District Court Finds False Claims Act (FCA) Punitive in Nature and Holds Retroactive Application of the Fraud Enforcement and Recovery Act of 2009 (FERA) Unconstitutional

In United States ex rel. Sanders v. Allison Engine Co., Inc., No. 1:95-cv-970 (S.D. Ohio Oct. 27, 2009), the court found FERA’s retroactive effective date for certain claims pending on or after June 7, 2008 to be both inapplicable to the facts of the case and a violation of the Ex Post Facto Clause of the U.S. Constitution because of the FCA's punitive nature.

On June 9, 2008, the Supreme Court handed down Allison Engine Co., Inc. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008), in which it held:

[A] plaintiff asserting a § 3729(a)(2) claim must prove that the defendant intended that the false record or statement be material to the government’s decision to pay or approve the false claim. Similarly, a plaintiff asserting a claim under § 3729(a)(3) must show that the conspirators agreed to make use of the false record or statement to achieve this end.

Id. at 2126. At the time Allison Engine was decided, the FCA provided liability for anyone who “knowingly makes, uses or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government.” 31 U.S.C. § 3729(a)(2) (emphasis added). In its opinion, the Court relied on the words “to get” and “paid or approved by the Government” to conclude that the defendant needed to intend the Government to pay the claim. Certain members of Congress disagreed with this interpretation of the FCA, and in FERA they amended the statute to overturn this interpretation by striking the words “to get” and “paid or approved by the Government.” FERA, Pub. L. No. 111-21, 123 Stat. 1617, § 4(a)(1). The new provision was recodified at 31 U.S.C. § 3729(a)(1)(B) and provides liability for one who “knowingly makes, uses or causes to be made or used, a false record or statement material to a false or fraudulent claim.” Id.

FERA was signed into law on May 20, 2009, and it contains an effective date provision that provides for retroactive application of the amendment to 31 U.S.C. § 3729(a)(2), to “take effect as if enacted on June 7, 2008 [two days before Allison Engine was decided], and apply to all claims under the False Claims Act (31 U.S.C. § 3729 et seq.) that are pending on or after that date.” FERA, § 4(f)(1). After the Supreme Court’s decision in Allison Engine, the case was remanded to the district court for further proceedings. FERA’s enactment required the district court to consider how the statute’s retroactive effective date would apply to the case.

The court made two holdings. First, FERA’s effective date is inapplicable on its face to the facts before the court because the effective date provision refers to “claims . . . pending on or after [June 7, 2008].” Allison Engine, No. 1:95-cv-970, at 5. The “claims” at issue “were paid in the late 1980s and early 1990s and were no longer pending on June 7, 2008.” Id.at 6. The court looked to the text of FERA and its legislative history and rejected the relators’ argument that FERA’s retroactivity language applies to “cases” pending on June 7, 2008. Second, the court conducted two stages of analysis under the Ex Post Facto Clause, asking 1) “whether the legislature intended to impose punishment when it enacted the law,” and 2) “if the legislature’s intention was to enact a civil and nonpunitive regulatory scheme . . . [whether it is] ‘so punitive either in purpose or effect as to negate [the State’s] intention to deem it ‘civil.’’” Id.at 8 (citations omitted). The court answered both questions in the affirmative. The court quoted numerous statements by legislators regarding their intent to use the FCA to “punish” defendants and concluded “Congress intended to impose punishment when it enacted the FCA and the amendments thereto.” Id. at 13. The court also held in the alternative that the “civil version of the FCA is punitive in purpose and effect.” Id. at 17.

This is a significant opinion for recipients of government funds subject to the FCA. First, the court’s reading of FERA’s retroactivity clause as applying to “claims” not “cases” will delay the time before which this provision impacts defendants, as cases for “claims” pending on June 7, 2008 will take time to work their way through litigation. Second, and more significantly, the conclusion that the FCA is punitive in purpose and effect--accompanied by the court’s thorough research and reasoning on this point--provides FCA defendants additional support in asserting FCA defenses under the Excessive Fines and Due Process Clauses of the U.S. Constitution.