Imagine that you’re counsel to a company embroiled in a False Claims Act (FCA) case. Now imagine that your company is about to sign a settlement agreement ending that case after years of protracted discovery and motion battles with a relator or the government. You sigh in relief, right? But if that settlement includes a corporate integrity agreement (CIA), you should think twice about relaxing. A recent decision by the U.S. District Court for the Eastern District of Pennsylvania dampens the upsides of settling, as it turns out that a CIA can potentially expose a company to new FCA cases for alleged CIA violations.
In U.S. ex rel. Boise v. Cephalon, Inc. (July 21, 2015) (1 No. 08-287, 2015 WL 4461793) the U.S. District Court for the Eastern District of Pennsylvania held that relators stated a claim under the 31 U.S.C. 3721(a)(1)(G)—otherwise known as the “reverse false claims” provision of the False Claims Act— based on alleged violations of a Corporate Integrity Agreement (CIA). In other words, just when Cephalon thought that it had a FCA matter behind it, a relator was able to advance a new action claiming that Cephalon hadn’t complied with the terms of the CIA.
Cephalon is part of the uptick in risk of reverse false claims liability. Another major new area of liability for reverse false claims is the Affordable Care Act’s (ACA) so-called “60-day rule.” The ACA, which became law in March of 2010, linked retention of an overpayment under Medicare or Medicaid and FCA liability by requiring Medicare and Medicaid providers, suppliers and managed care contractors to report and return an overpayment by the later of “60 days after the date upon which the overpayment was identified or the date any corresponding cost report was due, if applicable.” For in-depth analysis, see Tony Maida, “To Be or Not to be Identified is the 60-Day Question,” Bloomberg BNA Health Care Fraud Report. The Fraud Enforcement Recovery Act of 2009 (FERA) amended the FCA’s definition of reverse false claims in an attempt to broaden its reach. Along with this broader statute, holdings such as Cephalon will pave the way for more reverse false claims theories. This article explores these developments, as well as steps companies should take to protect themselves against such claims.
THE REVERSE FALSE CLAIMS ACT PROVISION
FERA amended the FCA’s definition of reverse false claims. Prior to 2009, the reverse false claims provision of the FCA, 31 USC 3729(a)(7), stated that a person who “knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government” was liable for civil penalties (between $5,500 and $11,000, and treble damages.) The FERA version of the reverse false claims provision, 31 USC § 3729(a)(1)(G), now provides for civil penalties for anyone who “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”
Why did FERA change the FCA’s reverse false claims provision? After reverse false claims had been one of the fastest-growing areas of FCA litigation in the 1990s, court decisions had cut back on the reach of the provision. See John T. Boese, Civil False Claims Act and Qui Tam Actions, (“Boese”), §2.01[K] at 2-63-2-66. In seeking to expand the conduct covered by the FCA, the FERA reverse false claims provision differs from the prior version in several ways.
Most significantly, FERA removed the requirement of an affirmative act, i.e., making or using a false statement or record to conceal, avoid or decrease an obligation to pay the government. The second clause of §3729(a)(1)(G) now provides for liability when a person “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government”—without the need to prove a false statement or record was made or used. Prior to FERA, 31 USC § 3729(a)(7) provided for liability to any person or entity that “knowingly makes, uses, or causes to be made or use, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the government.”
As the prior statute did not define the term “obligation,” some courts held that FCA liability for a reverse false claim only applied to “fixed sum.” See, e.g., U.S. v. Q.Intl’l Courier, Inc., 131 F.3d 770 (8th Cir. 1997). FERA therefore added a definition to the previously undefined term “obligation.” 31 USC § 3729(b)(3) now states that “obligation” means:
“[a]n established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensorlicensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment.”
Thus, FERA specifically defined the term “obligation” to include an established duty “whether or not fixed.” The definition also specifically includes retaining overpayments received from the government within the scope of liability. The notable potential expansion to the scope of reverse false claims that FERA did not add incorporate was contingent duties. See Boese, §2.01[L] at 2-83 (“’Contingent’ duties were specifically stricken from the legislation prior to its passage in the Senate because their inclusion could have been interpreted to include penalties or fines.” (citing 155 Cong. Rec. S. 4539 (daily ed. Apr. 22, 2009) (statement of Sen. Kyl)). 31 USC § 3729(b)(3)’s definition requires an obligation to be “an established duty.” The FERA definition of “obligation,” however, undoubtedly opens the door much wider for new relator allegations of reverse false claims.
CEPHALON AND RELATED CASES
A recent decision in the Eastern District of Pennsylvania also demonstrates that the risk of liability for reverse false claims is increasing. In Cephalon, the U.S. District Court for the Eastern District of Pennsylvania held that relators stated a claim for a reverse false claim based on alleged violations of a Corporate Integrity Agreement (CIA). The company’s CIA provided that failure to comply with its obligations “may” lead to monetary penalties, and that the Office of the Inspector General (OIG) could demand penalties (which were stipulated at various dollar amounts in the CIA) after determining that penalties were appropriate.
The relators alleged that Cephalon made reverse false claims by falsely certifying compliance with the CIA’s reporting requirements to avoid its obligations to pay CIA penalties. The allegedly false certifications related to allegations that Cephalon promoted medications off-label and paid unlawful kickbacks in violation of the CIA.
Cephalon’s motion to dismiss centered on the “obligation” requirement of the reverse false claim. Cephalon argued that an obligation to pay only arose under the CIA terms if the OIG demanded payment of the penalties. In other words, Cephalon argued that the penalty provisions of the CIA were contingent, as the OIG could choose whether or not to demand payment of penalties. Of note, the court stated that the outcome of the motion was not impacted whether the claims were analyzed under the pre- or post-FERA reverse false claims act provisions. The court did note,
I do not accept relators’ argument that Congress’ addition of the language [in the FCA definition of “obligation”] in §3729(b)(3) stating an obligation exists “whether or not fixed” was meant to address contingent obligations. That phrase refers to whether or not the amount owed was fixed at the time of the violation, rather than whether an obligation to pay was fixed. No. 08-287, 2015 WL 4461793 (July 21, 2015) at n. 1 [(internal quotations omitted) (quoting Boese, §2.01[L] at 2-83).
In reaching its decision, the Cephalon court considered two other cases analyzing a company’s failure to comply with a CIA involving similar terms as Cephalon’s CIA, noting that they reached opposite conclusions.
On one hand, applying the FERA version of the reverse false claims provision, the District of Massachusetts found that the penalties depended on intervening discretionary government acts, and were not sufficient to create obligations to pay. See U.S. ex rel. Booker v. Pfizer, Inc., 9 F. Supp.3d 34 (D. Mass. 2014). The Booker court found, “The mere fact that Pfizer’s failure to report ‘might result in a fine or penalty is insufficient’ to establish an “obligation” to pay the government under § 3729(a)(1)(G).” 9 F.Supp.3d at 49. The court found that the obligation to pay did not arise merely upon the occurrence of reportable events; rather, the CIA merely triggered an obligation to report, which was not inherently linked to the payment of money.
On the other hand, the Southern District of Texas held in Ruscher v. Omnicare, Inc., stated that since the “decision by the OIG that Stipulated Penalties are ‘appropriate’ is identical to the decision by any contracting party to sue for a breach,” concealing a CIA violation could amount to the “obligation” required for a reverse false claim. No. 08-3396, 2014 WL 4388726 (S.D. Tex, Sept 5, 2014) at *5. Applying the pre-FERA version of the statute, the Omnicare court evaluated and distinguished cases that rejected reverse false claim theories because potential statutory fines and penalties required a government act prior to imposition, relying on the contractual nature of the CIA. Indeed, it cited a Fifth Circuit holding which the Omnicare court argued “explicitly acknowledged that obligations arising out of a contract were different from the statutory fines and penalties that it held were insufficient to state a claim under § 3729(a)(7).” U.S. ex rel. Marcy v. Rowan Companies, Inc., 520 F.3d 384, 391 (5th Cir. 2008) (citing United States ex rel. Bain v. Georgia Gulf Corp., 386 F.3d 648, 657 (5th Cir. 2004)) (“the claim failed because such fines would arise from the general environmental laws, not any particular contractual relationship between the government and the defendant”).
After comparing these cases, the court concluded that Cephalon’s obligation to pay stipulated penalties was not contingent, and instead existed regardless of OIG’s payment demand. It stated, “The existence of a contractual obligation to pay does not typically depend upon the timing of the demand for payment.” 2015 WL 4461793 at *5. In reaching this conclusion, the court emphasized that in stipulating penalties, “Cephalon and the government have already negotiated and contracted for the remedies that arise upon a breach of the CIA.” 2015 WL 4461793 at *6.
While the Cephalon court acknowledges the argument that the CIA language grants the OIG discretion, and thus an intermediary step exists prior to imposition of a contractual obligation, its reasoning does not satisfactorily address the text of the CIA. Nevertheless, unless more courts follow the reasoning of Booker, any company subject to a CIA with stipulated penalties is at risk for claims of reverse false claims.
AVOIDING REVERSE FALSE CLAIMS UNDER CIAS
Corporations often are required to enter into CIAs with the OIG to settle FCA claims. Under cases such as Cephalon and the broader FCA definition of reverse false claims, CIAs are not only enforcement mechanisms for prior FCA violations, but are now sources of new FCA allegations by relators. As the underlying conduct may also support non-reverse false claims, companies potentially can face extensive liability.
Under the Cephalon and Omnicare line of reasoning, companies may not be able to rely on discretionary language regarding penalties as protection from reverse false claims allegations, at least to defeat a motion to dismiss. Ultimately, these new reverse false claims may not hold up—CIAs generally establish policies and procedures related to specific topics to help ensure compliance with the law and Medicare rules, and are not express statements that the company is in fact in compliance with the law. Similarly, factual arguments may present obstacles to liability under this relator-driven “CIA breach” theory. For instance, the CIA certifications are generally made by the compliance officer and other managers “to the best of his or her knowledge”—which means there is a factual question about whether the person believed their certification was true at the time it was made. Therefore, it is far from clear that CIAs will ultimately provide a viable vehicle to create additional FCA liability. Yet any FCA case that is not dismissed, even if a company ultimately prevails, is nevertheless a major burden for a company, as the cost of discovery alone is often extensive.
Thus, companies subject to CIAs should be cautious of even an appearance of potential CIA violations, as they could give rise to claims by relators. One of the most challenging aspects of CIAs is continuing to meet the obligations over the entire timeframe of the CIA, since agreements often last for five years. Appointing a visible “point person” or team for the CIA approachable by anyone in the company over the life of the CIA helps to ensure compliance over the long-term. Likewise, companies should plan to send out periodic reminders throughout the company through the life of the CIA to encourage continued compliance over its entire term.
Most importantly, companies should carefully plan and conduct CIA compliance auditing and monitoring activities at the beginning and regularly throughout the CIA period. Such audits should be routine to help capture potential claims, allowing the company to address them before a relator latches on. Such audits may result in more reporting and potentially payments to the government, but catching issues early and addressing them outside of litigation is typically much less costly than dealing with a relator-driven investigation and litigation.
