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FCA Civil Penalties May Double, Exploding Possible Damages Awards

On May 2, 2016, the Railroad Retirement Board (RRB) issued an interim final rule increasing civil penalties allowable under the False Claims Act (FCA).  The rule will be effective on August 1, 2016.  Public comments may be sent to the RRB by July 1, 2016.  The Bipartisan Budget Act of 2015 requires other agencies, including the U.S. Department of Justice, to issue similar regulations in the coming months.

The 1986 version of the FCA provided that on a finding of liability, the government can recover civil penalties of not less than $5,000 and not more than $10,000 per false claim in addition to treble damages.  The statute was subsequently amended to permit the civil penalties provision to be adjusted through the regulatory process by the Federal Civil Penalties Inflation Adjustment Act of 1990 and the Bipartisan Budget Act of 2015.  Civil penalties currently range from $5,500 to $11,000 per claim.

Under the RRB’s proposed regulation, penalties will increase to a minimum of $10,781 per claim and a maximum of $21,563 per claim, approximately double their current size.

The proposed regulation exacerbates an already alarming trend in the size of FCA damages awards and settlements.  Some commentators have already questioned whether the revised regulations raise constitutional concerns about the total size of a damages award.  In considering whether the size of a damages award violates a defendant’s right to due process, the Supreme Court has looked to the ratio of punitive damages and/or civil penalties and compensatory damages.  In one case, the Court recognized that a 10-to-1 ratio between punitive damages and compensatory damages may be the constitutionally permissible maximum.  See State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003) (noting that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process”).

It is easy to fathom an FCA case in which the ratio of civil penalties to single damages would exceed 10-to-1.  For example, in cases where the government alleges that a health care provider “upcoded” (i.e., assigned an inaccurate billing code to increase reimbursement) charges to a federal payor, the difference in reimbursement between the service for which the provider billed and the service actually performed might only be $100 per treatment (or even less).  In such a case, the $100 per treatment would represent the amount of damages the federal payor suffered.  In the event a court awarded a civil penalty of $21,563 per claim, the ratio of civil penalties to single damages could be over 215-to-1.

Contractors who face the possibility of civil penalties should keep in mind these constitutional considerations, as they may present opportunities for litigants to ask courts to decrease civil penalties or decline to apply them altogether.

Fourth Circuit Upholds Judgment of Over $237 Million against Tuomey Healthcare System

On July 2, 2015, the U.S. Court of Appeals for the Fourth Circuit affirmed the U.S. District Court for the District of South Carolina’s judgment of $237,454,195 in damages and penalties against Tuomey Healthcare System in United States ex rel. Drakeford v. Tuomey Healthcare System, Inc. (No. 13-2219).  The judgment followed a rare False Claims Act (FCA) trial, after which the jury found Tuomey liable for submitting 21,730 false claims to Medicare.  While the Fourth Circuit’s Tuomey decision addressed many claims of error advanced by Tuomey on appeal, this post highlights the court’s response to Tuomey’s challenges based on the “advice of counsel” defense and on the computation and size of the judgment.

Tuomey was alleged to have entered into part-time employment contracts with physicians that violated the Stark Law.  After one of the physicians expressed compliance concerns about the structure of the proposed arrangement, Tuomey sought Stark Law compliance advice about the contracts from several attorneys – one of whom, Kevin McAnaney, indicated that the contracts raised “red flags” under the Stark Law.  McAnaney was jointly retained by Tuomey and the physician, Drakeford, after Tuomey received a legal opinion from its longstanding counsel that the contracts were Stark compliant.  Despite McAnaney’s advice, Tuomey elected to move forward with the contracts.  Drakeford subsequently filed an FCA qui tam lawsuit against Tuomey, and the extensive litigation ensued. (more…)