Jeremy Kernodle, Christopher Rogers, and Nicole Somerville 2015-09-30 02:26:29
What every Texas lawyer should know about the False Claims Act. Against a backdrop of declining civil litigation, the dramatic increase in lawsuits under the False Claims Act1 presents challenges for clients and their counsel. Recent legislative changes and new theories of liability have expanded the statute far beyond the traditional area of government contracting. And, increasingly, competitors and former employees see the FCA as a vehicle to bring a lawsuit on behalf of the United States (called a qui tam suit) to settle a score and share in the government’s recovery of treble damages, statutory penalties, and attorneys’ fees. The potential for government intervention further complicates these suits. Trusted counsel should be educated about the special characteristics of FCA litigation before advising clients on how to proceed. Here are five common questions about the FCA, the reasons for its expanding scope, and the future of FCA litigation. What is the False Claims Act? Enacted during the Civil War, the FCA is a federal statute prohibiting fraud against the United States government.2 Anyone who knowingly submits a false claim for payment, lies to get a claim paid, or conceals an obligation owed to the government may be liable.3 If liable, a defendant must pay back three times the government’s damages and a penalty of up to $11,000 for each false claim.4 Either the United States or a private citizen—known as a relator—may bring a lawsuit to enforce the statute.5 Although all recoveries are paid to the U.S. Department of the Treasury, a relator is entitled to 15 to 30 percent of the total as a reward for bringing the fraud to the government’s attention.6 The FCA also protects relators who are employees of the defendant from retaliation.7 Why are we hearing so much about it? In the past few years, the Department of Justice has devoted substantial resources to prosecuting FCA cases, resulting in record recoveries. In 2014 alone, the DOJ recovered more than $5.6 billion in settlements and judgments under the statute.8 Approximately $3.1 billion of this related to cases against banks and other financial institutions involved in federally insured mortgages and loans, and $2.3 billion involved federal health care programs like Medicare and Medicaid. At the same time, private relators—often represented by sophisticated plaintiffs’ firms—have increasingly sued under the FCA to report fraud against the government. Last year, private relators filed more than 700 such suits—up from only 30 in 1987—resulting in $435 million in proceeds for relators. These lawsuits were brought against a variety of businesses in a number of different industries, including banks, other financial institutions, pharmaceutical and device manufacturers, health care providers, and government contractors. How is an FCA case different from common-law fraud? FCA cases have at least four unique characteristics. First, the plaintiff is different. The government and private citizens are entitled to bring an FCA suit, and who leads the charge can dramatically affect the outcome. If it is the government, the plaintiff has the resources of the United States at hand. In contrast, a private whistleblower may be more interested in settling a score with a prior employer. Second, the initial filing is often under seal. In initiating the case, a private relator must file the complaint under seal and confidentially serve a copy, along with a written disclosure of all material evidence, with the DOJ.9 The government then has 60 days (which can be extended for good cause, sometimes for years) to investigate the allegations. After conducting its investigation, the government has the opportunity to “intervene” and take over the case or to “decline” and allow the relator to pursue the case independently. If the government intervenes, the relator will receive between 15 to 25 percent of the recovery, and if the government declines, the relator’s share goes up to 25 to 30 percent. Third, damages are trebled and penalties are assessed per false “claim.” As a result, the amount of liability can proliferate quickly. In the 2013 case against Tuomey Healthcare System, for example, a jury found $39 million in single damages, but because of trebling and the number of false claims, the total award amounted to more than $237 million.10 Fourth, the FCA is increasingly being used to police contractual or regulatory requirements. The Tuomey case illustrates this point well. The government alleged that Tuomey and more than a dozen physicians entered into contractual arrangements that violated the Stark Law11 and that the hospital violated the FCA each time it submitted a Medicare claim for services performed by one of those physicians. Importantly, the government did not allege that the services were not performed, were overbilled, or were deficient in any way. Instead, it focused on the underlying violation of the Stark Law, which allegedly made the claims ineligible for reimbursement. However, not all regulatory provisions are created equal, and thus courts often struggle with whether an underlying regulatory or contractual provision actually affects the government’s decision to pay a claim. What should I tell my clients? If your client receives any money from the government, your client should be aware of the FCA. The best way to avoid FCA exposure is to develop a robust compliance program that can ferret out fraud before it begins. Employees should be routinely trained on fraud prevention and encouraged to come forward if they see any questionable behavior. Keeping in mind the FCA’s anti-retaliation provisions, companies should create a culture of open communication and protect complainants from any potential retaliation. If a client receives any kind of investigatory demand—either a formal civil investigative demand or an informal request for information—from a U.S. attorney’s office, an office of inspector general, the FBI, or a state attorney general’s office, it should notify counsel immediately. This may indicate that an FCA case has been filed under seal and that the government is investigating the allegations. During this early period, an experienced FCA attorney can often establish credibility on behalf of the client, help negotiate the scope of the subpoena, and possibly convince the government to decline to intervene in—or to quickly resolve—the case. What is the future of FCA litigation? Most attorneys practicing in this area agree that the general upward trend in FCA cases will likely continue as the reach of the federal government expands and courts extend theories of liability. Although the total recovery amounts reported by the DOJ may decline now that the financial crisis has passed, the number of whistleblower suits will almost certainly remain high. In recent years, private plaintiffs have successfully sued telecommunications companies, higher education institutions, technology firms, and a host of manufacturers that sell products to the government. In addition, the success of the relators’ bar and the entrance of many well-heeled plaintiffs’ firms into the FCA space will undoubtedly make this an area of growth for the near future. Notes 1) 31 U.S.C. §§ 3729-3733. 2) Many states, including Texas, have their own FCA statutes, which are enforced by the state attorneys general. The Texas statute, however, is limited to fraud against the state Medicaid program. See Tex. Hum. Res. Code Ann. §§ 36.001-36.132. 3) 31 U.S.C. § 3729(a)(1). 4) Id. 5) Id. § 3730. 6) Id. § 3730(d). 7) Id. § 3730(h). 8) Available at http://www.justice.gov/opa/pr/justice-department-recovers-nearly-6-billionfalse-claims-act-cases-fiscal-year-2014. 9) 31 U.S.C. § 3730(b). 10) United States ex rel. Drakeford v. Tuomey Healthcare Sys., Inc., 976 F.Supp.2d 776 (D.S.C. 2013), aff’d, 2015 WL 4036166 (4th Cir. July 2, 2015). 11) 42 U.S.C. § 1395nn. The Stark Law is commonly called the self-referral law and regulates all manner of financial relationships between physicians and medical facilities. In Tuomey, the government alleged that the hospital based its physician compensation on the physicians’ volume of referrals, which is prohibited by the Stark Law. See, e.g., Tuomey, 976 F.Supp.2d 776. JEREMY KERNODLE chairs Haynes and Boone’s False Claims Act/qui tam practice group. He has extensive experience defending clients in FCA cases and routinely advises health care providers, defense contractors, and other clients in high-stakes disputes with the government. CHRISTOPHER ROGERS co-chairs the white collar criminal defense practice group at Haynes and Boone. His clients include health care, telecommunications, financial, and industrial firms facing civil or criminal government enforcement of health care, securities, or antitrust laws. NICOLE SOMERVILLE is an associate in Haynes and Boone’s False Claims Act/qui tam and health care practice groups. She helps a variety of health care and government contracting clients navigate the complex fraud and abuse laws, including the FCA, the Anti-Kickback Statute, the Stark Law, and the Civil Monetary Penalties Law.
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