether to take a case, White explains that the firm is looking for several things: (1) "evidence of systematic fraud" as opposed to just some "rogue employee," hopefully involving a "scheme from the top of the company;" (2) a "credible witness" who can withstand scrutiny at trial; and (3) whether there are "common road blocks," such as the public disclosure bar.
White estimates that there are 100 FCA cases every year, of which "five of them are blockbusters." He estimates that the remaining "95 settle for about $10 million each," and that the average whistleblower award is around 16.2 percent.
The entire interview is at 26 Corporate Crime Reporter 8, February 20, 2012 print edition.
A. Brian Albritton
3/13/12
Tuesday, March 6, 2012
Calculating the Relator's Share: US ex rel Shea v. Verizon Communications, Inc.
A new blog began last month that is devoted to the False Claims Act, "The Original Source: The Sidley Austin False Claims Act Blog." They have done a number good blog articles in the short time they have been publishing.
I wanted to commend their recent blog discussion of US ex rel Shea v. Verizon Communications, No. 07-111(GK) (D.D.C. Feb. 23, 2012), 2012 U.S. Dist. LEXIS 22776. This very interesting case discusses the criteria for awarding the relator a share of a False Claims Act award and the key contributions that a relator can make to the investigation and resolution of a qui tam. As the Sidley Blog points out, the case highlights a number of contributions by the relator and his counsel that were instrumental to the success of the Government's case. For example, the Court notes that the relator "directed the Government to focus" on two surcharges of the defendant, "thereby enabling the Government to save enormous amounts of lawyer time, auditor time, and staff time." In another instance, the Government solicited the relator to prepare a legal memo explaining why "each surcharge" was prohibited by the applicable law and to rank the surcharges for investigation. The opinion goes on that the relator assisted the Government in drafting subpoenas; identified witnesses; and "participated fully in all aspects of the Government's investigation and settlement" and devoted "hundreds of hours each year on the case." This informative case summarizes the elements and contributions for determining the relator's share of an award.
Notwithstanding the relator's contributions to the case as outlined by the Court, the Government opposed awarding the relator anything more than 16% of the award, or only 1% more than the minimum to which the relator was entitled. The Court criticized the Government for making a "profoundly unfair characterization of the nature and extent" of the contributions of the relator and his counsel and for arguing that the relator's "share of the proceeds depends upon the extent of the [relator's] contribution the case rather than the contribution of his counsel." The Court observed that case law does not base the relator's contribution on just what he or she individually contributed, finding than the "relator should be compensated for all of the ways in which his investment of time, resources, information, and assistance contributed to the Government's recovery." In the end, the Court ruled in favor of the relator, awarding him 20% of the lions share of the recovery.
A. Brian Albritton
3/6/12
I wanted to commend their recent blog discussion of US ex rel Shea v. Verizon Communications, No. 07-111(GK) (D.D.C. Feb. 23, 2012), 2012 U.S. Dist. LEXIS 22776. This very interesting case discusses the criteria for awarding the relator a share of a False Claims Act award and the key contributions that a relator can make to the investigation and resolution of a qui tam. As the Sidley Blog points out, the case highlights a number of contributions by the relator and his counsel that were instrumental to the success of the Government's case. For example, the Court notes that the relator "directed the Government to focus" on two surcharges of the defendant, "thereby enabling the Government to save enormous amounts of lawyer time, auditor time, and staff time." In another instance, the Government solicited the relator to prepare a legal memo explaining why "each surcharge" was prohibited by the applicable law and to rank the surcharges for investigation. The opinion goes on that the relator assisted the Government in drafting subpoenas; identified witnesses; and "participated fully in all aspects of the Government's investigation and settlement" and devoted "hundreds of hours each year on the case." This informative case summarizes the elements and contributions for determining the relator's share of an award.
Notwithstanding the relator's contributions to the case as outlined by the Court, the Government opposed awarding the relator anything more than 16% of the award, or only 1% more than the minimum to which the relator was entitled. The Court criticized the Government for making a "profoundly unfair characterization of the nature and extent" of the contributions of the relator and his counsel and for arguing that the relator's "share of the proceeds depends upon the extent of the [relator's] contribution the case rather than the contribution of his counsel." The Court observed that case law does not base the relator's contribution on just what he or she individually contributed, finding than the "relator should be compensated for all of the ways in which his investment of time, resources, information, and assistance contributed to the Government's recovery." In the end, the Court ruled in favor of the relator, awarding him 20% of the lions share of the recovery.
A. Brian Albritton
3/6/12
Monday, February 27, 2012
Can DOJ Dismiss a Relator's Claim if the Relator Refuses Settlement?
Corporate Counsel at Law.com just featured an interesting an article, "Taking the Whistle Out of Her Hand," by Mike Scarcella, wihch highlights the case of Stephani Shweizer, a qui tam relator, who has appealed the District Court's dismissal of her qui tam claims based on the government's motion where she refused to approve the government's settlement with False Claims Act defendant. The DC Circuit held oral argument in the case, Stephanie Schweizer v. Oce N.V., (D.C. Cir. No 11-7030), on January 13, 2012, and a decision is awaited.
In an order found here, the District Court noted that a co-relator and the United States reached a settlement with the defendant for approximately $1.2 million, and the relators were supposed to get 19% of that. Ms. Schweizer, however, refused the settlement, and the government intervened in the case and moved to dismiss her. The Court akncowledged that prior appellate rulings held that the government had an "unfettered right" to dismiss a qui tam suit and that the decision to do so is "beyond judicial review." Neverthless, the District Court noted that the provision of the False Claims Act which permitted the govenment to dismiss a suit, 31 U.S.C. 3730(c)(2)(A), was "somewhat at odds" with the section that "envisions an active role for the Court in approving settlement," 31 U.S.C. 3730(c)(2)(B). Where the government seeks to settlement, the Court must determine "whether the proposed settlement is fair, adequate, and reasonable under all circumstances. Whether that section of the statute can be reconciled with the Court of Appeals' interepretation . . . is uncertain." Given the "law of the Circuit," the District Court believed that "there is no doubt that section 3730(c)(2)(B) may be circumvented" by the government dismissing the relator's claims.
At oral arument, the relator's counsel argued that the government does not have "unlimited authority" to dismiss a complaint where a whistleblower has rejected settlement, and he argued that the District Court should have evaluated the reasonableness of the proposed settlement. The government, Scarcella reports, argued that a settlement hearing is "meant not to convince a judge to keep a case going, but . . . to get the government to change its mind about dismissing a suit." Stated another way, such a hearing is meant to give the relator an opportunity to complain and voice that complaint, but it does not grant the court or the relator the power to keep the government from dismissing a qui tam claim.
The case is being watched because as Scarcella observed: "A ruling against the government could erode the Justice Department's control of False Claims Act litigation, encourage plaintiffs to reject settlements, and create a potential separation-of-powers conflict in an area of the law that has seen explosive growth in recent years."
A. Brian Albritton
In an order found here, the District Court noted that a co-relator and the United States reached a settlement with the defendant for approximately $1.2 million, and the relators were supposed to get 19% of that. Ms. Schweizer, however, refused the settlement, and the government intervened in the case and moved to dismiss her. The Court akncowledged that prior appellate rulings held that the government had an "unfettered right" to dismiss a qui tam suit and that the decision to do so is "beyond judicial review." Neverthless, the District Court noted that the provision of the False Claims Act which permitted the govenment to dismiss a suit, 31 U.S.C. 3730(c)(2)(A), was "somewhat at odds" with the section that "envisions an active role for the Court in approving settlement," 31 U.S.C. 3730(c)(2)(B). Where the government seeks to settlement, the Court must determine "whether the proposed settlement is fair, adequate, and reasonable under all circumstances. Whether that section of the statute can be reconciled with the Court of Appeals' interepretation . . . is uncertain." Given the "law of the Circuit," the District Court believed that "there is no doubt that section 3730(c)(2)(B) may be circumvented" by the government dismissing the relator's claims.
At oral arument, the relator's counsel argued that the government does not have "unlimited authority" to dismiss a complaint where a whistleblower has rejected settlement, and he argued that the District Court should have evaluated the reasonableness of the proposed settlement. The government, Scarcella reports, argued that a settlement hearing is "meant not to convince a judge to keep a case going, but . . . to get the government to change its mind about dismissing a suit." Stated another way, such a hearing is meant to give the relator an opportunity to complain and voice that complaint, but it does not grant the court or the relator the power to keep the government from dismissing a qui tam claim.
The case is being watched because as Scarcella observed: "A ruling against the government could erode the Justice Department's control of False Claims Act litigation, encourage plaintiffs to reject settlements, and create a potential separation-of-powers conflict in an area of the law that has seen explosive growth in recent years."
A. Brian Albritton
Sunday, February 26, 2012
2011 Year-End False Claims Act Update
Gibson Dunn has published the "2011 Year-End False Claims Act Update" online, and I commend it to you. The Update summarizes the Department of Justice statistics on False Claims Act matters and qui tams, which I reference in the the blog, for 2011, and includes several illustrative charts based on those statistics.
The Update provides a good review of "noteworthy settlements" in the "second half" of 2011 (Gibson Dunn had reviewed the first part of 2011 in their mid-year update). The Update does a good job discussing important case law developments and judicial trends.
The Update provides a good review of "noteworthy settlements" in the "second half" of 2011 (Gibson Dunn had reviewed the first part of 2011 in their mid-year update). The Update does a good job discussing important case law developments and judicial trends.
DOJ Publishes Summary of Statistics on False Claims Act and Qui Tams
The Civil Division of the U.S. Department of Justice has published a summary of statistics relating to the False Claims Act and qui tams for the period of 1987-2011. They are quite interesting, and include the following:
1. A chart showing the False Claims Act matters broken down between non qui tam and qui tam; the totals for each year for settlements and judgments for qui tam/non qui tam; for qui tams, along with a break down of the total amounts where the government intervened in the qui tam and the total settlements where the government declined to intervene; and the non qui tam total settlements; and a yearly summary of the relator share awards, broken down by whether the government intervened and where it declined.
2. There are three other charts which break out the False Claims Act/Qui Tams numbers, settlement and judgments, and relator share awards by client agent: (a) a chart for Health and Human Services showing the numbers relating to health care fraud; (b) a chart for Department of Defense; and (c) "other" relating to False Claims Act/Qui Tams unrelated to Health & Human Services and Department of Defense.
As has been reported elsewhere, 2011 was a good year for False Claims Act cases: there were over 762 new matters (referrals, investigations, and qui tam actions); total settlements of $3,029 billion, of which almost $2.8 billion related to qui tams. Relators share awards totaled $532 million.
1. A chart showing the False Claims Act matters broken down between non qui tam and qui tam; the totals for each year for settlements and judgments for qui tam/non qui tam; for qui tams, along with a break down of the total amounts where the government intervened in the qui tam and the total settlements where the government declined to intervene; and the non qui tam total settlements; and a yearly summary of the relator share awards, broken down by whether the government intervened and where it declined.
2. There are three other charts which break out the False Claims Act/Qui Tams numbers, settlement and judgments, and relator share awards by client agent: (a) a chart for Health and Human Services showing the numbers relating to health care fraud; (b) a chart for Department of Defense; and (c) "other" relating to False Claims Act/Qui Tams unrelated to Health & Human Services and Department of Defense.
As has been reported elsewhere, 2011 was a good year for False Claims Act cases: there were over 762 new matters (referrals, investigations, and qui tam actions); total settlements of $3,029 billion, of which almost $2.8 billion related to qui tams. Relators share awards totaled $532 million.
Sunday, February 19, 2012
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.
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.
Sunday, February 12, 2012
Contract Interpretation and False Claims Act Cases: Applying the Contra Proferentem Doctrine to the Government
Having an ambiguous contract with the government can give rise to a to False Claims Act allegations -- that is what the Chapman Law Firm discovered when it sought to sue the U.S. Department of Housing and Urban Development (“HUD”) for failing to perform a contract the firm had with HUD “for the management and marketing of single family homes in Ohio and Michigan.” See Chapman Law Firm v. United States, No. 09-891C,2012 WL 256090 (Fed. Cl. Jan. 18, 2012). The government responded to the suit alleging that Chapman had violated the False Claims Act by using unlicensed pest inspectors to perform termite inspections instead of “licensed” inspectors as the contract allegedly required. The government sought summary judgment against Chapman on the grounds that the contract called for licensed inspectors; Chapman defended, claiming that the contract was ambiguous and should be construed against the government. The U.S. Court of Claims denied the government’s summary judgment motion, applied the legal doctrine of contra proferentem, and construed the contractual ambiguity against the government.
I commend to you the “Fraud Alert” by John Boese and Douglas Baruch of Fried Frank which discusses the Chapman case and the significance of the Court’s application of the contra proferentem doctrine in a False Claims Act case: CIVIL FALSE CLAIMS ACT: Court Applies Contra Proferentem Doctrine Against the Government in an FCA Case Based on An Ambiguous Contract Provision. The authors explain that the contra proferentem doctrine is a rule of contract interpretation often applied in insurance contracts and to other commercial contexts, but until Chapman, the rule had not been applied in an False Claims Act ("FCA") case. Based on the principal that “a party that drafts and imposes an ambiguous term should not benefit from that ambiguity,” they explain that the rule provides that “a latent ambiguity in a contract provision to be construed against the party that drafted the [ambiguous] provision.”
The authors point out that the contra proferentem doctrine can be “be significant in a broad spectrum of FCA cases” as so many of such cases are based on allegations that the defendant violated “requirements incorporated into government grants, contracts, and regulations.” For example, the authors cite to the FCA cases where defendants are accused of falsely certifying their compliance with the myriad of contractual requirements frequently found in government contracts. See 11/30/11 blog entry on “implied false certification.” “These requirements,” they explain, “are drafted by the government, and where they are ambiguous or capable of more than one reasonable interpretation, the rule that ambiguous requirements are construed against the drafter places the burden on the government to draft clear requirements, which is where that burden belongs.” The authors further observe that a defendant’s “reasonable interpretation” of an ambiguous contract with the government can further support a defendant’s claim that they acted in “good faith” and did not have the requisite intent for FCA liability.
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