In an unusual ruling on August 18, 2017, the US Court of Appeals for the Sixth Circuit reversed the Middle District of Tennessee’s denial of the defendant’s motion for attorneys’ fees, and remanded the case for an award of legal fees and expenses related to defending against the government’s “excessive” damages demand, as well as fees incurred during the appeal and remand process. The case is United States ex rel. Wall v. Circle C Construction, LLC, and as we have previously reported, last year the government suffered a major loss when the Sixth Circuit dramatically reduced the damage award in this False Claims Act (FCA) litigation by over 95 percent (from $762,894.54 to $14,748), which resulted in damages of less than 1 percent of the $1.66 million originally claimed by the government. At the time, the Sixth Circuit called the government’s so-called “tainted goods” damage calculation “fairyland rather than actual.” Continue Reading Sixth Circuit Hits Federal Government with $450,000+ in Legal Fees to be Paid to FCA Defendant Under the Equal Access to Justice Act
This April, providers cheered when a federal district court in the Middle District of Florida found insufficient evidence to support a relator’s theory that a hospital had provided free parking to physicians, in violation of the Stark Law and Anti-Kickback Statute (AKS). In the Report and Recommendation for United States ex rel. Bingham v. BayCare Health Systems, 2017 WL 126597, M.D. Fla., No. 8:14-cv-73, Judge Steven D. Merryday of the Middle District of Florida endorsed magistrate judge Julie Sneed’s recommendation that Plaintiff Thomas Bingham’s Motion for Partial Summary Judgment be denied and that Defendant BayCare Health System’s Motion for Summary Judgment be granted. However, as we discussed in a previous FCA blog post regarding these allegations, this type of case encapsulates a worrying and costly trend where courts allow thinly pleaded relator claims in which the government opted not to intervene, to survive past the motion to dismiss stage into the discovery phase of the litigation.
Bingham is a serial relator who practices as a certified real estate appraiser in Tennessee and was unaffiliated with BayCare. In his latest attempt, Bingham alleged that BayCare Health System had violated the Stark Law and the AKS by providing affiliated physicians free parking, valet services and tax benefits to induce physicians to refer patients to the health system. Continue Reading A Hospital’s Deserving Stark and AKS Victory—But At What Cost?
The Yates Memo has many landscape-changing implications for corporate investigations, including the need for enhanced Upjohn warnings and the potential suppression of joint-defense agreements between corporations and their constituents (officers, directors, employees, shareholders). This new terrain exists because in order to receive cooperation credit from the government, companies must investigate and disclose all facts about corporate wrongdoers. With the spotlight shining on corporate actors from the outset, there will be an inevitable increase in individuals seeking to have independent counsel represent them early in the investigatory process. Defense costs will surely escalate under the new Yates directive. This has several important implications for D&O liability insurance coverage.
When settling a False Claims Act (FCA) case, the issue of a relator’s attorneys’ fees seems small compared to the monetary settlement and the breadth of the release. Two recent cases, however, demonstrate that fees can prove a sticking point in wrapping up an FCA case even after settlement. In U.S. ex. rel. Simring v. Rutgers, the U.S. Court of Appeals for the Third Circuit remanded a fee award entered after a settlement, finding that the lower court provided insufficient detail to review the reasonableness of deductions to a fee application. In U.S. ex. rel. Doghramji v. Community Health Systems Inc., the U.S. District Court for the Middle District of Tennessee evaluated whether a settlement agreement carve-out permitting objections to the relators’ attorneys’ fees permitted defendants to argue that the fees were barred by either the FCA’s “first to file” or “public disclosure” bar. The court decided that the carve-out did not protect such objections. The takeaway from these cases is that, in settling an FCA case, the parties should be prepared for the potentially lingering specter of attorneys’ fee issues.
In Simring, the Third Circuit issued a non-precedential opinion that nevertheless offered useful guidance on evaluating reasonableness of attorneys’ fees under the lodestar method. In 2009, one year after the government intervened, and five years after the relator brought the case, the parties settled the FCA claims for $4.45 million. The relator then petitioned the district court for $1.08 million in fees in December 2010. The district court reduced the fee award to around $750,000 based on reductions to the hourly rates and to certain categories of requested time.
The Third Circuit affirmed in part on August 4, 2015, finding that the reduction in one lawyer’s hourly rate from $850 to $625 was reasonable, but vacated and remanded on other issues. First, the Third Circuit found that the lower court had reduced the application for “administrative” tasks performed by lawyers, but failed to specify which entries were subject to the reduced administrative rate.
Second, the Third Circuit faulted the lower court for reducing the relator’s fee application for communicating with the state Attorney General’s Office, preparing for possible expert testimony, and preparation of a second amended complaint, as the lower court found that these strategies did not ultimately yield success (i.e., the state attorney general did not intervene, the expert did not testify because there was no discovery in the case, and the second amended complaint was ultimately not filed in the case). The Third Circuit stated that such background work could not be categorically rejected simply because the strategy did not yield a recognizable result in the record; the inquiry instead should focus on whether the work is “useful” and “of a type ordinarily necessary” to the litigation.
Finally, the Third Circuit found that the lower court’s 39 percent reduction to one partner’s hourly rate for all days he conducted legal research was arbitrary. The lower court had suggested that legal research is associate-level work and thus reduced the award for all such block entries. The Third Circuit disagreed, stating that research is an essential part of a lawyer’s job and not always associate-level work, and that the lower court needed to provide more reasoning for the fee reduction.
In Doghramji, seven consolidated whistleblower cases were globally settled for $97 million in July of 2014, payable by defendant Community Health Systems, Inc. (CHSI). After the settlement, the United States approved payment of a relator’s share to one relator for the claim that yielded $88 million of the $97 million settlement. CHSI paid this relator his attorneys’ fees, but objected to paying the attorneys’ fees of the other relators, as the settlement agreement reserved the right of CHSI to “challenge or object to Relators’ claims for attorneys’ fees, expenses, and costs pursuant to 31 U.S.C. § 3730(d).” CHSI argued that the fee applications of the other relators were barred by either the FCA’s “first to file” or “public disclosure” bar.
However, the court rejected CHSI’s arguments on August 6, 2015. In interpreting the breadth of the settlement agreement’s reservation of rights to object to attorneys’ fees, the court pointed out that the parties could have explicitly carved out first-to-file and public-disclosure objections to paying the fees for all relators but did not. Rather, the global settlement reserved challenges under 31 USC §3730(d), the provision that simply addresses the relator’s share of an FCA award and payment of “reasonable” attorneys’ fees and costs. The court then referred the plaintiffs’ fee requests to a magistrate for consideration of the reasonableness of the fee requests.
These cases demonstrate that even when an FCA case has settled, the issue of attorneys’ fees can keep the case alive. Where requested fees are significant (particularly in cases like Doghramji involving more than one whistleblower), this can be a big headache for defendants, preventing true resolution of an otherwise resolved case and causing further costs to be incurred in connection with a fee challenge.
The Eastern District of Texas confirmed a jury verdict holding highway-guardrail manufacturer Trinity Industries liable for False Claims Act violations on June 9, 2015, resulting in a judgment of over $680 million against the company. Out of the $663 million in damages and penalties, the court awarded the relator a 30 percent share of the recovery, citing the government’s decision not to intervene in the case, and awarded almost $19 million in attorneys’ fees and expenses. All told, the relator was awarded over $218 million. The case is likely to be appealed based on Trinity’s arguments that the claims were not legally false because of retroactive government approval of the guardrails in question. The district court’s opinion is notable both due to the interesting appellate issues it presents, and the large recovery awarded to the relator.
The federal government, through the Federal Highway Administration (FHWA), reimburses state transportation departments for certain highway construction expenses. In order to be eligible for reimbursement, guardrails must be crash-tested and accepted by the FHWA. Defendant Trinity had obtained such acceptance for its ET-Plus units in 1999. In 2005, Trinity then modified the design of the ET-Plus units. The relator alleged, and the jury agreed, that Trinity did not disclose these modifications to the approved guardrails. The relator, a small competitor of Trinity’s, alleged that the modifications made the guardrails unsafe.
Based on the failure to disclose the modifications, the jury found that Trinity falsely certified that the modified guardrails were FHWA crash-tested and approved. In its post-trial motion for judgment as a matter of law, Trinity’s primary argument was that the reimbursement claims could not be false because the FHWA determined in 2014 that the modified guardrail was eligible for reimbursement. The FHWA’s June 2014 letter, issued shortly before trial, stated that the modified guardrail complied with safety standards and was therefore fully eligible in the past, present and future for federal reimbursement. In other words, regardless of whether the changes to the units were disclosed in 2005 or thereafter, the FHWA determined retroactively that the modified guardrails met reimbursement standards.
The Eastern District of Texas, however, found that the FHWA’s June 2014 letter “merely recites Trinity’s representations” that the modified guardrail was crash-tested in 2005, and stated that “Plaintiff introduced substantial and often uncontroverted evidence that … Trinity failed to disclose any of those modifications to the FHWA at any time prior to 2012.” The court discounted the FHWA letter because “the FHWA did not participate into any investigation into the modification of the ET-Plus or the veracity of Trinity’s claims that the ET-Plus was eligible for federal reimbursement until after the jury rendered its verdict.” Thus, the court found that the FHWA letter was insufficient to contradict the evidence at trial that “Trinity withheld material information regarding the ET-Plus units, concealed substantial modifications to the standard ET-Plus unit that was tested and originally approved by the FHWA, and falsely certified that the ET-Plus units were compliant.”
In a press release, Trinity announced its intention to file post-judgment motions and potentially appeal the outcome. The appeal will be an interesting one to watch given the FHWA’s 2014 letter supporting Trinity’s argument, and prior statements by the Fifth Circuit in denying requests for interlocutory review that it is a “close” case. The Fifth Circuit stated shortly before the second trial that “a strong argument can be made that the defendant’s actions were neither material nor were any false claims based on false certifications presented to the government.” The Fifth Circuit stated that the FHWA letter “seems to compel the conclusion” that FHWA found the product compliant with federal safety standards and therefore eligible for federal reimbursement claims. It’s therefore unlikely that the lower court’s recent decision is the end of this matter. Any opinion by the Fifth Circuit will be instructive on the question of whether agency guidance issued after the presentment of an allegedly false claim prevents materiality or legal falsity of the claim, a question particularly relevant to industries such as health care, where regulatory guidance often changes in light of updated evidence or changes in industry practice.
Nevertheless, the lower court’s opinion is also noteworthy for the size of the award to the relator —the maximum possible share of the damages and penalties (30 percent). The court also provided a generous attorneys’ fee award, awarding the relator all of the fees that he requested, despite Trinity’s argument that the fees were not reasonable. This is unusual because an award of attorneys’ fees is judged against the familiar “reasonable attorney fees” standard. In commercial disputes, an award to a prevailing party based on the “reasonable attorney fees” standard often comes with a substantial discount of the incurred fees, particularly when the prevailing party’s counsel is a national law firm with hourly rates above those in the local legal community. The district court nonetheless awarded the relator 100 percent of the requested fees, even though the average of the standard hourly rate for the lead attorneys was over $1,000 an hour, and where the court had previously applied a blended $300 hourly rate for fee awards to the parties related to discovery disputes in the case. We will continue to watch developments in this case.
On March 31, 2015, the Illinois Appellate Court issued an opinion affirming the dismissal of a qui tam lawsuit filed by a law firm acting as a whistleblower on behalf of the State of Illinois against QVC, Inc., under the Illinois False Claims Act. The opinion affirmed an important precedent previously set by the court regarding the standard for dismissal of such claims when the State moves for dismissal, and established favorable precedent for retailers by holding that use tax voluntarily paid after the filing of a qui tam action does not qualify as “proceeds” of the action within the meaning of the Illinois False Claims Act.
On March 20, 2015, the Eastern District of California ruled in United States ex rel. Doe v. Biotronik, Inc., that defendant Biotronik Inc.’s attorneys did not have to turn over their billing records to the relator and his counsel, who sought those records claiming they were relevant to prove the reasonableness of their own fees. No. 2:09-cv-3617-KJM-EFB, 2015 WL 1291371 (E.D. Cal. Mar. 20, 2015). The False Claims Act (FCA) entitles successful relators to “receive an amount for reasonable expenses . . . plus reasonable attorneys’ fees and costs.” 31 U.S.C. § 3730(d).
The complaint in Biotronik alleged violations of the FCA based on kickbacks and off-label uses and billing. The United States intervened and effected a settlement. The parties agreed that the relator was entitled to fees and costs — at issue was whether discovery of defense attorneys’ fees and billing records was relevant to determining the reasonableness of relator’s attorneys’ fees.
The Ninth Circuit uses the lodestar method in analyzing attorneys’ fees, and has held that comparing the hours of the prevailing and losing parties is “a useful guide.” Democratic Party of Washington State v. Reed, 388 F.3d 1281, 1287 (9th Cir. 2004). The Biotronik court explained that the standard for reasonable attorneys’ fees is based on “how many hours were reasonably expended on the litigation, and then multiply those hours by the prevailing local rate for an attorney of the skill required to perform the litigation.”
The court ruled that while Biotronik’s attorneys had to provide their hourly rates, as those were “part of the universe of data from which one would determine the range for rates charged in this district by experienced and qualified attorneys to litigate cases of this nature,” they did not have to share their billing records for the litigation. This was because Biotronik did not contest the reasonableness of the number of hours the relator’s lawyers spent on any particular task. Instead, Biotronik claimed that the relator was unable to collect fees for (1) any time that was vaguely described or block-billed; and (2) any time spent on issues on which the relator did not prevail (as defined by reference to the settlement agreement). The court found that, absent an argument that the time the relator’s counsel spent was unreasonable, “comparing the amount of time [defense counsel] spent on this case or on any particular tasks has no bearing on the pending fee petitions.”
This case is notable against a landscape where legal fees incurred by FCA defendants are increasingly under scrutiny. FCA defendants face fee-related litigation, or face media demands in states with open records laws that enable journalists to obtain defense counsel billing data. While Biotronik has no impact on the latter category, it underscores the fact that, depending on the position of a challenge to a relator’s fees, billing records reflecting attorneys’ fees incurred by FCA defendants may be deemed irrelevant.