The False Claims Act (31 U.S.C. §§3729-3733) (“FCA”) imposes liability on persons and companies who defraud the government. It is the federal Government’s primary tool in combating fraud against the Government. There are also similar provisions under most states’ laws. Because of changes in the law, which make it easier to file these actions, there has been a significant increase in these actions in the last decade.
The Department of Justice (DOJ) under the Trump Administration, however, has recently issued guidance memoranda which could be beneficial to defendants in FCA actions. The first policy, issued in January 2018, instructs federal prosecutors to consider whether declined qui tam actions should be dismissed to better advance the government’s interest. (Granston Memo). Also in January 2018, the Office of the Associate Attorney General issued a new policy that prohibits DOJ’s civil litigators from using “guidance documents” in the enforcement of affirmative civil cases including the FCA. (Brand Memo). Then in May 2018, the DOJ announced a policy discouraging duplicative corporate penalties, which could impact on FCA cases as well. (United States Attorneys Manual Section 1-12.100). All of these are discussed in more detail at in previous blog posts at wirskyelawfirm.com.
The FCA imposes liability on a defendant who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” using federal funds. 31 U.S.C. § 3729(a)(1)(A). To establish a violation under §3729(a)(1)(A), courts require (1) a false or fraudulent claim, (2) made or carried out with requisite scienter, (3) that was material, and (4) that caused the government to pay or forfeit money. There are other provisions under the FCA, including making a false record or statement material to a false or fraudulent claim or conspiring to violate the FCA. The other subsections at §3729(a) generally require a false claim with the elements listed in this paragraph, and sometimes others.
The whistleblower provisions of the FCA allows individuals who are not affiliated with the government, called “relators” to file actions on behalf of the government. Relators are frequently disgruntled former employees, competitors and even estranged spouses.
Persons filing under the FCA to receive a portion of any recovered damages. The percentage is usually 15% to 30%, so the payout can be quite large. The defendant also pays the relator’s attorney’s fees.
The Knowledge Standard
The term knowingly in the FCA is generally broadly interpreted by courts, and means that a person, with respect to the information, (1) has actual knowledge of the information; (2) acts in deliberate ignorance of the truth or falsity of the information; or (3) acts in reckless disregard of the truth or falsity of the information. The FCA requires no proof of a specific intent to defraud.
Actual knowledge has been defined as “the act was done voluntarily and intentionally, not because of mistake or accident.” Fifth Circuit Criminal Pattern Jury Instruction 1.37, Knowingly-to Act. The second two definitions are more subjective. In criminal cases, the Fifth Circuit has defined deliberate ignorance, as “the defendant deliberately closed his eyes to what would otherwise have been obvious to him. While knowledge on the part of the defendant cannot be established merely by demonstrating that the defendant was negligent, careless, or foolish, knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact.” The third definition of knowledge in the FCA, acting in “reckless disregard,” is also difficult to quantify. Although debatable, the government has taken the position that it is equal to very high negligence.
Qui Tam Relators file FCA cases under seal. During that time, the government conducts its own investigation to determine whether it wants to intervene, or participate, in the case.
Through the use of civil investigative demands (CIDs), the government can obtain documents and oral testimony from defendants and others. The Fraud Enforcement and Recovery Act of 2009 amended the FCA to permit the Attorney General to delegate its authority to issue CIDs and in 2009, the Department of Justice delegated that authority to all United States Attorneys. Since that time, the use of CIDs has increased substantially and in 2011, the Department of Justice issued almost 1,000 CIDs which is more than ten times the number issued in the preceding two years.
While conducting its investigation, the government can decide if it wants to intervene in a case. They can intervene and go forward with the litigation or intervene for settlement purposes. Moreover, if the case is not settled when the government intervenes, it often files an amended complaint in which it can add defendants and allegations. Also, after conducting some investigation, sometimes a criminal referral is made. A potential defendant often does not know of the whistleblower action until after the criminal referral is made and the criminal investigation well under way.
The Yates Memorandum’s Impact on FCA Cases
In September 2016, the DOJ issued guidance to its prosecutors aimed at encouraging white collar criminal and civil cases against corporate executives. This policy is commonly known as the Yates Memorandum. There are six main principals in the Yates Memorandum as follows:
- To be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct;
- Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation;
- Criminal and civil attorneys handling corporate investigations should be in routine communication with one another;
- Absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals;
- Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitations expires and declinations as to individuals in such cases must be memorialized; and
- Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.
A defendant who cooperates, therefore, is explicitly entitled to credit for its cooperation according to the Yates Memorandum. On the other hand, most of the policy could potentially negatively impact a FCA defendant. For example, individuals are a focus of federal investigations from the beginning, and there is more interaction between the criminal and civil side. Also, a civil case perhaps has more likelihood of being referred criminally. Finally, a corporate resolution is less likely to result in a pass for an individual defendant.
Perhaps the most significant change in civil cases is the government pursuing individuals more aggressively, regardless of their ability to pay. In addition to an individual’s ability to pay, when settling a civil case under the principals in the Yates Memo, the DOJ is instructed to focus on factors such as the seriousness of the misconduct, the ability of success in litigation and if the action reflects important federal interests.
Penalties and Settlements
Penalties under the FCA are steep. A person found to violate the FCA can be liable for a civil penalty of three times the amount of damages that the government sustains plus up to $11,000.00 per violation. When resolving a case via settlement, the DOJ’s internal policy generally requires recovery of at least one and a half times the damages in order to obtain a False Claims Act release if the settlement is based upon the merits, and not the defendant’s ability to pay.
As stated earlier, a defendant can attempt to resolve a FCA based upon its ability to pay. If a defendant proceeds accordingly, they have to provide the government with extensive financial disclosures then there is negotiation regarding the defendant’s ability to pay. It is also important to keep in mind that a defendant will want a release from the underlying agency. For example, in a healthcare fraud investigation, the government will need approval of the settlement from the Department of Health and Human Services Office of Inspector General or in a customs fraud case, from Customs and Border Patrol.
Statute of Limitations
The long statute of limitations under the FCA also contributes to large damages. Specifically, section 3730 provides an action cannot be brought
…(1) more than 6 years after the date on which the violation of section 3729 is committed, or (2) more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed, whichever occurs last.”
The government often attempts to take the position that the ten-year statute of limitations applies. In addition to damages, this is significant because conduct going back ten years can be considered.
False Claims Act actions are certainly a government priority. Sharing the recovery with relators has been a huge incentive for individuals to bring these actions. Moreover, these cases have resulted in tremendous recoveries for the government. They have also been an excellent lead in developing criminal investigations.
It will be interesting to see if the recent DOJ pronouncements will result in FCA reform. Nevertheless, the DOJ has continued to negotiate significant settlements in FCA cases over the last several years and that is expected to continue.