• Current Developments and Future Trends in False Claims Act Litigation
  • June 17, 2015 | Author: Norman R. Cerullo
  • Law Firm: Ruskin Moscou Faltischek, P.C. - Uniondale Office
  • This past year marked another wildly successful year for the Department of Justice (DOJ) in recovering nearly six billion dollars as a result of False Claims Act (FCA) enforcements, settlements and qui tam whistleblower lawsuits. The exact figure, $5.69 billion, is the largest annual recovery ever announced by the DOJ and brings total recoveries from 2009 through fiscal year 2014 to $22.75 billion. Recent history and current developments suggest the trend toward aggressive DOJ enforcement and private qui tam whistleblower lawsuits will continue. Companies with potential FCA exposure should act proactively to, in the first instance, take reasonable steps to avoid or mitigate FCA liability and must tread carefully in navigating the civil, criminal and administrative consequences when FCA actions are commenced

    The FCA
    The FCA, 31 U.S.C. §§ 3729-3733, imposes liability on companies and individuals who defraud the federal government. Often referred to as “the Lincoln Law” because it was enacted during the Civil War to combat frauds committed by government contractors against the Union Army, the FCA has become the primary weapon utilized by the federal government to root out fraud directed at government programs.

    The FCA contains a “qui tam” provision that allows private individuals, technically called “relators” but more commonly referred to as “whistleblowers,” to commence civil actions based on alleged FCA violations on behalf of the federal government. Qui tam is an abbreviated Latin phrase meaning, “he who sues in this matter for the king as well as for himself.” When whistleblowers commence suit they must file the action under seal, providing the Civil Division of the DOJ with the opportunity to investigate. Ultimately, the DOJ may decide to intervene and prosecute on the whistleblowers’ behalves, decline intervention and leave the action in the hands of the whistleblowers to prosecute on behalf of the government or recommend dismissal to the court. Whistleblowers are incentivized because they stand to receive a portion of any recovered damages or settlements, typically ranging from 15%-30% depending on several factors, including whether the federal government intervened.
    Industries with FCA Exposure
    FCA claims arise in virtually any industry that receives or relies on government funds. For example, government contractors, healthcare providers, pharmaceutical companies, transportation companies, energy providers, environmental service and remediation companies, education providers, construction companies and, more recently, financial service institutions are all businesses with potential FCA liability. Indeed, the latter category, while not a traditional target of FCA claims, accounted for $3.1 billion of the $5.69 billion recovered during fiscal year 2014 as the DOJ stepped-up enforcement efforts against financial institutions that allegedly committed fraud in connection with federally-backed mortgages.
    Health care fraud accounted for $2.3 billion of the fiscal year 2014 FCA recoveries, marking the fifth straight year in which the DOJ recovered more than $2 billion in health care fraud cases. Recoveries were also obtained in cases involving the pharmaceutical industry and from hospitals and home health service providers.
    While the largest recoveries in fiscal year 2014 were in the financial services and healthcare sectors, the DOJ and private whistleblowers continue to target more traditional industries, such as government contractors. For example, Hewlett-Packard Co. agreed to a pay $32.5 million concerning allegations it overbilled the U.S. Postal Service and The Boeing Co. paid $23 million to resolve allegations of improper billing of labor costs to the Air Force. Smaller government contractors and subcontractors did not escape FCA liability. For example, Sanborn Map Co., which provided maps for military convoy routes in Iraq, settled for $2.1 million for allegedly using unapproved domestic and foreign subcontractors. In addition, MPRI Inc. paid $3.2 million to resolve allegations it submitted false labor charges on a contract to design and build a national security system for Afghanistan.
    Highlighting that the DOJ and private whistleblowers are not confined to traditional targets of FCA liability, claims against private sector career schools are on the rise. Many career schools derive substantial percentages of their revenues from federally-backed Title IV student loans. The DOJ and whistleblowers have alleged such schools have engaged in a host of improprieties to wrongfully participate in the Title IV student loan program, such as paying recruiters prohibited incentive-based compensation, changing failing students’ grades to passing and misrepresenting their graduates’ career placement rates. For example, in 2009 the University of Phoenix, the nation’s largest for-profit university, announced a $78.5 million settlement of an FCA lawsuit based primarily on allegations it paid recruiters banned incentive-based compensation.
    The FCA landscape may become even more perilous for companies and individuals subject to FCA liability in 2015. Two of the most recent developments include a decision that will likely be handed down by the United States Supreme Court later this year and a pronouncement by the DOJ regarding the criminal aspect of FCA liability. These developments, either alone or in combination, have the potential to dramatically expand the scope and breadth of FCA liability.
    First, in Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, a case concerning alleged fraud by a defense contractor, the Supreme Court will consider two issues. The first issue up on appeal is whether the Wartime Suspension of Limitations Act (WSLA), 18 U.S.C. § 3287, a criminal statute that tolls the statute of limitations for “any offense” involving fraud against the government “[w]hen the United States is at war,” should apply in FCA lawsuits where there has been no formal declaration of war. The Court will consider the related issue of whether WSLA should apply to civil FCA claims brought by private whistleblowers, considering WSLA is a criminal statute. The second issue up on appeal is whether the “first to file” bar, which generally precludes repetitive FCA whistleblower cases premised on the same or similar allegations of earlier filed cases, should preclude those subsequent FCA cases when the previously-filed cases have been dismissed.
    The second development with major implications for FCA whistleblower liability occurred when a representative of the Criminal Division of the DOJ announced that all newly-filed FCA whistleblower complaints will be reviewed by the Criminal Division. Concurrent review of FCA whistleblower complaints by both the Civil and Criminal Divisions has certainly occurred in the past. However, review of all new cases by both divisions is new and a significant development.
    Going forward, the trend of aggressive FCA enforcement by the DOJ and whistleblower lawsuits is likely to continue in 2015 and beyond. It is clear the government will follow the trail of federal funds into any sector that receives federal monies to the extent it detects FCA liability. Moreover, the enforcement and whistleblower landscape is fluid. Recent policy-shifts toward increased criminal exposure and key court decisions will add further complexity to an already uncertain area of the law. It is against this backdrop that companies and executives should work closely with experienced counsel to develop vigorous compliance programs and should not hesitate to engage counsel as soon as FCA liability is suspected.