Side-Swiped by the False Claims Act

Background

The FCA, which was enacted in 1863 and amended in 1986 and 2009, was a relatively straightforward prohibition on false statements to obtain money from the government but has been strengthened to reach indirect, implied, and reverse false claims that bear little resemblance to conduct that led to enactment of the statute ' fraud in the sale of defective military supplies to the Union Army. These theories, which impose indirect FCA liability, can become a trap for the unwary and demand careful analysis.

Implied Certifications

Liability under the FCA has traditionally been focused on submission of a written claim for payment that was actually false or fraudulent, or the creation of a document to conceal a duty to repay the government. Enforcement actions are often based on written certifications of compliance with federal requirements, which are routinely required for some aspects of federal contracts, grants, loans, and entitlement programs, such as Medicare and Medicaid. Examples include representations made in connection with the award of a contract or grant, continued participation in entitlement programs, such as Medicare provider participation agreements, and billings to federal agencies and their prime contractors.

Courts are increasingly imposing FCA liability based on “implied certification” of compliance with a variety of statutory, regulatory, and contractual requirements that are deemed material. Implied certification has been founded on a variety of legal theories over the past two decades, and the case law continues to vary widely by circuit. At one end of the spectrum, FCA liability attaches upon the submission of a claim for payment, if there is an underlying violation of statute, regulation, or contract and if compliance is an express precondition of payment. At the other end of the spectrum, liability attaches if the government might not have approved the payment if it had been aware of the breach.

The upshot of the implied false claim is that liability may be based on an implicit, unwritten “certification” of compliance with any federal “requirement” even where no concrete statement is made that is actually false. Indeed, the potential for implied certifications may be as limitless as the government's desire to dictate social policy through federal program requirements. For example, an interim regulation mandated that federal contractors “should ' [a]dopt and enforce policies that ban text messaging while driving ' when performing any work for or on behalf of the Government,” and this requirement also must be passed down to subcontractors. Interim Rule, 75 Fed. Reg. 60264 (Sept. 29, 2010); see also Final Rule, 76 Fed. Reg. 39240 (July 5, 2011) (rule changed to non-mandatory). At least in some circuits, FCA liability could be based on testimony that the government might not have approved the payment if it had been aware of a failure to implement a ban on texting, if it were mandatory, even though implementing such a policy was not an express precondition of payment. Until the Supreme Court agrees to address “implied certification,” there will be continued uncertainty in the standard of liability, as well as forum shopping.

Reverse FCA Liability

Reverse false claims may now arise where funds are innocently received but “improperly” retained and not repaid to the government. After the 2009 amendments, liability attaches even without a false statement to the government, any false record, or any action to conceal a repayment duty. The FCA now prohibits the “retention” of funds owed to the government if a repayment obligation is avoided “improperly.” Although the law does not define “improperly,” the term “obligation” includes any “duty … arising ' from the retention of any overpayment.” Arguably, therefore, the statutory basis of reverse false claim liability is circular and may impose strict liability based, for example, on a failure to honor “most favored customer” pricing terms, an issue underlying Oracle's recent $199.5 million settlement under a General Services Administration (GSA) Schedule contract.

The law is circular because it imposes a statutory penalty for the “retention of any overpayment” when repayment is “improperly” avoided. To avoid circularity, courts presumably would impose liability based only on intentional, reckless, or deliberate disregard of a specific legal, contractual or federal regulatory program requirement, although it is unclear what degree of diligence, if any, would insulate a party from liability. Otherwise, a party could be strictly liable even for innocent receipt of money in the context of a federal contract, grant, or federal program participation. However, the statutory language is not clear, and there appear to be no case decisions on this point.

Improper retention of “overpayments” could include direct refunds and advance payments from agencies, or a failure to share “best pricing” with a federal agency, if required. The clear lesson is that failing to diligently track down the reason for receiving any federal funds and considering any possible obligations to repay in a timely manner could be considered “reckless” and result in FCA liability.

In the health care field, these repayment obligations were further sharpened with a 60-day timeliness rule under health reform legislation, the Patient Protection and Affordable Care Act of 2010. Health care providers, suppliers and health plans are now liable under the FCA for “funds that a person receives or retains ' to which the person, after applicable reconciliation, is not entitled under” Medicare or Medicaid, unless the overpayment is reported in writing and returned to the government within 60 days.

Indirect FCA Liability

Indirect false claims can arise when a subcontractor submits a false invoice to a prime contractor, who then passes the costs along to the government in an innocent, but nonetheless false, claim. Yet, the Supreme Court reasonably recognized that the FCA did not impose liability if the “defendant makes a false statement to a private entity and does not intend the Government to rely on that false statement as a condition of payment,” based on the FCA's pre-2009 language that requires proof that the subcontractor intended “to get a false or fraudulent claim paid ' by the Government.” Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662, 672 (2008).

Within a year, however, Congress overturned Allison Engine by deleting the “to get” language. Under the 2009 FCA amendments, the FCA now imposes liability on a non-submitting party that “causes” the submission of a false claim or “causes to be made or used, a false record or statement [that is] material to a false or fraudulent claim,” or that is “material to an obligation to pay ' money ' to the Government.” 31 U.S.C. 3729(a)(1) (A), (B) and (G).

The current state of FCA indirect liability was revealed when the U.S. Court of Appeals for the Fifth Circuit ruled in February 2011 that Caremark, a Pharmacy Benefit Manager, could be held liable under a broader “indirect” FCA theory. United States v. Caremark, Inc., 634 F.3d 808 (5th Cir. 2011).

Caremark had contracts with private heath insurance companies that did not reference or impose any duties regarding coordination of benefits with Medicaid. The state Medicaid agencies, however, were subject to statutory duties to obtain repayment of federal funds from private plans when Medicaid was billed for services to “dual eligibles” ' patients covered by both Medicaid and a private plan. The trial court found that even if Caremark had incorrectly denied Medicaid agency requests for repayment, “Caremark does not have any obligation to the Government for denials of reimbursement requests” because the only obligations created under Medicaid were those imposed on state Medicaid agencies and because no “economic relationship existed” between Caremark and the government.

The Fifth Circuit reversed, side-swiping Caremark with indirect, implied, reverse FCA liability. The court ruled that liability for reverse false claims “does not require that the statement impair the defendant's obligation; instead, it requires that the statement impair 'an obligation to pay or transmit money or property to the Government.'” (emphasis in original). The striking facts are that Caremark did not submit any claims to the government, had no direct relationship with Medicaid or duty under any law, and did not submit bills that would be paid using federal funds. The court's ruling, however, suggests that mere proximity to, or foreseeability of, any impact to federal funds may suffice to bring a defendant to trial.

A few months later, the First Circuit similarly held that a party may violate the FCA if it causes the certification of another party to become false. United States ex. rel. Hutcheson v. Blackstone Medical Inc., 647 F.3d 377 (1st Cir. 2011); cert. den., _ S.Ct. _, 2011 WL 3841712 (Dec. 5, 2011). In Blackstone, the qui tam plaintiff alleged that a medical device manufacturer paid kickbacks to physicians to encourage them to use certain products during surgeries conducted at the hospitals. The manufacturer, like Caremark, did not submit any express or implied certifications, but hospitals and physicians may have submitted false certifications to Medicare that their claims were untainted by kickbacks. The court, nevertheless, ruled that the manufacturer could be liable for “causing” Medicare providers to submit false certifications. Recently, the Supreme Court denied a petition for certiorari in Blackstone, thereby ensuring continued uncertainty in the standard of liability under the FCA.

Conclusion

Under the FCA, doing business with the government can be a journey through a minefield, with a long checklist of precautions that includes complex federal program requirements and tricky compliance and reporting duties. And, when compliance or enforcement issues arise, there appears a dim and tortured path toward a “global settlement” with multiple enforcement authorities.

A few conclusions are clear. Written certifications make easier targets for FCA enforcement, so great care should be taken before certifying any compliance with any federal requirement. An important consequence of recent “indirect” FCA case law is that vendors and subcontractors may now face strict liability if others rely on their documents and these are determined to be false. This concern is not far-fetched ' prime contractors and hospitals may obtain or rely on vendor certifications, timesheets, and quality and compliance records when preparing bills to the government. Under current law, vendors and subcontractors are well-advised to presume that any false record could be deemed to be “material to” and “cause” the submission of a false claim to the government. Finally, retaining funds that may be “overpayments” of government funds ' especially Medicare or Medicaid ' is a high-risk proposition.

Laurence A. Urgenson ([email protected]), Chairman of this newsletter's Board of Editors, is a partner at Kirkland & Ellis LLP. Robert S. Ryland ([email protected]) is a partner specializing in health care and government contracts. H. Boyd Greene ([email protected]) and Matthew C. Thuesen ([email protected]) are associates specializing in government contracts and litigation.

You didn't see it coming. Your company took a supporting role in a federally funded program such as Medicare, or supported a prime contractor to a defense or civilian agency. Your company is certain it never submitted a false invoice, never certified compliance with any federal requirements, and never promised to comply with federal regulations.

Out of the blue, the Department of Justice (DOJ) contacts you about a qui tam complaint alleging your company submitted “false claims” involving federal funds and is liable for treble damages, plus penalties under the civil False Claims Act, 31 U.S.C. 3729 (FCA). You think: “This cannot be happening to my company.”

Welcome to the FCA defendants' club, which is becoming less and less exclusive. DOJ, in its own words, “has never been more aggressive or more successful” and recently announced record fraud recoveries ' $5.6 billion in 2011 and more than $15 billion since 2009, including $8.4 billion in health care cases. The FCA accounted for $3 billion in 2011, including $2.8 billion in qui tam cases where a whistleblower is entitled to a percentage of the recovery. The trend is sharply upward ' 28% of all FCA recoveries over the past 25 years were obtained in the past three years. There were 638 new qui tam cases filed in 2011 alone ' nearly double the trend over the past decade ' and DOJ has obtained large increases in funding to combat fraud, abuse and excessive costs, especially in federal health programs.

Background

The FCA, which was enacted in 1863 and amended in 1986 and 2009, was a relatively straightforward prohibition on false statements to obtain money from the government but has been strengthened to reach indirect, implied, and reverse false claims that bear little resemblance to conduct that led to enactment of the statute ' fraud in the sale of defective military supplies to the Union Army. These theories, which impose indirect FCA liability, can become a trap for the unwary and demand careful analysis.

Implied Certifications

Liability under the FCA has traditionally been focused on submission of a written claim for payment that was actually false or fraudulent, or the creation of a document to conceal a duty to repay the government. Enforcement actions are often based on written certifications of compliance with federal requirements, which are routinely required for some aspects of federal contracts, grants, loans, and entitlement programs, such as Medicare and Medicaid. Examples include representations made in connection with the award of a contract or grant, continued participation in entitlement programs, such as Medicare provider participation agreements, and billings to federal agencies and their prime contractors.

Courts are increasingly imposing FCA liability based on “implied certification” of compliance with a variety of statutory, regulatory, and contractual requirements that are deemed material. Implied certification has been founded on a variety of legal theories over the past two decades, and the case law continues to vary widely by circuit. At one end of the spectrum, FCA liability attaches upon the submission of a claim for payment, if there is an underlying violation of statute, regulation, or contract and if compliance is an express precondition of payment. At the other end of the spectrum, liability attaches if the government might not have approved the payment if it had been aware of the breach.

The upshot of the implied false claim is that liability may be based on an implicit, unwritten “certification” of compliance with any federal “requirement” even where no concrete statement is made that is actually false. Indeed, the potential for implied certifications may be as limitless as the government's desire to dictate social policy through federal program requirements. For example, an interim regulation mandated that federal contractors “should ' [a]dopt and enforce policies that ban text messaging while driving ' when performing any work for or on behalf of the Government,” and this requirement also must be passed down to subcontractors. Interim Rule, 75 Fed. Reg. 60264 (Sept. 29, 2010); see also Final Rule, 76 Fed. Reg. 39240 (July 5, 2011) (rule changed to non-mandatory). At least in some circuits, FCA liability could be based on testimony that the government might not have approved the payment if it had been aware of a failure to implement a ban on texting, if it were mandatory, even though implementing such a policy was not an express precondition of payment. Until the Supreme Court agrees to address “implied certification,” there will be continued uncertainty in the standard of liability, as well as forum shopping.

Reverse FCA Liability

Reverse false claims may now arise where funds are innocently received but “improperly” retained and not repaid to the government. After the 2009 amendments, liability attaches even without a false statement to the government, any false record, or any action to conceal a repayment duty. The FCA now prohibits the “retention” of funds owed to the government if a repayment obligation is avoided “improperly.” Although the law does not define “improperly,” the term “obligation” includes any “duty … arising ' from the retention of any overpayment.” Arguably, therefore, the statutory basis of reverse false claim liability is circular and may impose strict liability based, for example, on a failure to honor “most favored customer” pricing terms, an issue underlying Oracle's recent $199.5 million settlement under a General Services Administration (GSA) Schedule contract.

The law is circular because it imposes a statutory penalty for the “retention of any overpayment” when repayment is “improperly” avoided. To avoid circularity, courts presumably would impose liability based only on intentional, reckless, or deliberate disregard of a specific legal, contractual or federal regulatory program requirement, although it is unclear what degree of diligence, if any, would insulate a party from liability. Otherwise, a party could be strictly liable even for innocent receipt of money in the context of a federal contract, grant, or federal program participation. However, the statutory language is not clear, and there appear to be no case decisions on this point.

Improper retention of “overpayments” could include direct refunds and advance payments from agencies, or a failure to share “best pricing” with a federal agency, if required. The clear lesson is that failing to diligently track down the reason for receiving any federal funds and considering any possible obligations to repay in a timely manner could be considered “reckless” and result in FCA liability.

In the health care field, these repayment obligations were further sharpened with a 60-day timeliness rule under health reform legislation, the Patient Protection and Affordable Care Act of 2010. Health care providers, suppliers and health plans are now liable under the FCA for “funds that a person receives or retains ' to which the person, after applicable reconciliation, is not entitled under” Medicare or Medicaid, unless the overpayment is reported in writing and returned to the government within 60 days.

Indirect FCA Liability

Indirect false claims can arise when a subcontractor submits a false invoice to a prime contractor, who then passes the costs along to the government in an innocent, but nonetheless false, claim. Yet, the Supreme Court reasonably recognized that the FCA did not impose liability if the “defendant makes a false statement to a private entity and does not intend the Government to rely on that false statement as a condition of payment,” based on the FCA's pre-2009 language that requires proof that the subcontractor intended “to get a false or fraudulent claim paid ' by the Government.” Allison Engine Co. v. United States ex rel. Sanders , 553 U.S. 662, 672 (2008).

Within a year, however, Congress overturned Allison Engine by deleting the “to get” language. Under the 2009 FCA amendments, the FCA now imposes liability on a non-submitting party that “causes” the submission of a false claim or “causes to be made or used, a false record or statement [that is] material to a false or fraudulent claim,” or that is “material to an obligation to pay ' money ' to the Government.” 31 U.S.C. 3729(a)(1) (A), (B) and (G).

The current state of FCA indirect liability was revealed when the U.S. Court of Appeals for the Fifth Circuit ruled in February 2011 that Caremark, a Pharmacy Benefit Manager, could be held liable under a broader “indirect” FCA theory. United States v. Caremark, Inc. , 634 F.3d 808 (5th Cir. 2011).

Caremark had contracts with private heath insurance companies that did not reference or impose any duties regarding coordination of benefits with Medicaid. The state Medicaid agencies, however, were subject to statutory duties to obtain repayment of federal funds from private plans when Medicaid was billed for services to “dual eligibles” ' patients covered by both Medicaid and a private plan. The trial court found that even if Caremark had incorrectly denied Medicaid agency requests for repayment, “Caremark does not have any obligation to the Government for denials of reimbursement requests” because the only obligations created under Medicaid were those imposed on state Medicaid agencies and because no “economic relationship existed” between Caremark and the government.

The Fifth Circuit reversed, side-swiping Caremark with indirect, implied, reverse FCA liability. The court ruled that liability for reverse false claims “does not require that the statement impair the defendant's obligation; instead, it requires that the statement impair 'an obligation to pay or transmit money or property to the Government.'” (emphasis in original). The striking facts are that Caremark did not submit any claims to the government, had no direct relationship with Medicaid or duty under any law, and did not submit bills that would be paid using federal funds. The court's ruling, however, suggests that mere proximity to, or foreseeability of, any impact to federal funds may suffice to bring a defendant to trial.

A few months later, the First Circuit similarly held that a party may violate the FCA if it causes the certification of another party to become false. United States ex. rel. Hutcheson v. Blackstone Medical Inc. , 647 F.3d 377 (1st Cir. 2011); cert. den., _ S.Ct. _, 2011 WL 3841712 (Dec. 5, 2011). In Blackstone, the qui tam plaintiff alleged that a medical device manufacturer paid kickbacks to physicians to encourage them to use certain products during surgeries conducted at the hospitals. The manufacturer, like Caremark, did not submit any express or implied certifications, but hospitals and physicians may have submitted false certifications to Medicare that their claims were untainted by kickbacks. The court, nevertheless, ruled that the manufacturer could be liable for “causing” Medicare providers to submit false certifications. Recently, the Supreme Court denied a petition for certiorari in Blackstone, thereby ensuring continued uncertainty in the standard of liability under the FCA.

Conclusion

Under the FCA, doing business with the government can be a journey through a minefield, with a long checklist of precautions that includes complex federal program requirements and tricky compliance and reporting duties. And, when compliance or enforcement issues arise, there appears a dim and tortured path toward a “global settlement” with multiple enforcement authorities.

A few conclusions are clear. Written certifications make easier targets for FCA enforcement, so great care should be taken before certifying any compliance with any federal requirement. An important consequence of recent “indirect” FCA case law is that vendors and subcontractors may now face strict liability if others rely on their documents and these are determined to be false. This concern is not far-fetched ' prime contractors and hospitals may obtain or rely on vendor certifications, timesheets, and quality and compliance records when preparing bills to the government. Under current law, vendors and subcontractors are well-advised to presume that any false record could be deemed to be “material to” and “cause” the submission of a false claim to the government. Finally, retaining funds that may be “overpayments” of government funds ' especially Medicare or Medicaid ' is a high-risk proposition.

Laurence A. Urgenson ([email protected]), Chairman of this newsletter's Board of Editors, is a partner at Kirkland & Ellis LLP. Robert S. Ryland ([email protected]) is a partner specializing in health care and government contracts. H. Boyd Greene ([email protected]) and Matthew C. Thuesen ([email protected]) are associates specializing in government contracts and litigation.