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The False Claims Act Tax Bar

By Jonathan DeSantis

The False Claims Act (“FCA”) generally applies to all false or fraudulent “claims” and broadly defines “claims” as including any request or demand for Government funds.[1]  However, a little known provision of the FCA provides that it “does not apply to claims, records, or statements made under the Internal Revenue Code.”[2] This provision is generally known as the FCA Tax Bar.

While the FCA Tax Bar prohibits relators from pursuing FCA claims where it applies, relators often can report tax-related fraud to the IRS Whistleblower Office and receive up to 30% of whatever funds the Government recovers.

History of the FCA Tax Bar

Congress added the tax bar to the FCA.[3]  Courts have explained that the “Tax Bar is designed to allow the [IRS] to enforce the [tax code] as it sees fit.” U.S. ex rel. Lissack v. Sakura Glob. Capital Markets, Inc., 2003 WL 21998968, at *5 (S.D.N.Y. Aug. 21, 2003).[4]  Other courts have explained that the FCA Tax Bar is designed to recognize that it is unnecessary to pursue FCA claims based on tax-related issues because the IRS maintains its own whistleblower program, described below.[5]

Applying the FCA Tax Bar

The FCA Tax Bar only applies with respect to FCA claims premised on “claims, records, or statements made under the” tax code.  The quintessential example of this would be a relator’s attempt to bring FCA claims based on an individual’s or entity’s failure to pay taxes.  These claims would almost certainly be barred under the FCA Tax Bar.

However, courts have broadly interpreted the FCA Tax Bar to apply to claims involving tax issues even if the claims do not directly arise in the context of submission of documents or tax returns to the IRS.

For example, in one case,[6] the relators alleged that the defendant violated the FCA by submitting false statements in connection with efforts to obtain low income housing credits that were part of a governmental rural development program.  Even though the misrepresentations were made in connection with obtaining loans related to a development program – and not in submitting actual tax returns – the district court concluded that the FCA Tax Bar applied.

The district court explained: “The Plaintiffs are correct that the Rural Development Program is not part of the Tax Code. However, to the extent that Plaintiffs seek to recover . . . for allegedly ill-gotten tax credits . . .  this Court lacks jurisdiction [under the FCA’s tax bar].” Id. at *1.  Apart from this specific examples, courts have typically afforded a broad interpretation to the FCA Tax Bar.[7]

IRS Whistleblower Program

Fortunately, the IRS operates its own whistleblower program that allows individuals to submit information to the IRS involving tax fraud and “[i]f the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30 percent of the additional tax, penalty and other amounts it collects.”[8]

This is a robust whistleblower program. Indeed, in 2016, the IRS reported that in the preceding ten years, “information submitted by whistleblowers has assisted the IRS in collecting $3.4 billion in revenue, and, in turn, the IRS has approved more than $465 million in monetary awards to whistleblowers.”[9]

Conclusion

In conclusion, while the FCA Tax Bar prohibits bringing many claims based on tax-related issues, the same issues can serve as the basis for submissions to the IRS’s whistleblower program.  Berger & Montague represents whistleblowers with respect to both the FCA and the IRS’s whistleblower program and can assist you in determining the proper course in reporting tax-related fraud.

 

[1] 31 USC § 3729(b)(2).

[2] 31 USC § 3729(d).

[3] FALSE CLAIMS AMENDMETNS ACT OF 1986, PL 99–562 (S 1562), PL 99–562, October 27, 1986, 100 Stat 3153.

[4] See also U.S. ex rel. Lissack v. Sakura Glob. Capital Markets, Inc., 377 F.3d 145, 152–53 (2d Cir. 2004) (“Those courts that have considered the Tax Bar have concluded that it was intended to codify case law existing before  the 1986 amendment, which reserved discretion to prosecute tax violations to the IRS and barred.”).

[5] See U.S. ex rel. Calilung v. Ormat Indus., Ltd., 2015 WL 1321029, at *14 (D. Nev. Mar. 24, 2015) (“The Tax Code provides its own whistleblower statute whereby parties can provide information directly to the IRS if a tax-related violation is known or suspected.”

[6] Sears v. Livingston Management, 2013 WL 5816690 (M.D. La. Oct. 29, 2013).

[7] E.g. Barber v. Paychex Inc., 439 F. App’x 841, 842 (11th Cir. 2011) (affirming dismissal of FCA claims that “involve[d]” the IRC); U.S. ex rel. Lissack v. Sakura Glob. Capital Markets, Inc., 377 F.3d 145, 153 (2d Cir. 2004) (“[N]othing . . . suggests that the Tax Bar should prohibit only actions that, on their face, seek to recover tax.”).

[8] IRS, Whistleblower-Informant Award, available at https://www.irs.gov/uac/whistleblower-informant-award.

[9] IRS, IRS Whistleblower Program Fiscal Year 2016 Annual Report to Congress, available at https://www.irs.gov/pub/whistleblower/fy16_wo_annual_report_final.pdf.

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Retaliation Claims Under the False Claims Act

By Susan Schneider Thomas

Two recent decisions by district courts illustrate some of the issues that continue to arise in claims under Sec. 3730(h) of the False Claims Act (“FCA”), for retaliatory conduct against those who report or might report false claims.

Terminating an Employee Based on the Fear of FCA Claims Can Support a Retaliation Claim

In Hull v. Restore Management Co., LLC, 2017 WL 2797141, (N.D.Ala. June 28, 2017), the court made clear that retaliation claims do not need to be pled with particularity, but must only meet the usual standards for federal pleading under Fed. R. Civ. P. 8(a) — “a short and plain statement of the claim showing that [the pleader] is entitled to relief.”  This is a significant point for whistleblowers because substantive fraud claims under the FCA have to meet a more demanding standard by pleading the circumstances of fraud with “particularity.”

Additionally, the court evaluated plaintiff’s allegations that she had complained about the allegedly illegal conduct by her employer, convened an internal team to investigate her concerns, been directed to terminate the employees who worked on that team, and been instructed to delete all emails concerning the suspected conduct.  Based on this pattern, plaintiff claimed that she was terminated as a result of her investigation and internal reporting.  The court held those allegations were sufficient to plead a claim that her employer feared the possibility of a qui tam action and discharged plaintiff as a result.

This decision seems to be in line with the 2009 amendments to the FCA that broadened the reach of the anti-retaliation provisions:

“This language is intended to make clear that this subsection protects not only steps taken in furtherance of a potential or actual qui tam action, but also steps taken to remedy the misconduct through methods such as internal reporting to a supervisor or company compliance department and refusals to participate in the misconduct that leads to the false claims, whether or not such steps are clearly in furtherance of a potential or actual qui tam action.”

See Fraud Enforcement And Recovery Act Of 2009, Speech Of Hon. Howard L. Berman Of California In The House Of Representatives, Monday, May 18, 2009, Congressional Record.

Other courts have reached similar conclusions: “It should be noted that an employee does not need to have necessarily filed a qui tam action in order to have engaged in protected activity.” Eberhardt v. Integrated Design & Constr., Inc., 167 F.3d 861, 867 (4th Cir.1999).

The language of 31 U.S.C. § 3730(h) “manifests Congress’ intent to protect employees while they are collecting information about a possible fraud, before they have put all the pieces of the puzzle together.” United States ex rel. Yesudian v. Howard Univ., 153 F.3d 731, 740 (D.C.Cir.1998

Individuals Accused of Retaliatory Conduct Cannot Be Sued Under the FCA If They Are Not Actual Employers

Turning from the whistleblowers to the employers, the U.S. District Court for the Eastern District of New York dismissed a retaliation case against the individual owners of an ophthalmology practice where the plaintiff had been employed.

In McKoy v. Uliss, 2017 WL 2963456 (E.D.N.Y. July 11, 2017), plaintiff alleged that she had been fired in retaliation for her complaints against defendants’ allegedly unlawful billing practices.  The court rejected plaintiff’s argument that because the named individuals owned and controlled the practice and hired, supervised, and fired her, they qualified as her employer.  Although her claims against the practice itself were sustained, the claims against the individual defendants were dismissed based on the court’s statutory interpretation of the FCA.

The question arose in part from the 2009 amendments to Section 3730, which eliminated the word “employer” from the anti-retaliation provision.  The majority of courts, however, like the court in Uliss, have found themselves “not convinced that when Congress deleted the word employer from the statute Congress was expressing its intent to dramatically widen the scope of potential defendants in retaliation claims filed under the FCA.” Aryai v. Forfeiture Support Assocs., 25 F. Supp. 3d 376, 387 (S.D.N.Y. 2012) (“[S]ection 3730(h) does not provide a cause of action against individual defendants….”).  See also Monsour v. N.Y. State Office for People with Developmental Disabilities, 2014 WL 975604, at *10 (N.D.N.Y. March 12, 2014) (“[A]n individual may not be sued under § 3730(h) or Section 191, either in an individual or official capacity; liability may only be imposed on employers.”); Fisch v. New Heights Acad. Charter Sch., 2012 WL 4049959, at *4 (S.D.N.Y. Sept. 13, 2012) (“Section 3730(h) imposes liability only on employers.”).  But see U.S. ex rel. Moore v. Community Health Services, Inc., 2012 WL 1069474, at *9 (D. Conn. Mar. 29, 2012) (“The current Section 3730(h) following the 2009 amendments, however, conspicuously omits the word “employer.” Therefore, [plaintiff’s] allegations … regarding post-May 2009 conduct, primarily her termination, do give rise to a retaliation claim against these Defendants.”)  The Uliss court also noted that “where Congress intended to impose individual liability, it used the phrase ‘it shall be unlawful for any person’.”  McKoy v. Uliss, 2017 WL 2963456, at *3.

Further, the Uliss court found that imposing personal, individual liability on persons who have incorporated their practices or businesses would frustrate the purpose of incorporation – to avoid individual liability. Id. at *4.

Conclusion

Given the heavy line-up of courts that have refused to hold individuals personally liable under the False Claims Act, it would appear that any change in that position will need to come from Congress.

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Issues Arising Under the False Claims Act’s First-to-File Rule

By Susan Schneider Thomas

The First-to-File Rule

One of the many procedural obstacles that a potential qui tam plaintiff must overcome is the first-to-file (“FTF”) rule.  This provision of the False Claims Act (“FCA”) states that “no person” other than the Government may intervene or bring a related action based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5).

The FTF provision basically means that once an FCA case has been filed against a particular defendant for specific misconduct, any later-filed suit for substantially the same claims is subject to dismissal.

This is an odd provision, in part because many later-filed suits get filed while the first-filed case is still under seal and simply unknowable to anyone.  Nonetheless, the rule persists, apparently in an effort to streamline litigation and reduce the chances of multiple suits causing confusion for defendants or even for the government in terms of figuring out which relator is entitled to an award upon successful resolution of a case.  In theory, at least, the government will inform a relator or her counsel if there is an earlier-filed case, and may facilitate discussions between the first- and later-filed actions to see if the parties want to reach some type of accommodation to allow both relators to contribute to the case and derive some benefit from any resolution.

Issues Arising Under the First-to-File Rule

Many questions arise from the implementation of the FTF rule, including:

  • Whether a case that is dismissed still bars a later-filed action,
  • Whether a second relator can join in an already-filed suit, and
  • When a defendant needs to assert the FTF defense in a later-filed action.

The Supreme Court resolved the “still pending” question in Kellogg Brown & Root Services Inc. v. United States ex rel. Carter, KBR, 135 S. Ct. 1970 (2015), basically holding that a later-filed action is only barred by a first-filed case if that case is still pending when the second action is filed.  The issue of how and when a defendant can assert the FTF rule against a later-filed action remains very much a matter of dispute, however. In April of this year, the Second Circuit followed the D.C. Circuit in holding that the FTF rule is not considered jurisdictional, meaning that it must be asserted in a timely fashion or it is waived, as well as influencing the procedural nature of how the defense is adjudicated.

Is the First-to-File Rule Jurisdictional?

In United States ex rel. Hayes v. Allstate Ins. Co., 2017 WL 1228551 (2d Cir. Apr. 4, 2017), the court held, “Because the FCA clearly states that other limitations on qui tam actions are jurisdictional, but does not clearly state that the first-to-file rule is jurisdictional, we must treat the first-to-file rule as nonjurisdictional in character.”  This followed the decision of the D.C. Circuit, which was the first appellate court to break from the established pattern of deeming the FTF rule as jurisdictional.  See U.S. ex rel. Heath v. AT&T Inc., 791 F.3d 112, 119 (D.C. Cir. 2015), cert. denied, 136 S. Ct. 2505 (2016).

Both of the circuit courts looked to a line of recent Supreme Court cases, in which the Court warned against loose holdings that statutory requirements are jurisdictional. Thus the Court observed in Sebelius v. Auburn Regional Medical Ctr., 133 S.Ct. 817, 824 (2013), that “[c]haracterizing a rule as jurisdictional renders it unique in our adversarial system.” The principal reason is that subject matter jurisdiction is not waivable. “Objections to a tribunal’s jurisdiction can be raised at any time, even by a party that once conceded the tribunal’s subject-matter jurisdiction over the controversy.” Id.

In an earlier decision, the Supreme Court had noted that a requirement that goes to subject-matter jurisdiction means that courts have an obligation to consider the issue even if parties have not raised it or if they affirmatively concede that jurisdiction is appropriate. Gonzalez v. Thaler, 132 S.Ct. 641, 648 (2012).

How These New Decisions Might Impact Potential FCA Filings

The decisions in Heath and Hayes potentially create an easier path for plaintiffs who are concerned about FTF issues.  The FTF defense may be deemed to be waived if a defendant does not raise it promptly, generally in a motion to dismiss, although it is difficult to see how that would be applied if the defendant didn’t know of an earlier-filed case that remained under seal while a later-filed case moved forward. But there would be at least some constraints on defendants being able to raise the FTF defense very late in the game, or a court suddenly deciding to analyze that question, even near the close of litigation.  Particularly since violations of the FTF rule are often totally innocent – because later-filing plaintiffs could not find out about a filed case that was still under seal – this move toward mitigating the harsh consequences of dismissal of the later-filed case is a positive step for FCA litigation.

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“Transactions of Fraud” in the Third Circuit

By Shauna Itri

The Third Circuit has repeatedly held that “to constitute ‘allegations or transactions,’ the public disclosure must either allege the actual fraud, or must allege both the misrepresented state of facts and the true state of facts such that an inference of fraud may be drawn.” United States ex rel. Morgan v. Express Scripts, Inc., No. 2:05-CV-1714 DMC JAD, 2013 WL 6447846, at *5 (D.N.J. Dec. 9, 2013) aff’d sub nom. United States v. Express Scripts, Inc., 602 F. App’x 880 (3d Cir. 2015) (emphasis added).

“An allegation of fraud is an explicit accusation of wrongdoing. . . . [while a] transaction warranting an inference of fraud is one that is composed of a misrepresented state of facts plus the actual state of facts.” United States ex rel. Zizic v. Q2Administrators, LLC, 728 F.3d 228, 235-36 (3d Cir. 2013).

The Third Circuit’s “Zizic Formula” for Determining a Transaction of Fraud

The Third Circuit has adopted a formula to represent when publicly disclosed information qualifies as a “transaction of fraud”:

If X + Y = Z, Z represents the allegation of fraud and X and Y represent its essential elements. In order to disclose the fraudulent transaction publicly, the combination of X and Y must be revealed, from which readers or listeners may infer Z, i.e., the conclusion that fraud has been committed.

Zizic, 728 F.3d, at 236 (internal citations omitted).

Zizic Explained

A summary of Zizic is instructive in applying the formula to meet the “transaction of fraud” element.

In Zizic, the relator was the CEO of a company that made devices and billed Medicare.  Under Medicare regulations, in order to deny claims, among other things, the claim needs to be reviewed by a panel of healthcare professionals.

The government contracted with defendants to perform a review, on behalf of Medicare, of claims submitted by the relator’s company.   Based on defendants’ review of the relator’s claims, Medicare subsequently denied many of those claims.  The relator declared bankruptcy, and his bankruptcy trustee later sued the government seeking a reversal of the denial of claims.

In discovery, the relator reviewed documents showing that defendants did not utilize a panel of healthcare professionals to review his claims, but instead rejected many of his claims without reviewing them at all.

The trustee moved for summary judgment against the government, arguing that the defendants who were contracted by the government to review the denials did not abide by Medicare regulations, and the claims should not have been denied.

More specifically, the trustee publicly alleged in court filings that “[Defendant] is . . . funded by a contract with [HHS]. . . . [n]one of the claims . . . have any evidence of nurse or physician review [by the Defendant].” Id. at 237.

The relator subsequently filed a False Claims Act action against defendants, citing the evidence which was publicly disclosed by the bankruptcy trustee in the bankruptcy litigation.   The defendants moved to dismiss the FCA case based on the public disclosure bar.  The motion was granted. Id.

In reviewing the case on appeal, the Third Circuit, “consider[ed] whether the information publicly disclosed . . . constituted allegations or transactions of fraud.”  Id.

Using the Third Circuit’s formula (X+Y=Z), the Court found that the true state of facts (Y) was that the defendants were obligated to perform physician reviews in second level appeals under the government contracts incorporating Medicare rules. The misrepresented state of facts (X) was that defendants received payment under those contracts despite their failure to perform such services (a fact publicly disclosed in the bankruptcy litigation).

The Court found that both the true (Y) and misrepresented facts (X) were publicly disclosed, and  therefore, the public disclosure bar applied.

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Ninth Circuit Applies Escobar to Assess Materiality in False Claims Act Case

By Jonathan DeSantis

The Ninth Circuit recently applied the materiality requirement for claims under the False Claims Act (“FCA”) and provided guidance for the application of the Supreme Court’s seminal decision on the FCA’s materiality requirement in Universal Health Servs., Inc. v. United States ex rel. Escobar.[1]

The False Claims Act’s Materiality Requirement

Under the FCA, “a misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government’s payment decision in order to be actionable under the False Claims Act.”[2]   Put differently, a defendant’s misrepresentation must actually affect or be likely to affect the Government’s payment decision to be actionable under the FCA.

In 2016, the Supreme Court issued its seminal decision on the materiality requirement in Esocbar. As we addressed in a previous blog entry, while Escobar did not necessarily change the law on materiality, it did provide important guidance for relators and lower courts moving forward.  For example, the Supreme Court explained that “proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement.”[3]

The Materiality Requirement in Campie

In United States ex rel. Campie v. Gilead Scis., Inc.,[4] the Ninth Circuit recently clarified the FCA’s materiality requirement in light of Escobar.  In Campie, the Government purchased large quantities of anti-HIV drugs from a drug manufacturer.  Two relators filed a lawsuit under the FCA alleging that the manufacturer made misrepresentations to the Food and Drug Administration (“FDA”) in connection with its application to get the drugs approved.

Specifically, the relators alleged that the manufacturer told the FDA that it would procure one of the main ingredients for the drugs from Canada, Germany, the United States, and South Korea, when in reality it was obtaining the ingredient from an unapproved facility in China.

The relators also alleged that the manufacturer eventually obtained FDA approval to obtain the ingredient from the facility in China, but in doing so misrepresented to the FDA that testing established that the ingredient performed just as well when acquired from China as from the other countries.  In reality, the relators alleged that the manufacturer’s internal testing revealed substantial problems when using the ingredient from China.

Many of the relator’s allegations suggested that the FDA did not withdraw its approval of the drugs even after it learned of the manufacturer’s alleged misrepresentations. Thus, in relevant part, the manufacturer moved to dismiss the relators’ claims on the basis the misrepresentations to the FDA were not material to the FDA continued approval of the drugs.

Before the Supreme Court issued Escobar, the district court granted the manufacturer’s motion to dismiss upon concluding (in relevant part) that the manufacturer’s misrepresentations to FDA were immaterial to the Government’s decision to purchase and pay for the drugs.[5]

On appeal and with the benefit of the Supreme Court’s intervening decision in Escobar, the Ninth Circuit reversed.  The Ninth Circuit rejected the manufacturer’s argument that the FDA’s apparent continued approval of the drugs after learning of the manufacturer’s alleged misrepresentations conclusively precluded a finding of materiality for two reasons.

First, the court noted that this reasoning “would allow [the manufacturer] to use the allegedly fraudulently-obtained FDA approval as a shield against liability for fraud.”[6]  Second, the court explained that “there are many reasons the FDA may choose not to withdraw a drug approval, unrelated to the concern that the government paid out billions of dollars for nonconforming and adulterated drugs.”[7]

In sum, the Ninth Circuit concluded that “the issues raised by the parties here are matters of proof, not legal grounds to dismiss relators’ complaint.”[8] Accordingly, the Ninth Circuit reversed the district court’s dismissal of the relators’ claims.

Conclusion

In conclusion, decisions like the Ninth Circuit’s decision in Campie will continue to provide guidance to lower courts, relators, and attorneys as to the proper application of the FCA’s materiality requirement in light of Escobar.

[1] 136 S. Ct. 1989 (2016), available at https://www.supremecourt.gov/opinions/15pdf/15-7_a074.pdf.

[2] Id. at 2002.

[3] Id. at 2003.

[4] 2017 WL 2884047 (9th Cir. July 7, 2017), available at http://cdn.ca9.uscourts.gov/datastore/opinions/2017/07/07/15-16380.pdf.

[5] United States ex. rel. Campie v. Gilead Scis., Inc., 2015 WL 3659765 (N.D. Cal. June 12, 2015), rev’d and remanded sub nom. United States ex rel. Campie v. Gilead Scis., Inc., No. 15-16380, 2017 WL 2884047 (9th Cir. July 7, 2017).

[6] 2017 WL 2884047 at *11.

[7] Id.

[8] Id.

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Employees and Competitors Should Be on the Lookout for Violations of “Buy American” Laws in Federal Procurement, Part II

By Susan Schneider Thomas

We previously wrote about the adverse inference permitted by the court in United States ex rel. Scutellaro v. Capitol Supply, 2017 WL 1422364 (D.D.C. Apr. 19, 2017).  That inference allowed the whistleblower and the government to prove the falsity element of their claims against a supplier of office products to various federal agencies based on the defendant’s blatant failure to have maintained required documentation concerning its products’ country of origin (“COO”).

This blog post covers the court’s analysis of the materiality requirement under the False Claims Act, basically whether the violations alleged were significant enough and sufficiently related to the government’s determination whether it would pay on particular claims or purchases.

Materiality Under Escobar

Basically, “if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.” Id. at *7, citing the Supreme Court’s 2016 opinion in United Health Services v. United States ex rel. Escobar. In the Capitol Supply case, the court reviewed defendant’s contention that the government both regularly paid the allegedly tainted claims and signaled no change in position on account of the wrongdoing.  As the court explained:

[F]or more than a decade, the GSA gave the defendant mixed signals. On the one hand, the GSA’s regional office gave the defendant not just “satisfactory” or “very good,” but “exceptional” ratings on its report cards…. Ms. Springer, the assigned IOA out of the Atlanta Regional Office who conducted the defendant’s [Contractor Assistance Visits] CAVs, never once marked the defendant down for TAA non-compliance despite the defendant’s complete lack of retention of historical COO information until at least June 2009, testifying that she ‘didn’t see anything wrong with their process or their understanding of the Trade Agreements Act.’ …  Moreover, during the pendency of this seven-year litigation, the defendant received two additional GSA contracts and seven renewals of prior contracts.”

2017 WL 1422364 at *21.

The court denied both defendant’s and the relator/government motions for summary judgment, ruling that there were disputed facts and inferences that could be drawn from the evidence. Basically, the court held that the mixed signals discussed above defeated a ruling on summary judgment for either side.

Should One Side Have Won on Summary Judgment?

The court’s decision to deny summary judgment to defendant was clearly appropriate. There were obvious violations both in terms of non-compliant products and grossly insufficient and non-compliant record-keeping.  Barring some prior specific determination by the relevant agency about the particular conduct at issue, based on full and complete information about the challenged conduct, it should be an extremely high burden for a defendant to prevail on summary judgment regarding materiality, basically a ruling that defendant’s violative conduct simply didn’t matter.  It is also helpful for whistleblowers that the court did not accept the defendant’s evidence of ongoing and additional contracts as being sufficient, on its own, to defeat a showing of materiality.

It seems to be a closer question whether the evidence introduced by Relator and the government was sufficient to support summary judgment in their favor.  The court’s citation of facts that ostensibly could allow a jury to reach a conclusion of non-materiality is a bit weak, because there is only vague indication of whether the “signals” of a lack of concern were sent by people with a full understanding of the totality and egregiousness of the facts. Indeed, the primary evidence cited of “mixed signals” had earlier been described by the court as report cards issued by one GSA employee based on Contractor Assistance Visits in which “the defendant controlled the scope of the CAVs by selecting three small samples of data.” U.S. ex rel. Scutellaro v. Capitol Supply, Inc., 2017 WL 1422364, at *4.

Similarly for the contract renewals, it is hard to see that the government’s ongoing relationship with a contractor signals acquiescence in the contractor’s misconduct absent a clear demonstration that those ongoing or new contracts were awarded in the face of full and accurate information about the alleged violations.

Impact of Executive Order and Related Promulgations Concerning Enforcement of Buy American Laws

It will be interesting to see if the President’s Executive Order about Buy American requirements and the related memorandum that came out of the Office of Management and Budget and the Secretary of Commerce, right at the end of June, will have any impact on future evaluations of materiality. The memo focused on enforcing the Buy American laws and cutting back on waivers.  Assuming federal agencies actually comply–and there are some fairly strict reporting obligations to suggest that will happen–the impact of those efforts might provide evidence of materiality and will possibly prompt agencies themselves to define their regulations in this area as material.

Finally, if an employee or competitor realizes that a company has discovered that it is out of compliance with Buy American laws, self-reporting is likely required. A knowing failure to self-report can itself constitute a False Claims Act violation, and such claims will likely bypass the materiality determinations altogether.

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Employees and Competitors Should Be on the Lookout for Violations of “Buy American” Laws in Federal Procurement, Part I

By Susan Schneider Thomas

Earlier this year, the D.C. District Court denied cross-motions for summary judgment in a False Claims Act (“FCA”) case alleging that defendant Capitol Supply sold document shredders manufactured in China through the General Services Administration (“GSA”) website, in violation of the Trade Agreements Act (“TAA”). United States ex rel. Scutellaro v. Capitol Supply, 2017 WL 1422364 (D.D.C. Apr. 19, 2017).

We will discuss two significant aspects of the court’s opinion: materiality, and the availability of adverse inferences against a company that fails to maintain required records.  This post will address the adverse inferences, and a subsequent post will discuss materiality.

Factual Background of the Capitol Supply Lawsuit

The defendant entered into a Multiple Award Schedule contract with GSA in January 2003. The contract allows the defendant to advertise and sell office supplies to various federal agencies through the GSA Advantage! website.  Various provisions of the Federal Acquisition Regulation (“FAR”) were incorporated, requiring that all vendors selling products to federal agencies retain records regarding the country-of-origin (“COO”) of their products. Defendant Capitol Supply certified that each “end product” it listed and sold was TAA compliant.  Id. at *2.

In fact, defendant had an automated system in place to identify and track the COO for its merchandise, but for a period of time it utilized a system that overwrote the COO data as new data came in from different suppliers.

After various efforts to forestall discovery, defendant admitted that it did not have any information on the COO for products sold prior to June 2009, had incomplete COO information for products sold between July 2009 and November 2010, and only had complete COO information for products sold after December 2010.  The unavailability of that information potentially presented a critical obstacle in the FCA case, because there was no direct way to prove that many of the defendant’s products were non-compliant.

Impact of Defendant’s Failure to Retain Records Showing Country of Origin

The relator and government, which had intervened in part of the case, filed motions requesting an “adverse inference” ruling – to wit, that the court “exercise its inherent power to draw the adverse inference that, for all products for which COO is unknown because the defendant failed to retain that information, the COO is non-designated.”

The court readily concluded that the failure to maintain records violated Capitol’s regulatory and contractual obligations to retain COO data and proceeded to analyze whether the requested adverse inference ruling was appropriate.

Key factors in the court’s analysis were:

  • the overwriting of the data was not accidental or unknowing, but was a company practice notwithstanding the regulatory and contractual requirements to retain the information;
  • the government was within the class of persons sought to be protected by the tracking and retention regulations; and
  • the missing information was critical to a determination of the COO violations alleged in the case.

Based on its analysis of its inherent powers and the circumstances at hand, the court concluded that the relator and government were entitled to an adverse inference that the unavailable COO information would show that Capitol’s products came from non-designated countries.  Essentially, the adverse inference demonstrated the falsity element of the FCA claims.

Implications for Whistleblower Litigation

A company’s willful failure to comply with the Buy American laws and the Buy American terms in their contracts or subcontracts with U.S. government agencies presents a viable False Claims Act case.  The adverse inference permitted by the Capitol Supply court is a powerful tool against a company that might believe it can blow past a government investigation or litigation simply by claiming that the government cannot prove all the claims, and the company did not retain all of the relevant documentation.

This ruling could have consequences beyond the GSA supply or Buy American context.  Contractors have any number of contractual requirements to retain documents, including standard audit clauses.  If a contractor cannot produce such documents, the Capitol Supply decision could be invoked in support of an adverse inference that the contractor violated the obligation in question.  That could be a huge step towards success in FCA cases challenging various types of regulatory violations where there are corresponding record-retention requirements.

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Can a Promulgated Court Opinion in a Qui Tam Case be Vacated Upon the Parties’ Request in Order to Facilitate a Settlement? Part II

By Sherrie Savett

In Part I of this blog series, we established that Courts have discretion to vacate, but it should not be used “absent exceptional circumstances.”  Amaefule v. Exxonmobil Oil Corp., 630 F. Supp. 2d 42, 43 (D.D.C. 2009) (quoting U.S. Bancorp Mortg. Co. v. Bonner Mall P’ship, 513 U.S. 18, 26 (1994)).

Courts Evaluate Whether There is Public Interest Involved in Resolving Legal Issues

The 7th, D.C. Circuit, 10th and Second Circuits, and many district courts have addressed this issue and come out against vacatur of opinions.

Various courts have recognized that opinions serve an important public interest in resolving legal issues, i.e. that opinions have significance beyond the relationship between the private litigants.  As the Supreme Court describes, “[j]udicial precedents are presumptively correct and valuable to the legal community as a whole. They are not merely the property of private litigants and should stand unless a court concludes that the public interest would be served by a vacatur.” U.S. Bancorp Mortg. Co. v. Bonner Mall P’ship, 513 U.S. 18, 26 (1994) (internal quotation marks omitted).  Put differently, there is a substantial public interest in “the development of decisional law” given “the importance of published opinions to other courts and future litigants.” United States v. Reid, 2000 WL 1843291, at *3 (E.D.N.Y. Oct. 31, 2000).

The seminal case on this issue is the Seventh Circuit’s decision in Matter of Mem’l Hosp. of Iowa Cty., Inc., 862 F.2d 1299 (7th Cir. 1988). In it a bankruptcy court held a party in contempt of court, and the district court affirmed the bankruptcy court’s decision in a published opinion.  The losing party appealed to the Seventh Circuit.  During the pendency of the appeal, the parties reached a settlement agreement, and the parties filed a motion asking the Seventh Circuit to vacate the district court’s opinion.   The Seventh Circuit denied the parties’ request in explaining:

Litigants who settle their dispute while an appeal is pending often file a joint motion asking us not only to dismiss the appeal but also to vacate the opinion and judgment of the district court. We always deny these motions to the extent they ask us to annul the district court’s acts, on the ground that an opinion is a public act of the government, which may not be expunged by private agreement. History cannot be rewritten. There is no common law writ of erasure. . . .  When a clash between genuine adversaries produces a precedent, however, the judicial system ought not allow the social value of that precedent, created at cost to the public and other litigants, to be a bargaining chip in the process of settlement. The precedent, a public act of a public official, is not the parties’ property. We would not approve a settlement that required us to publish (or depublish) one of our own opinions, or to strike a portion of its reasoning . . . The opinions written in this case record two judges’ solutions to a legal problem. These opinions may be valuable for other litigants and judges . . . They will be left as they are. The parties may be free to contract about the preclusive effects of these decisions inter se . . . [but] they are not free to contract about the existence of these decisions.

Id. (emphasis added). Notably, in In re U.S., 927 F.2d 626 (D.C. Cir. 1991), the D.C. Circuit adopted the reasoning of Matter of Mem’l Hosp. and denied the parties’ request to vacate an opinion after the parties reached a settlement agreement.

In Oklahoma Radio Assocs. v. F.D.I.C., 3 F.3d 1436, 1436 (10th Cir. 1993), the Tenth Circuit issued an opinion, and the losing party filed a motion for rehearing en banc.  Before the Tenth Circuit ruled on that motion, the parties reached a settlement agreement; one of the conditions of the settlement agreement was the parties would ask the Tenth Circuit to vacate its opinion.  Thus, the parties filed a joint motion asking the Tenth circuit to “vacate its . . .  opinion and remand the case to the District Court with instructions to vacate the Judgment.”  Id. at 1436.   The Tenth Circuit rejected the parties’ motion on public policy grounds:

The furthering of settlement of controversies is important and desirable, but there are significant countervailing considerations which we must also weigh. A policy permitting litigants to use the settlement process as a means of obtaining the withdrawal of unfavorable precedents is fraught with the potential for abuse. Moreover, the reasoning in the published opinion “may be helpful to other courts to the extent that it is persuasive. . . . [T]he instant case the joint motion and joint memorandum clearly indicate that vacatur of our . . .  opinion . . .  was an important consideration in the settlement. For the reasons we have given, we are unwilling to vacate our opinion to accommodate the parties in accord with their settlement.

Id. at 1444-45 (internal quotation marks and citation omitted).

In Fed. Ins. Co. v. Hanover Ins. Co., 2013 WL 6403189 (N.D. Tex. Nov. 27, 2013), a district court explained that “[i]n connection with the parties’ settlement of this lawsuit, they have filed a . . .  motion to withdraw opinion, in which they request that the court withdraw its . . . memorandum opinion and order.”  The court agreed with the request: “Although the court is not obligated to withdraw an opinion, it has done so to facilitate settlement and where matters of public interest were not involved.” Id. at *1 (emphasis added).

Vacatur is Not Appropriate to Serve a Private Litigant’s Interest to Remove Adverse Precedent

In a somewhat similar public policy vein, courts have also been cognizant of large corporate parties’ attempts to eliminate adverse precedent by “buying off” a smaller party. For example, in Manufacturers Hanover Trust Co. v. Yanakas, 11 F.3d 381, 382 (2d Cir. 1993), the Second Circuit affirmed in part and reversed in part a district court’s decision and remanded the case to the district court for further proceedings.  The parties then reached a settlement agreement, which was conditioned upon the Second Circuit’s agreement to vacate its opinion. The parties consequently filed a joint motion asked the Second Circuit to vacate its opinion.  The Second Circuit denied the parties’ motion:

Nor do we view the granting of such a motion as a wise exercise of discretion, for vacatur of the appellate court’s judgment would facilitate two abuses. First, it would allow the parties to obtain an advisory opinion of the court of appeals in a case in which there may not be, or may no longer be, any genuine case or controversy; the federal courts of course have no jurisdiction to render such opinions. Second, even where there was a genuine case or controversy, it would allow a party with a deep pocket to eliminate an unreviewable precedent it dislikes simply by agreeing to a sufficiently lucrative settlement to obtain its adversary’s cooperation in a motion to vacate. We do not consider this a proper use of the judicial system.

Id. at 384 (emphasis added).

Likewise, a district court explained that “[v]acatur is requested almost exclusively by repeat-player litigants who have the greatest incentive to remove adverse precedent from the books. The repeat player, as opposed to the one-shot litigant, is principally concerned with the long-range effects of the judgment.”  McMellon v. United States, 528 F. Supp. 2d 611, 614 (S.D.W. Va. 2007).

Vacatur is Not Appropriate Where the Decision Addresses Significant or Novel Legal Issues

Courts appear more willing to grant a parties’ request to vacate an opinion where the opinion did not address novel or important legal issues.  For example, in granting a request to vacate a previously-issued order, one court noted that the opinion “d[id] not involve novel or controversial applications of the law.” BMC, LLC v. Verlan Fire Ins. Co., 2008 WL 2858737, at *2 (W.D.N.Y. July 22, 2008).  Similarly, vacatur is more appropriate when a decision presented “a fact-specific inquiry” rather than threshold legal issues, i.e. vacatur is more appropriate when the decision addressed factual issues that only affect the parties rather than legal issues that could be significant to non-parties. McKinney v. Philadelphia Hous. Auth., 2010 WL 2510382, at *2 (E.D. Pa. June 16, 2010).

On the other hand, courts have rejected parties’ requests to vacate decision that address important or novel legal issues. See e.g. Obrycka v. City of Chicago, 913 F. Supp. 2d 598, 602 (N.D. Ill. 2012) (describing the decision as addressing “a novel situation”); Barry v. Atkinson, 193 F.R.D. 197, 200 (S.D.N.Y. 2000) (addressing the “significance” of a decision in deciding whether to grant the parties’ request to vacate the decision to facilitate a settlement agreement); In re Aden, 2013 WL 4513838, at *2 (D. Idaho Aug. 23, 2013) (similar); Bashkin v. Keisler, No. 06 C 2518, 2008 WL 4866352, at *4 (N.D. Ill. June 13, 2008) (“While we agree with plaintiffs that other courts and litigants are interested in the matters addressed in our September 20, 2007 opinion, this only strengthens our view that our decision should be left intact.”) (footnote omitted).

Vacatur is Not Appropriate Simply to Facilitate a Settlement Agreement

Courts have also rejected parties’ arguments that vacatur of a decision to facilitate a settlement agreement is necessary to promote the important interests served by settlement agreements.  For example, in Amaefule v. Exxonmobil Oil Corp., 630 F. Supp. 2d 42, 43 (D.D.C. 2009), the only case that research reveals in the District of the District of Columbia to address this issue, the parties reached a settlement agreement, and in connection with that settlement agreement, asked the district court to “vacat[e] the oral rulings issued . . . in connection with the preliminary injunction and . . . on the parties’ summary judgment motions such that the rulings could not be cited as precedent and would carry no precedential value.”  Id. at 42.  The district court denied the parties’ motion.  The district court rejected the parties’ argument that vacatur was necessary to promote a policy of encouraging settlements:

The parties argue that “vacatur is necessary to uphold this District’s longstanding policy of encouraging the amicable termination of litigation.” They cite to no precedent, though, establishing any longstanding practice in this District of encouraging settlement by vacating court decisions.1 Indeed, a court encourages settlement by ruling on parties’ dispositive motions so that parties know where they stand when they engage in settlement discussions about surviving claims. Similarly, a court encourages settlement by making available its reasoning for litigants in similar actions to rely upon when assessing whether settlement is the preferable resolution to a dispute. Nevertheless, neither party has demonstrated any exceptional circumstances justifying deviating from longstanding policy in this circuit against vacatur following settlement. Nor have the parties argued that the previous rulings in this action were erroneous. Having expended the time and effort to resolve the parties’ motions and create precedent which may be of value to other courts and litigants, this court finds no basis for vacating the previous rulings in this action. (Emphasis added)

Id. at 43-44.

Put differently, as another district court explains, “[t]he policy in favor of settlement did not vest in the parties to this case the authority to decide which judicial orders they wish to remain good law.” Predator Int’l, Inc. v. Gamo Outdoor USA, Inc., 2014 WL 4057118, at *3 (D. Colo. Aug. 14, 2014); see also McMellon v. United States, 528 F. Supp. 2d 611, 614 (S.D.W. Va. 2007) (denying a motion to vacate a decision and explaining that “[s]ettlements are desirable, yet are not the sole concern of the judicial system”); Allen-Bradley Co., LLC v. Kollmorgen Corp., 199 F.R.D. 316, 320 (E.D. Wis. 2001) (similar).

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Can a Promulgated Court Opinion in a Qui Tam Case be Vacated Upon the Parties’ Request in Order to Facilitate a Settlement? Part I

By Sherrie Savett

The Motivation to Vacate

Often the parties in a hotly contested case want to settle, but the removal of a negative opinion affecting one side or the other is even more important than the money involved.  This can be true for defendants who want to remove a bad precedent on a merits or a plaintiff/relator who wants to remove a decision containing a criticism of the Relator or a bad decision on something which could bar future cases, like a public disclosure bar or a seal breach.

The answer to the question of whether an issued opinion can be vacated upon request of the parties is that although the Court has discretion to vacate a previously issued decision, this discretion is rarely exercised. If exercised, it is limited to very few circumstances, and vacation of opinions is frowned upon by numerous appellate courts (e.g. the 7th, 10th, 2nd, and District of Columbia Circuits), as well as most district courts who have considered the issue.

The Court Has the Discretion to Vacate, But it Can Only be Exercised in Exceptional Circumstances

In In re Aden, 2013 WL 4513838, at *1 (D. Idaho Aug. 23, 2013) the Court stated: “A court may vacate an earlier decision if the parties settle, but it is not required to do so.”.   Of course, that does not mean that courts should vacate previously-issued opinions; indeed, “mootness by reason of settlement does not justify vacatur ‘absent exceptional circumstances.”  Amaefule v. Exxonmobil Oil Corp., 630 F. Supp. 2d 42, 43 (D.D.C. 2009) (quoting U.S. Bancorp Mortg. Co. v. Bonner Mall P’ship, 513 U.S. 18, 26 (1994)).

The Factors a Court Must Consider in Deciding Whether or Not to Vacate Upon the Parties’ Request

While courts recognize the importance of settlement agreements, the clear weight of authority counsels against vacatur of a previously-issued opinion to facilitate a settlement agreement.  Courts consider a variety of factors, including (1) the adverse effect on the public interest if a court agrees to a vacate a decision to facilitate an agreement between private parties and (2) whether the decision that the parties seek to vacate addresses significant or novel legal issues. Moreover, courts have rejected an argument that vacatur is appropriate simply to facilitate a settlement agreement, i.e. that the important interests promoted by a settlement agreement necessarily outweigh the adverse effects of vacating a decision.  Overall, the weight of authority has found that vacatur of a previously-issued decision is inappropriate.

In False Claims Act Cases, the Public Interest in the Government Not Paying for False or Fraudulent Claims is Always Present, and the Government Must Approve the Settlement

In Fed. Ins. Co. v. Hanover Ins. Co., 2013 WL 6403189 (N.D. Tex. Nov. 27, 2013), a district court explained that “[i]n connection with the parties’ settlement of this lawsuit, they have filed a . . .  motion to withdraw opinion, in which they request that the court withdraw its . . . memorandum opinion and order.”  The court agreed with the request: “Although the court is not obligated to withdraw an opinion, it has done so to facilitate settlement and where matters of public interest were not involved.” Id. at *1 (emphasis added).

Where there is a False Claims Act case, the public interest is always involved because such cases are concerned with public funds and the improper payment of same due to fraud of some type. Qui tam cases implicate matters of public interest even more than a case with private litigants.  Thus withdrawal of an opinion of the court could almost never be appropriate.  Another reason vacation of an opinion is particularly improper and unlikely in a qui tam case is because ultimately the case, whether the government has intervened or not, belongs to the government, and any settlement requires the government’s approval.  It is highly unlikely that the government would consent to a settlement which would contain a term agreeing that a court should withdraw its opinion.

PART II: TO COME……

Part II will describe in more detail the factors applied by the Court in deciding whether to exercise its discretion to vacate an already released decision.  Part II will set forth the key cases and their reasoning not to allow vacatur of a court’s opinion in order to facilitate a settlement.

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Court Allows False Claims Act Case Involving Janssen’s HIV/AIDS Drugs to Proceed

By Joy Clairmont

On May 31, 2017, the United States District Court for the District of New Jersey allowed relators’ False Claims Act (“FCA”) lawsuit against Janssen to proceed to litigation.  United States et al. v. Johnson & Johnson, et al., Civ. A. No. 12-7758, 2017 WL 2367050 (D.N.J. May 31, 2017).  Although claims against Janssen’s parent company, Johnson & Johnson, were dismissed, the Court denied Janssen’s motion to dismiss the lawsuit in all significant respects.  Id. *8.  The government had previously declined to intervene in the action, and the case will be litigated by relators’ counsel, Berger & Montague, P.C., and Cohn Lifland Pearlman Herrmann & Knopf LLP.

The lawsuit alleges that defendant Janssen purposely misrepresented, misbranded, and illegally marketed two potentially dangerous, expensive AIDS drugs – Intelence and Prezista – and paid kickbacks to certain physicians to influence them and others to prescribe these drugs. Defendant’s misleading marketing of Prezista concealed a dangerous side effect of the drug – elevated lipids – and falsely minimized the very serious risk of cardiovascular disease for HIV and AIDS patients. Defendant also aggressively and knowingly marketed Intelence off-label, for “treatment-naïve” patients, contrary to the label, as well as for once-daily use, which was directly contrary to its limited FDA approval for twice a day use.

In his opinion, Judge Michael A. Shipp held that relators’ complaint adequately pled “falsity” and “materiality,” required elements under the FCA.  2017 WL 2367050, *4-6. Further, the complaint satisfied the heightened pleading requirements for fraud under Rule 9(b) of the Federal Rules of Civil Procedure.  Id. *6-7.

Relying on the Third Circuit’s Petratos decision, the district court upheld allegations that use of a drug within its overall label class could still constitute false claims if the drug was not reasonable and necessary for specific patients:  “FDA approval does not per se render a drug ‘reasonable and necessary,’ but rather a drug ‘must also be ‘reasonable and necessary for the individual patient.’”  Id. *5.

The court found that materiality was satisfied by the allegations that there had been false certifications rendering the claims “ineligible for reimbursement.”  Id. *5-6.

Finally, the court followed established Third Circuit law in holding that a plaintiff need not plead specific false claims if their particularized allegations lead to a strong inference that claims were actually submitted.  Id. *6-7 (citing Foglia v. Renal Ventures Mgmt., LLC, 754 F.3d 153 (3d Cir. 2014)).

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