Fraud Enforcement and Recovery Act (FERA)

In light of the rising civil monetary penalties under the False Claims Act (FCA) and the looming threat of bank-breaking treble damages, avenues to dismissal are paramount to defendants operating in industries vulnerable to FCA claims, including health care. The United States Supreme Court’s unanimous decision in State Farm Fire & Casualty Co. v. United States ex rel. Rigsby, issued on December 6, 2016, narrows the path for one such avenue.

In Rigsby, the Supreme Court closed the door on what would have been a powerful tool for defendants facing qui tam complaints brought under the FCA: mandatory dismissal based on a relator’s violation of the 60-day seal requirement. The Court did not, however, foreclose dismissal as a possible sanction against relators who violate the seal‑requirements.

Continue Reading A Closer Look at Rigsby and the Supreme Court’s Rejection of Mandatory Dismissal for Seal Violations

While there are a number of executive policies that will be affected by the presidential election, there are several reasons to expect modest change in the government’s approach to False Claims Act (FCA) actions. The most significant reason for this expectation is that the vast majority of FCA cases are filed by relators on behalf of the government and the Department of Justice (DOJ) has historically viewed itself as obligated to conduct an investigation into those cases. There is little reason to suspect the financial motivations that encourage relators and relators’ counsel to continue to bring cases under the FCA will diminish. That said, the possibility of repeal of the Affordable Care Act (ACA) could remove or change some of the ACA’s FCA amendments that enhanced the ability of certain individuals to qualify as a relator. The composition of the Supreme Court may have the most significant impact on the FCA given the Court’s increasing interest in this area.

Continue Reading Predictions on False Claims Act Enforcement in the Trump Administration

On October 5, 2016, the Court of Appeals for the Third Circuit remanded a “reverse” False Claims Act (FCA) case to the District Court for the Eastern District of Pennsylvania for further proceedings. The court’s decision in United States ex rel. Custom Fraud Investigations, LLC v. Victaulic Company, Case No. 15-2169 (3d Cir., Oct. 5, 2016), breathes new life into a case that was previously dismissed by the district court in September 2014, and provides extensive discussion about how reverse claims operate in the era of the 2009 Fraud Enforcement and Recovery Act (FERA) amendments.

The case involves nondiscretionary import regulations—set forth in the Tariff Act of 1930—that apply to the pipe fitting industry. These regulations mandate that pipe fittings manufactured outside the United States must be marked with the country of origin; in contrast, pipe fittings manufactured in the United States are typically unmarked. Failure to properly mark foreign-manufactured pipe fittings results in a 10 percent ad valorem that accrues from the time of importation. Furthermore, if improperly marked goods are discovered by customs officials, the importer has three options: (1) re-export the goods; (2) destroy the goods; or (3) mark them properly to be released for sale in the United States. Since customs officials largely rely on importers to self-report any duties that are owed at the time of import, it is possible for improperly marked pipe fittings to enter the United States’ stream of commerce. To the extent that improperly marked pipe fittings are discovered after they have entered the market, the 10 percent ad valorem is due immediately, retroactive to the date of importation.

Continue Reading Third Circuit Revives Reverse False Claims Act Case but Acknowledges Burden on Defendants

The Fifth Circuit Court of Appeals recently affirmed a district court’s dismissal of a retaliation claim under the False Claims Act (FCA) as to several individual defendants.

In Howell v. Town of Ball, a Ball, Louisiana police officer, Howell, sued the town and several town officials for employment retaliation in violation of the FCA (among other claims).  The officials moved to dismiss, arguing that the FCA creates a cause of action only against a plaintiff’s employer.  The district court agreed, citing the subsection of the FCA that creates a cause of action for those “discriminated against in the terms and conditions of employment . . .”  31 U.S.C. § 3730(h) (emphasis added).

On appeal, Howell argued that a 2009 amendment to the FCA (which removed the reference to “employer” in § 3730(h)) “indicate[d] a legislative intent to broaden the class of viable defendants.” In a July 1 decision, a three-judge panel of the Fifth Circuit disagreed with Howell, holding that “the reference to an ‘employer’ was deleted to account for the broadening of the class of FCA plaintiffs to include ‘contractors’ and ‘agents,’ not to provide liability for individual, non-employer defendants.”

In sum, FCA plaintiffs can only bring retaliation actions against their actual employers, notwithstanding the role that other non-employer individuals may have had in allegedly retaliatory activity.

On July 27, 2016, a three-judge panel of the Ninth Circuit Court of Appeals in California issued a ruling in United States ex rel. Hastings v. Wells Fargo Bank, NA, Inc., affirming the district court dismissal of a qui tam suit on the grounds that the relator was not an original source.

The relator had sued Wells Fargo and a number of other lending institutions under the Federal Claims Act (FCA), claiming they had falsely certified to the federal Department of Housing and Urban Development (HUD) that they were in compliance with a regulation requiring borrowers to make a down payment of at least 3%. Federal regulations allow this down payment to be paid via gift, so long as repayment for the gift is not “expected or implied.” See U.S. ex rel. Hastings v. Wells Fargo Bank, Nat. Ass’n (Inc.), 2014 WL 3519129, at *1 (C.D. Cal. July 15, 2014) (summarizing HUD regulations).

The defendants moved to dismiss, arguing that the gravamen of the allegations (that certain charities were, with the tacit approval the defendants, making “gifts” to borrowers that were ultimately repaid) had already been disclosed in various public documents that predated the qui tam suit. Because of these public disclosures, the suit could only proceed if the relator was an “original source” of the information, per 31 U.S.C. § 3730(e)(4)(A). The district court held that the relator, a real estate agent, was not an original source because his knowledge of the charities and their gift programs was secondhand. The court also held the fact that relator had “offered his view to HUD that [the gift programs] violated HUD standards” to be of no moment, because “[i]dentifying the legal consequences of information already in the public domain does not constitute discovery of fraud.” 2014 WL 3519129, at *11.

On appeal, the relator argued that the district court incorrectly applied the 1986 FCA definition of “original source” (someone who has “direct and independent knowledge of the information on which the allegations are based”) instead of the 2010 definition (someone who “(1) prior to a public disclosure … has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions”). Compare 31 U.S.C. § 3730(e)(4)(B) (1986) with 31 USC. § 3730(e)(4)(B) (2010). The Ninth Circuit panel unanimously held that the relator was not an original source under either definition. Regarding the former, it held that his knowledge was not “direct and independent” where it was “assembled from information available to all members of the Multiple State Listing Service.” 2016 WL 4011199, at *1. Regarding the latter, it held that the relator had merely provided the government with information that did not “materially add to [the] public disclosures,” citing the fact that the gift programs in question “were extensively examined in proposed rules, internal audits, a GAO report, and congressional hearings.”  Id. at *2.

In sum, the FCA’s original source requirement represents a high bar for qui tam plaintiffs. Suits brought by relators who are not true insider “whistleblowers” with first-hand knowledge of the alleged fraud are remain highly vulnerable to dismissal on the pleadings.