No other area of government enforcement or civil liability has experienced anything quite like the three dramatic developments in initiation, penalties and standards for False Claims Act cases over the last twelve months. FY 2015 reporting data revealed a major shift in the way False Claims Act cases are initiated and rewarded. In the same period, Congress mandated an exponential increase in False Claims Act penalties. Finally, the Supreme Court issued a decision that resulted in a sweeping change to the False Claims Act liability standard. The one-two-three seismic combination will leave every industry doing business with the U.S. government adjusting to the new landscape. Healthcare and pharmaceuticals, defense and government contractors, financial institutions, the education and insurance sectors, non-profits and grantees, and any other industry that contracts with or receives grants from the federal government will be impacted.
Whistleblower Driven Awards Increase as Percentage of False Claims Act Recoveries
The False Claims Act has, for several years now, been a major source of revenue for the U.S. government, with settlements and judgments over the last five years totaling $21 billion. The monetary total recovered in False Claims Act settlements and judgments in fiscal year 2015, which concluded September 30, 2015, was almost exactly on pace with fiscal year 2014’s $3.5 billion, but the 2015 number was remarkable for the portion of the total initiated and conducted solely by whistleblowers. Fully 32%, or $1.1 billion, of the $3.4 billion recovered in fiscal year 2015 was in “qui tam” (whistleblower) cases where the government declined to intervene. That exceeds the total for whistleblower- originated, government-declined cases in all prior years combined.
To give that statistic some perspective, in 1986, whistleblowers initiated just 8% (30 of 373) of False Claims Act cases filed. In 2015, whistleblowers accounted for a staggering 86% (632 of 737) of the caseload. But it’s the monetary success of the 2015 whistleblowers that is the real sea change. 2015 marks the fifth straight year in which whistleblowers filed more than 700 new False Claims Act cases, but in 2015 the recoveries attributable to such cases accounted for a staggering 32% of the total—over three times the previous high of 9% attributable to whistleblower- originated, government-declined cases. That jump, from less than ten percent to roughly thirty percent, may be an anomaly, or it may be a sign of times to come. Either way, the perception of potential financial success (and an accurate perception, at that) will likely embolden both whistleblowers and regulators.
Congress and DOJ Double Potential False Claims Act Penalties
The second development that seems likely to incentivize more False Claims Act cases was legislative. In late 2015, Congress passed a law increasing the per- claim penalties available in False Claims Act cases. The Bipartisan Budget Act, and specifically, the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, went into effect in November 2015 and required the Department of Justice to increase civil penalties to account for inflation by August of 2016. Accordingly, the Department of Justice recently announced that the False Claims Act’s civil per-claim penalty range will almost double, from a previous penalty range of $5,500 to $11,000 per false claim, to a minimum penalty of $10,781 and a maximum penalty of $21,563.
This penalty increase impacts different industries very differently and disproportionately. For example, for a Department of Defense services contractor on a one-year contract consisting of twelve monthly invoices, the per claim penalty increase may not represent a significant portion of a potential damages award. But for entities, like healthcare providers, who often have thousands of claims at issue in a single case, this increase will mean the penalties assessed alone may now far exceed the actual damages. Such penalties in some cases could even violate the Eighth Amendment’s prohibition on excessive fines, creating an additional avenue for appellate challenge in 2016. See, e.g., United States v. Mackby, 261 F.3d 821, 829-32 (9th Cir. 2001) (Eighth Amendment excessive fines rule applies to False Claims Act civil penalties).
Supreme Court Announces New Standard for False Claims Act Liability
The third, and potentially even more significant change impacting False Claims Act litigants came this June, when, in the last weeks of its term, the U.S. Supreme Court issued a sweeping restatement of the standard for False Claims Act liability. By unanimous holding, Universal Health Services v. United States ex rel. Escobar resolves a long-simmering Circuit split over when imperfect performance of a government contract qualifies as a fraud deserving of the punitive remedies of the False Claims Act. With its holding, the Court facially adopts the broadest definition of fraud that any lower court had suggested, finding fraud by omission in certain circumstances where a contractor requests payment despite knowing noncompliance with a statute, regulation, or contract term, and explicitly rejecting the idea that liability should be limited to only those circumstances where the noncompliance violates an express condition of payment in the government contract.
Several Circuits had previously limited what is known as “implied certification” fraud in the False Claims Act context to just those express condition noncompliance scenarios. At least one Circuit had entirely rejected implied certification theories of fraud liability, requiring instead an express falsehood in the claim to trigger the False Claims Act’s treble damages liability. Escobar rejects both those formulations, endorses the concept of implied certification fraud in False Claims Act cases, puts forward a new viability standard for implied certification fraud, and elaborates on what establishes materiality in the False Claims Act context.
New Standard for False Claims Act Implied Certification Liability
The Escobar opinion focuses on when fraud by omission should be actionable, emphasizes that not every violation of a statute, regulation, or contractual requirement will result in False Claims Act liability, and sets forth the two conditions necessary for implied certification liability to attach, as follows. First, the claim itself must make “specific representations about the goods or services provided.” (As discussed in more detail below, in the healthcare fraud context, this condition is likely to be routinely satisfied by standard Medicare and Medicaid billing forms. In other procurement and invoicing contexts, and in industries without elaborate systems of specific and descriptive billing codes, this first condition may ultimately prove to be more of a hurdle.) Second, the organization’s failure to disclose noncompliance with “material” requirements must equate to “misleading half-truths.” The two conditions are interrelated, in that fraud liability logically attaches because the defendant’s failure to disclose its noncompliance is what renders the specific representation in the claim misleading.
The facts of Escobar offer helpful insight into the parameters of the new standard. The case was brought by whistleblower parents of Yurushka Rivera, a deceased teenaged beneficiary of Massachusetts’ Medicaid program. Yarushka died after an adverse reaction to a medication prescribed by what the opinion describes as a “purported doctor.” The subsequent qui tam false claim action was based on the allegation that Arbour Counseling Services, a mental health center performing Medicaid services and a subsidiary of defendant United Health, allegedly failed to disclose serious violations of regulations pertaining to staff qualifications while seeking Medicaid reimbursement for counseling services. In connection with its Medicaid reimbursement claims, Arbour submitted invoices containing specific payment codes and including National Provider Identification numbers associated with specific Arbour employees, corresponding to specific job titles. In one example, an employee who treated Yarushka registered for an NPI number associated with “social worker, clinical” despite lacking the credential and licensing requirements for that designation.
In this context, the Court found fraud by omission, and set forth the new standard accordingly. Arbour’s failure to disclose its lack of compliance with regulations pertaining to staff qualifications is what rendered the specific representations on the invoice, namely, the payment codes and NPI numbers, misleading. The new False Claims Act implied certification liability standard articulated in the case holding follows that formula:
"False Claims Act liability attaches when the (1) defendant submits a claim for payment that makes specific representations about the goods or services, and (2) defendant’s failure to disclose noncompliance with a statutory, regulatory, or contractual requirement renders those specific representations misleading."
The requirement of the first condition, that the claim itself must do more than merely request payment, but instead also make specific representations about the goods or services provided, is an important one, and one that has been overlooked in much of the post-Escobar commentary. The specificity of the representations included in the payment codes and NPI numbers were a key aspect of the reasoning in Escobar. The Court described how the payment codes on the invoices corresponded to specific counseling services, such as individual therapy, family therapy, preventive medication counseling, and other types of treatment, and how the NPI numbers on the invoices corresponded to specific job titles reflecting credentials and licenses. The Court held that “these representations were clearly misleading in context.”
Indeed, by contrast, going forward under the Court’s new standard, a claim that is a mere demand for payment, containing no additional specific representations, does not fit within the reasoning behind recognizing a fraud by omission theory of false claims liability, i.e., the omission must render a specific representation misleading. It will be especially important that courts applying the Escobar two-condition test recognize and rigorously enforce the specificity requirement of the first condition, because that (and the materiality standard explained below) is what will prevent every statutory, regulatory or contract violation from transmutating into an adequately pled false claim. It is also the only way the new liability standard comports with general particularity requirements for pleading fraud. If the Court had not included the first condition, and had instead put forward a formula for implied certification liability wherein a general demand for payment were enough, then allegations following that formula— without a specific representation to refer back to and measure as misleading-half-truth-or-not in the context of the omission—would routinely fail to satisfy the particularity requirements for pleading fraud.
Establishing Materiality in False Claims Act Cases
In addition to the new two-condition test for implied certification (or fraud by omission) liability, Escobar also offers new guidance for how the materiality requirement should be enforced in a False Claims Act context. Reasserting that a misrepresentation about compliance with a particular statutory, regulatory or contractual requirement is only actionable under the False Claims Act if it is material to the government’s decision whether to pay a claim, Escobar first emphasizes that the materiality standard is a demanding one, then emphasizes that even the Government’s decision to expressly pre-identify a provision as a condition of payment is “not automatically dispositive” of the provision’s materiality to the payment decision. A demanding standard, indeed.
Departing from Circuit precedent, the Escobar Court ruled that materiality is not established by showing that the defendant knew the government could refuse to pay if it knew of the nonconformity. The Court referred instead to longstanding statutory, Restatement, and common law understandings of materiality that look to the effect on the likely or actual behavior of the recipient of the misrepresentation. To prove or refute materiality, litigants in false claim cases should now point, for example, to whether or not the government paid the claims at issue or similar claims in full—despite knowledge of non-compliance. Importantly, Escobar notes that it is not sufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance. Thus, that the government might be entitled to refuse to pay and that the defendant knows so will no longer carry the day on materiality. This development will no doubt serve as the basis for robust argument between litigants going forward, especially concerning at what stage of the proceedings a court can resolve materiality in light of the Court’s explicit rejection, at footnote six of the Escobar opinion, of the assertion that materiality is too fact intensive for courts to dismiss False Claims Act cases on a motion to dismiss or at summary judgment.
Three developments in the last twelve months have now vastly altered the landscape for False Claims Act litigation. Fiscal year 2015 saw a dramatic shift in favor of monetary success for whistleblowers, even in cases where the government does not intervene. Congress added to the ever-mounting potential costs for defendants facing False Claims Act liability by mandating an inflation-related increase in the available civil penalty range, a mandate that the Department of Justice took up by doubling False Claims Act penalties. And lastly, after months of conferencing and reconferencing multiple possible False Claims Act implied certification cases last term, in its final rigorous materiality requirement.
Undoubtedly, going forward, there will still be uncertainty over what constitutes a false claim, and likely some appellate litigation over what amounts to a “specific representation” in a claim for purposes of satisfying the first condition of Escobar’s implied certification liability standard. And, there will almost certainly be divergent opinions and continued disputes over the meaning of materiality, and over when it can be conclusively deemed wanting in a false claims case.
What can litigants and potential litigants do in the meantime? Two things: (1) The trend towards whistleblower-driven enforcement and the increase in whistleblower judgments means the deluge of False Claims Act cases will not abate. This makes it critical to identify early when an investigation into a whistleblower’s allegation must be taken seriously and to know how to recognize it as the existential litigation threat it may be. Potential defendants must respond accordingly, and devote appropriate resources to resolving potential False Claims Act claims at the earliest possible stages, then be prepared to take up the fight in litigation when necessary. (2) Whether you are a potential plaintiff-relator-whistleblower or a potential defendant, you must know how the Escobar opinion impacts your industry, because the impact of the new standard varies widely, and you must be prepared to develop a litigation strategy that is industry-specific. Litigation strategy and investigations in False Claims Act cases must account for a trial court and appellate victory strategy from day one, recognizing and navigating the still-unresolved areas of False Claims Act case law. Trial success is possible—even early success is possible—but weeks, the Supreme Court took on the Circuit split on implied certification/fraud by omission and articulated a new, two-condition standard for False Claims Act liability, along with some guidance for enforcement of the statute’s understanding the leverage points fast-changing field will be crucial.