By Shauna Itri
A non-intervened False Claims Act case filed against Medstar, an ambulance company, settled for $12.7 million on January 17, 2017. The qui tam case was filed on October 4, 2013 in the Federal District Court of Massachusetts under the caption United States ex rel. Dale Meehan v. MedStar et als, Civil Action No. 13-12495-IT.
Many whistleblower cases brought under the False Claims Act (“FCA”) against ambulance companies involve determining if the ambulance transports were “medically necessary.”
Ambulance Services and Medicare
Medicare does not pay for any and all services furnished to beneficiaries, but only those which are “reasonable and necessary for the diagnosis or treatment of illness or injury . . . .” 42 U.S.C. § 1395y(a)(1)(A). With respect to ambulance services in particular, Medicare covers such services only “where the use of other methods of transportation is contraindicated by the individual’s condition, but only to the extent provided in regulations.” 42 U.S.C. § 1395x(s)(7).
The Medicare regulations regarding ambulance transport are set forth in 42 C.F.R. § 410.40, which is entitled “Coverage of ambulance services.” Accordingly, the regulations in effect for ambulance transportation services for the entire period of time covered by this Complaint provide, in relevant part:
(d) Medical necessity requirements—
1) General rule. Medicare covers ambulance services, including fixed wing and rotary wing ambulance services, only if they are furnished to a beneficiary whose medical condition is such that other means of transportation are contraindicated. The beneficiary’s condition must require both the ambulance transportation itself and the level of service provided in order for the billed service to be considered medically necessary. Nonemergency transportation by ambulance is appropriate if either: the beneficiary is bed-confined, and it is documented that the beneficiary’s condition is such that other methods of transportation are contraindicated; or, if his or her medical condition, regardless of bed confinement, is such that transportation by ambulance is medically required. Thus, bed confinement is not the sole criterion in determining the medical necessity of ambulance transportation. It is one factor that is considered in medical necessity determinations. For a beneficiary to be considered bed-confined, the following criteria must be met:
(i) The beneficiary is unable to get up from bed without assistance.
(ii) The beneficiary is unable to ambulate.
(iii) The beneficiary is unable to sit in a chair or wheelchair.
42 C.F.R. § 410.40(d)(1).
In addition, CMS established a requirement that “nonemergency, scheduled ambulance services,” such as maintenance dialysis, are covered if “the ambulance provider or supplier, before furnishing the service to the beneficiary, obtains a written order from the beneficiary’s attending physician certifying that the medical necessity requirements of paragraph (d)(1) of this section are met.” 42 C.F.R. § 410.40(d)(2).
The Medicare Benefit Policy Manual
The Medicare Benefit Policy Manual (“MBPM”), which sets forth the rules and regulations for Medicare reimbursement, further describes the requirements for coverage of ambulance transport. For example, the MBPM states:
Medical necessity is established when the patient’s condition is such that use of any other method of transportation is contraindicated. In any case in which some means of transportation other than an ambulance could be used without endangering the individual’s health, whether or not such other transportation is actually available, no payment may be made for ambulance services. In all cases, the appropriate documentation must be kept on file and, upon request, presented to the carrier/intermediary. It is important to note that the presence (or absence) of a physician’s order for a transport by ambulance does not necessarily prove (or disprove) whether the transport was medically necessary. The ambulance service must meet all program coverage criteria in order for payment to be made.
MBPM at § 10.2.1.
By Susan Thomas
A common problem for potential whistleblowers trying to start a case under the False Claims Act (“FCA”) is that they do not always have access to individual claims for payment made by the target defendant. Often this results because the employee does not work in the finance or billing division of the company and does not have access to this type of documentation. In some instances, however, the employee might be aware of the negotiations and documentation that led to the initial contract or grant award and might be able to identify falsities or misrepresentations at that phase of the interaction. In that situation, there may be a basis for a qui tam case under what is called the fraudulent inducement theory.
Fraudulent Inducement Theory
A cause of action for fraudulent inducement exists if a contractor makes a false statement to induce a government entity to award a grant or contract to that contractor, and the contract or grant is awarded in reliance on this false statement. E.g., United States ex rel. Marcus v. Hess, 317 U.S. 537, 542, 63 S.Ct. 379, 87 L.Ed. 443 (1943)(contractors could be liable under the False Claims Act for claims submitted under government contracts which the defendants obtained via collusive bidding); Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 376 (4th Cir.2008) (recognizing fraudulent inducement claim under the FCA based on obtaining a government contract through false statements); Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 785 (4th Cir. 1999)(rejecting district court’s determination that FCA liability could not rest on false statements submitted to the government to gain approval for a subcontract); United States ex rel. Hagood v. Sonoma County Water Agency, 929 F.2d 1416, 1420 (9th Cir.1991)(contract obtained based on false information or fraudulent pricing).
As the court found in U.S. ex rel. Danielides v. Northrop Grumman Sys. Corp., 09 CV 7306, 2014 WL 5420271 (N.D. Ill. Oct. 23, 2014), allegations of fraud in the inducement can include promising the government “to do work that it never intended to do” and “promising to do so, [but] never intend[ing] to provide its best efforts in performing the contract and fraudulently inducing the government to enter into the contract.” Id .at *6 n. 6.
If the government or relator can demonstrate that a contract or grant was procured by fraud, all resulting requests for payment can then be deemed fraudulent because they are based on the original false statement. E.g., United States ex rel. Longhi v. Lithium Power Techs., Inc., 575 F.3d 458, 467–68 (5th Cir.2009) (where a contract was procured by fraud, even when subsequent claims for payment under the contract were not literally false, they became actionable FCA claims because they “derived from the original fraudulent misrepresentation”); United States ex rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166, 1173 (9th Cir.2006) (“liability will attach to each claim submitted to the government under a contract, when the contract was originally obtained through false statements or fraudulent conduct”); United States ex rel. Main v. Oakland City Univ., 426 F.3d 914, 916 (7th Cir.2005); United States ex rel. Bettis v. Odebrecht Contractors of Cal., Inc., 393 F.3d 1321, 1326 (D.C.Cir.2005) (“[C]ourts have employed a ‘fraud-in-the-inducement’ theory to establish liability under the Act for each claim submitted to the Government under a contract which was procured by fraud, even in the absence of evidence that the claims were fraudulent in themselves”) (citation omitted).
Fraudulent Inducement Theory Case Examples
The availability of a claim under the FCA based on invoices submitted to the government for payment pursuant to contracts that were fraudulently induced has been upheld many times. This type of claim is referenced in the legislative history of the 1986 amendments to the FCA. S.Rep. No. 99–345, at 9 (1986), reprinted in 1986 U.S.C.C.A.N. at 5266, 5274 (“[E]ach and every claim submitted under a contract, loan guarantee, or other agreement which was originally obtained by means of false statements or other corrupt or fraudulent conduct, constitutes a false claim.”) (emphasis added). Indeed, even prior to the 1986 amendments, these claims had been recognized. See, e.g., United States v. Veneziale, 268 F.2d 504, 505 (3d Cir.1959) (“[A] fraudulently induced contract may create liability under the False Claims Act when that contract later results in payment thereunder by the government ….”) (citing United States ex rel. Marcus v. Hess, 317 U.S. 537, 543–44, 63 S.Ct. 379, 87 L.Ed. 443 (1943)).
In any particular case, proof in support of allegations of fraudulent inducement would focus on promises and representations made by the target defendant at various times before the government entity awarded the initial contract, awarded any optional years or extended the contract to include different projects, or extended the entire contract at the end of the planned base and optional years. The government’s decision to contract with the target defendant for option years and extensions are all points at which the defendant can be found liable for fraudulent inducement as long as there was either an independent contract award or the situation otherwise involved representations and commitments by the defendant to procure the additional work. In Danielides, for example, the court sustained FCA claims based on allegations that defendant’s “lies induced the government to enter the phase three contract.” U.S. ex rel. Danielides v. Northrop Grumman Sys. Corp., 2014 WL 5420271, at *6 (N.D. Ill. Oct. 23, 2014) (describing how phase three of the contract had been separately awarded, even though it was contemplated from the beginning of the overall project). In U.S. v. Bae Sys. Tactical Veh. Sys., LP, 2016 WL 894567, at *4 (E.D. Mich. Mar. 9, 2016), the court rejected defendant’s argument that there could be no fraud in the inducement claims based on statements made after the initial contract award, reasoning as follows:
The Court does not find this argument availing. As Defendant admits, the September price agreement was a modification of the Contract. (See, e.g., Dkt. 19, at 16-17 (referring to the “price modification”).) The fraudulent inducement theory may apply not only when fraud is used to obtain a contract, but also when used to obtain sub-contracts or modifications to contracts. See, e.g., United States ex rel. Frascella v. Oracle Corp., 751 F. Supp. 2d 842, 855 (E.D. Va. 2010) (FCA claim sufficiently pleaded where false statements were made “with the intent to induce [the government] to enter into contract modifications”); [U.S. ex rel.] Woodlee [v. Science Applications Intern. Corp.], 2005 WL 729684, at *1-2 (master contract awarded prior to individual delivery orders, the negotiations of which were the basis of the FCA fraudulent inducement claims).
The usual materiality and scienter requirements would still apply, meaning that the relator would have to be able to allege (and ultimately prove) that 1) the commitments or information that was misrepresented during the negotiation phase and that were the predicate for the contract award were material to the government’s decision to grant the award, and 2) that the information or misrepresentations were knowingly false when made.
 To avoid repetition, this article will refer only to contracts, but the same theories apply to government grants or other awards of government business.
Using Differences in Geographic Scope to Avoid the First-to-File Rule in False Claims Act Whistleblower Cases
As recounted in our previous blog entry, the federal False Claims Act (“FCA”) contains a first-to-file rule, which provides that “[w]hen a person brings an action under [the False Claims Act] 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). Our previous blog entry provided an overview of various factors that courts consider when evaluating whether the first-to-file rule applies. This blog entry provides a detailed analysis of one of the most important factors: the geographic scope of the alleged fraud.
An Earlier-Filed Local Fraud Does Not Preclude a Later-Filed National Fraud.
A very strong and often effective argument for a later-filed case to avoid the first-to-file rule is that the later case alleges both a nationwide scheme and fraud at one or more specific locations, whereas the first-filed complaint alleges a fraud at only one or two specific locations. This argument is more potent in a qui tam case where the defendant is a large nationwide company with multiple facilities. An example would be a hospital chain with tens or hundreds of hospitals in many different states.
Several whistleblower cases support this position. For example, in U.S. ex rel. Heath v. AT & T, Inc., 791 F.3d 112 (D.C. Cir. 2015), an earlier-filed complaint asserted FCA claims against Wisconsin Bell, a wholly-owned subsidiary of AT&T, based on allegations that Wisconsin Bell engaged in improper billing practices with respect to a federally subsidized telecommunications program. A later-filed complaint asserted FCA claims against AT&T on an entity-wide national basis based on similar fraudulent practices. While the earlier complaint had only alleged fraud in Wisconsin against AT&T’s Wisconsin subsidiary, the second complaint alleged fraud across the country against AT&T and various other subsidiaries. The district court granted AT&T’s motion to dismiss on first-to-file grounds, but the D.C. Circuit reversed. The D.C. Circuit noted that “the greater fraud often includes the lesser” but “the lesser fraud does not, without more, include the greater.” Id. at 122 (emphasis added). In language that is extremely helpful to our position, the D.C. Circuit explained:
There simply is no hint in the [first-filed] Complaint of a country-wide, institutionalized corporate practice of [engaging in the underlying fraud] . . . To hold, as AT & T suggests, that the first-to-file bar kicks in every time an initial complaint alleges that a subsidiary of a national company violated a national law would erase a broad swath of False Claims Act coverage. The point of the first-to-file bar is not to allow isolated misconduct to inoculate large companies against comprehensive fraud liability. The point, instead, is to prevent copycat litigation, which tells the government nothing it does not already know. Because [the] complaints go after two materially distinct fraud schemes, the first-to-file bar does not apply.
Id. at 123.
In U.S. ex rel. Hutcheson v. Blackstone Medical, 694 F. Supp. 2d 48 (D. Mass. 2010), rev’d on other grounds by United States ex rel. Hutcheson v. Blackstone Med., 647 F.3d 377, 394 (1st Cir. 2011), a first-filed complaint alleged that a defendant engaged in a fraudulent kickback scheme in Arkansas and also made a passing “upon information and belief” allegation that the defendants engaged in the same scheme in other states without providing any factual support with respect to the allegation of fraud outside Arkansas. A later-filed complaint alleged, in detail, a similar kickback scheme between the defendants and doctors across the country. The district court concluded that the later-filed complaint was not barred under the first-filed rule because it did not allege the same material facts as the first-filed complaint in that the later-filed complaint alleged a nationwide fraud while the earlier-filed complaint alleged only a fraud in Arkansas.
An Earlier-Filed National Fraud Likely Precludes a Later-Filed Local Fraud.
The inverse is also true. In U.S. ex rel. Chovanec v. Apria Healthcare Grp. Inc., 606 F.3d 361, 365 (7th Cir. 2010), the Seventh Circuit held that the first-filed rule is implicated when an earlier-filed complaint alleges a nationwide fraud and a later-filed complaint alleges fraud in only a particular locality. In that case, the Seventh Circuit recognized that fraud alleged in a specific location would not necessarily implicate the first-filed rule with respect to other locations. The court said: “Allegations about a scam in California or Kansas . . . would not reveal to the United States any risk of a scam in Illinois.” However, the Seventh Circuit found that allegations of a nationwide fraud necessarily subsume allegations of fraud in a particular locality in explaining that “[f]raud in Illinois . . . is within the scope of a national, continuing, scheme.”
Because the first-filed complaint referred to a nationwide fraud and the later-filed complaint only referred to fraud in a specific location, the Seventh Circuit concluded that the first-filed rule precluded pursuit of the later-filed case.
Merely Alleged Fraud at a Different Location May Implicate the First-to-File Rule.
There are qui tam cases holding that alleging the same fraud at a different geographic location is insufficient to avoid application of the first-to-file rule. However, these cases are distinguishable from the situation where the first-filed case alleges a fraud against a subsidiary or entity in one location and the later case sets forth a national scheme.
In U.S. ex rel. Branch Consultants v. Allstate Ins., 560 F.3d 371 (5th Cir. 2009), the first-filed complaint alleged that four insurance companies defrauded the government by improperly characterizing damage in connection with federally subsidized insurance policies and specifically alleged instances of the fraud in Mississippi. The second-filed complaint alleged a very similar fraud at locations in Louisiana. The district court dismissed the second-filed complaint as barred under the first-filed rule, and on appeal, the Fifth Circuit affirmed the dismissal. The Fifth Circuit explained that “a relator cannot avoid [the] first-to-file bar by simply adding factual details or geographic locations to the essential or material elements of a fraud claim against the same defendant described in a prior compliant.” Id. at 378. It held: “Because [the second relator] cannot avoid the preclusive effect of [the first-filed case] by focusing on additional instances of fraud occurring in other geographic locations, § 3730(b)(5) applies to bar its allegations against [the defendant].” Id.
Other courts have reached similar conclusions. See U.S. ex rel. Ortega v. Columbia Healthcare, Inc., 240 F. Supp. 2d 8, 13 (D.D.C. 2003) (“If the later-filed complaint alleges the same type of wrongdoing as the first, and the first adequately alleges a broad scheme encompassing the time and location of the later filed, the fact that the later complaint describes a different time period or geographic location that could theoretically lead to a separate recovery does not save it from the absolute first-to-file bar.”) (emphasis added); Palladino ex rel. U.S. v. VNA of S. New Jersey, Inc., 68 F. Supp. 2d 455, 478 (D.N.J. 1999) (applying the first-to-file bar to a later-filed complaint alleging a similar fraud in Runnemede, New Jersey as an earlier-filed complaint had alleged in Philadelphia).
These cases involve circumstances where a later-filed complaint alleged a materially similar fraud as an earlier-filed complaint but simply alleged that the fraud occurred at a different geographic location. This is very different from a later-filed complaint alleging a broad, nationwide scheme relative to an earlier-filed complaint’s allegations of a narrow, localized scheme. As the D.C. Circuit explained, “the greater fraud often includes the lesser” but “the lesser fraud does not, without more, include the greater.” Heath, 791 F.3d at 122 (emphasis added).
In sum, differences in the geographic scope of the alleged fraud may assist whistleblowers in avoiding application of the first-to-file rule. Specifically, there is substantial authority in support of the proposition that a later-filed case is not barred by the FCA’s first-to-file rule when it alleges a broad, nationwide scheme relative to a narrow scheme alleged at a few discrete locations in an earlier-filed complaint.
 See also United States v. Sanford-Brown, Ltd., 27 F. Supp. 3d 940, 948 (E.D. Wis. 2014) (finding that the first-to-file rule does not apply when an earlier-filed complaint alleges “geographically disparate” fraud, among other reasons).
It is well established that the scope and conduct of discovery are well within the sound discretion of the trial court. Gaul v. Zep Mfg. Co., No. 03-2439, 2004 U.S. Dist. Lexis 1990, at *3 (E.D. Pa. Feb. 5, 2004) (quoting Marroquin-Manriquez v. Immigration and Naturalization Serv., 699 F.2d 129, 134 (3d Cir. 1983)). Pursuant to Federal Rule of Civil Procedure 26(b)(1), a party may seek discovery of “matter that is relevant to any party’s claim or defense.” Fed. R. Civ. P. 26(b)(1). “Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.” Id. Rule 37 of the Federal Rules of Civil Procedure “authorizes a party who has received evasive or incomplete answers to discovery authorized by Federal Rule of Civil Procedure Rule 26(a) to bring a motion to compel disclosure of materials sought.” Northern v. City of Phila., No. 98-6517, 2000 U.S. Dist. LEXIS 4278, at *3 (E.D. Pa. April 4, 2000).
Waiving Attorney Client Privilege In Qui Tam Whistleblower Cases Under The False Claims Act
When a party waives the attorney client privilege in a qui tam whistleblower case under the False Claims Act – for example, in order to assert an “advice of counsel” defense – the law in the Third Circuit is clear: a party waiving the attorney client privilege must make a full and timely disclosure as to the entire subject matter at issue in the case. As noted by this Court,
[W]hen one party intentionally discloses privileged material with the aim, in whole or in part, of furthering that party’s case, the party waives its attorney-client privilege with respect to the subject-matter of the disclosed communications.
Murray v. Gemplus Int’l, S.A., 217 F.R.D. 362, 367 (E.D. Pa. 2003) (emphasis added) accord SEC v. Welliver, No. 11-CV-3076, 2012 U.S. Dist. LEXIS 188019, *31-32 (D. Minn. Oct. 26, 2012) (“If a party waives attorney-client privilege by putting privileged communications at issue, “the scope [of the waiver] must of necessity be somewhat broad and, is, in fact, a ‘subject matter’”) (quotation omitted). This is known as the subject-matter waiver rule.
Subject-Matter Waiver Rule
The underlying purpose of the subject-matter waiver rule is to prevent the party waiving the privilege as to certain communications from gaining an advantage in litigation by presenting a one-sided story. See Glenmede Trust Co. v. Thompson, 56 F.3d 476, 486 (3d Cir. 1995) (finding that in the context of an affirmative advice of counsel defense, the defendant had waived “all communications, both written and oral, to or from counsel as to the entire transaction… include[ing the attorney’s] internal research and other file memoranda”). As this Court has previously stated: “Courts have recognized that it would be fundamentally unfair to allow a party to disclose opinions which support its position and to simultaneously conceal those that are unfavorable or adverse to its position.” Katz v. AT&T Corp., 191 F.R.D. 433, 439 (E.D. Pa. 2000).
These principles apply to all attorney client privilege waivers. For example, in the case of Berckeley Inv. Group, Ltd. v. Colkitt, 455 F.3d 195,(3d Cir. 2006), the Third Circuit rejected the lower court’s grant of summary judgment for the Defendant [Berckeley], which was based in part on Berckeley’s contention, supported by an attorney affidavit, that it did not act with the requisite state of mind. Id. at 217. In remanding the matter, the Court held,
For purposes of the remand … we remind the parties that the attorney-client privilege cannot be used as both a “shield” and a “sword”: Berckeley cannot rely upon the legal advice it received for the purpose of negating its scienter without permitting Colkitt the opportunity to probe the surrounding circumstances and substance of that advice.
Id. at 222. (emphasis supplied) (citing Livingstone v. North Belle Vernon Borough, 91 F.3d 515, 537 (3d Cir. 1996).
In conclusion, when a party in a qui tam whistleblower lawsuit under the False Claims Act waives the attorney client privilege, that waiver should be interpreted broadly in order to allow the opposing party to fully explore any materials related to the waiver.
 See also Dietz & Watson, Inc. v. Liberty Mut. Ins. Co., No.14-CV-4082, 2015 U.S. Dist. LEXIS 58827, at *15 (E.D. Pa. May 5, 2015) (“‘If partial waiver does disadvantage the disclosing party’s adversary by, for example, allowing the disclosing party to present a one-sided story to the court, the privilege will be waived as to all communications on the same subject.’”) (quoting Westinghouse Elec. Corp. v. Republic of Phil., 951 F.2d 1414, 1426 fn. 13 (3d Cir. 1991)); Pallares v. Kohn (In re Chevron Corp.), No. 10-MC-209, 2010 U.S. Dist. LEXIS 134970, at *22 (E.D. Pa. Dec. 20, 2010) (“The voluntary disclosure by a client of a privileged communication waives the privilege as to other such communications relating to the same subject matter made both prior to and after the occurrence of the waiver.”) (emphasis added), rev’d on other grounds, Pallares v. Kohn (In re Chevron Corp.), 650 F.3d 276 (3d Cir. 2011).
The False Claims Act’s first-to-file rule provides that “[w]hen a person brings an action under [the False Claims Act], 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). This blog provides an overview of some of the most important factors courts consider in determining whether the first-to-file rule applies.
Claims Brought Under Different State False Claims Act Statutes
The federal False Claims Act (“FCA”) permits relators to bring claims in connection with fraud committed against the federal government. Likewise, several states have adopted their own false claims act that permit relators to bring claims in connection with fraud committed against state governments.
Case law supports an argument that the first-to-file rule does not exclude similar claims brought under different states’ false claims acts. For example, in one case, a relator brought a qui tam suit against Merck for defrauding Medicaid by failing to give it the benefit of the lowest price for a drug as required by law.  Louisiana sought to intervene in its suit to recover damages under its false claims act. The defendant argued that Louisiana was barred from intervening based on the first to file bar of the federal FCA. The district court noted that the bar only applies “[w]hen a person brings an action under” the federal FCA, and Louisiana was seeking to bring purely state law claims. Further, the court found that the bar did not apply because the state was seeking separate damages from the United States.
If, for example, case #1 is only pursuing claims under the federal FCA and the Florida False Claims Act, whereas case #2 pursues similar claims under the federal FCA and the false claims acts of Florida, California, and Nevada, case #2’s federal and Florida claims are precluded under the first-to-file rule, but claims under the California and Nevada false claims act should survive.
Whether First-Filed Complaint Survive Rule 9(b)
Federal Rule of Civil Procedure 9(b) provides that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake,” which is a heightened standard relative to the standard that ordinarily applies to filing complaints. Lawsuits brought under the FCA are subject to Rule 9(b)’s heightened pleading standard.
Some courts have held that the first-to-file rule does not apply if the earlier-filed complaint was subject to dismissal under Rule 9(b) for failure to plead the underlying fraud with particularity; however, most courts have disagreed with these decisions.
The Sixth Circuit has held that that the first-filed complaint must plead fraud with particularity as required by Rule 9(b) in order to bar a later-filed detailed complaint in reasoning that “[a] complaint that fails to provide adequate notice to a defendant [because it does not satisfy Rule 9(b)] can hardly be said to have given the government notice of the essential facts of a fraudulent scheme, and therefore would not enable the government to uncover related frauds.” The Ninth Circuit has suggested, but not expressly held, that it would also follow this approach.
Most courts that have considered the issue, however, have rejected an argument that there is a Rule 9(b) exception to the first-to-file bar. For example, the D.C. Circuit expressly rejected the Sixth Circuit’s earlier decision and held that “first-filed complaints need not meet the heightened standard of Rule 9(b) to bar later complaints; they must provide only sufficient notice for the government to initiate an investigation into the allegedly fraudulent practices, should it choose to do so.” The D.C. Circuit noted that the Sixth Circuit’s approach put courts in the uncomfortable position of determining the sufficiency of a complaint in another jurisdiction and could result in two courts disagreeing over whether a complaint meets Rule 9(b)’s particularity requirement.
The First Circuit later adopted the D.C. Circuit’s position. Likewise, the Fifth, Eighth and Tenth Circuits have suggested that they are likely to side with the D.C. Circuit without expressly adopting or rejecting the Rule 9(b) exception to the first-to-file rule as of yet.
Whether First-Filed Complaints Survive Public Disclosure Bar
The Ninth Circuit has held that the first-to-file rule does not apply when the public disclosure bar applied to the first-filed complaint. Campbell v. Redding Med. Ctr., 421 F.3d 817, 825 (9th Cir. 2005).
Differences in Substantive Claims
Under the first-to-file rule, “a later case need not rest on precisely the same facts as a previous claim to run afoul of this statutory bar.”  Instead, “if a later allegation states all the essential facts of a previously-filed claim, the two are related and section 3730(b)(5) bars the later claim, even if that claim incorporates somewhat different details.” Put differently, the analysis for the first-to-file rule focuses on whether the claims alleged in second-filed complaint are based on the same material facts as the claims in the first-filed complaint.
As a result, “where the nature of the fraud alleged in two complaints is different, they are not related for purposes of the FCA” and thus do not implicate the first-to-file rule. Even if there is some overlap between the substantive allegations of the first complaint and later filed complaints, the courts will carefully examine the differences in the substantive claims. If the later-filed complaint is based on different material facts than the first-filed complaint, then the first-to-file bar will not apply. The critical question is identifying and evaluating any overlap between the material facts in the complaints.
Courts analyze many factors before barring a later filed case. Some of the most important are different statutes under which claims are asserted, whether the first-filed complaint complies with Rule 9(b)’s heightened pleading standard, whether the first-filed complaint is subject to dismissal under the public disclosure bar, and differences in the material facts underlying both lawsuits.
 U.S. ex rel. LaCorte v. Merck & Co., 2004 WL 595074 (E.D. La. Mar. 23, 2004).
 Id.; see also United States et al. ex rel. Westmoreland v. Amgen, Inc., 707 F. Supp. 2d 123 (D. Mass. 2010) (holding that later-filed action alleging violations of Georgia and New Mexico State False Claims Acts not jurisdictionally barred).
 Walburn v. Lockheed Martin Corp., 431 F.3d 966, 973 (6th Cir. 2005).
 Campbell v. Redding Med. Ctr., 421 F.3d 817, 824 (9th Cir. 2005).
 United States ex rel. Batiste v. SLM Corp., 659 F.3d 1204 (D.C. Cir. 2011).
 United States ex rel. Heineman-Guta v. Guidant Corp., 718 F.3d 28, 36 (1st Cir. 2013).
 United States ex rel. Wickliffe v. EMC Corp., 473 F. App’x 849, 851 (10th Cir. 2012) (“We admit to being uneasy with the parties’ suggestion that Rule 9(b)’s particularity requirement should be applied to the first-to-file bar. Such an interpretation of § 3730(b)(5) ‘would create a strange judicial dynamic, potentially requiring one district court to determine the sufficiency of a complaint filed in another district court, and possibly creating a situation in which the two district courts disagree on a complaint’s sufficiency.’”) (citing Batiste, 659 F.3d at 1210); Roberts v. Accenture, LLP, 707 F.3d 1011, 1018-19 (8th Cir. 2013) (applying the relevant Batiste reasoning to an analogous situation to hold that Fed. R. Civ. P. 9(b) does not play a role in determining “whether a relator is entitled to share in the settlement proceeds resulting from a qui tam action in which the government elects to intervene”); United States ex rel. Branch Consultants v. Allstate Ins. Co., 560 F.3d 371, 378 n. 10 (5th Cir. 2009) (finding that the sufficiency of an earlier-filed complaint is an issue to be addressed only by the court in the earlier-filed action but declining to expressly address whether earlier-filed complaint must satisfy Rule 9(b) to implicate the first-to-file bar).
 U.S. ex rel. LaCorte v. SmithKline Beecham Clinical Labs., Inc., 149 F.3d 227, 232-33 (3d Cir. 1998).
 United States ex rel. Urquilla-Diaz v. Kaplan Univ., 2016 WL 3909521, at *4 (S.D. Fla. Mar. 24, 2016).
 E.g. United States v. Garman, 2016 WL 3562062, at *6 (E.D. Tenn. June 24, 2016) (finding certain claims but not others barred by the FCA’s first-to-file rule).
Employers frequently retaliate against whistleblower employees through a variety of adverse actions, including termination, demotion, failure to promote, or reassignment to a less desirable position. Employers will often attempt to justify retaliation by creating an excuse that is unrelated to an employee’s attempts to uncover or report fraud when the employer’s real motivation is to punish the employee or stop the employee from further investigation.
Retaliation has a chilling effect on employees who would otherwise be willing to report fraud under the False Claims Act (“FCA”). This is particularly troubling given that employees are often in the best position to learn about, investigate, and disclose fraud.
Fortunately, the FCA contains strong employment protections for whistleblowers. The FCA provides:
Any employee, contractor, or agent shall be entitled to all relief necessary to make that employee, contractor, or agent whole, if that employee, contractor, or agent is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done by the employee, contractor, agent or associated others in furtherance of an action under this section or other efforts to stop 1 or more violations of [the FCA].
31 U.S.C. § 3730(h)(1). The retaliation provision is “designed to protect persons who assist the discovery and prosecution of fraud and thus to improve the federal government’s prospects of deterring and redressing crime.” To impose liability against an employer for improper retaliation under the FCA, an employee must show that “(1) he engaged in protected activity, (2) his employer, or the entity with which he has contracted or serves as an agent, knew about the protected activity, and (3) he was retaliated against because of his protected activity.”
The FCA Retaliation Provision
The scope of the retaliation provision is wide, but not unlimited. It protects employees from retaliation based on both (1) furtherance of an action under the FCA and (2) an attempt to stop a violation of the FCA regardless of whether the employee, another individual, or the government pursues an action under the FCA. Importantly, under the first category, the employee need not personally bring a lawsuit under the FCA’s qui tam provisions but must merely act in furtherance of an FCA lawsuit. For example, if the government files its own FCA lawsuit, an employee’s lawful conduct in support of the lawsuit would be protected. Additionally, an employee’s investigation of potential fraud is protected under the statute, as is filing an internal complaint with an employer. Likewise, even if an employee unsuccessfully attempts to pursue an FCA claim as a qui tam relator, this does foreclose application of the anti-retaliation provision subject to the below discussion on whether the employee had a reasonable belief of fraud. 
However, courts have also limited the scope of the retaliation provision by requiring that an employee have a subjectively and objectively reasonable belief that the employer engaged in fraud. Put differently, “the employee must undertake the protected conduct with the actual and reasonable belief that the employer is committing fraud against the government.”
Remedies for Retaliation
The FCA also provides the remedies available to employees who are the victims of retaliation:
Relief . . . shall include reinstatement with the same seniority status that employee, contractor, or agent would have had but for the discrimination, 2 times the amount of back pay, interest on the back pay, and compensation for any special damages sustained as a result of the discrimination, including litigation costs and reasonable attorneys’ fees.
31 U.S.C. § 3730(h)(2). Importantly, the remedies provision utilizes the mandatory language “shall,” and courts generally hold that if a plaintiff successfully pursues a retaliation cause of action, a district court must award the available remedies.
Collaboration Between Qui Tam Lawyers and Employment Lawyers
Retaliation claims also present an opportunity for qui tam lawyers and employment lawyers to collaborate. Retaliation claims can be brought in the same lawsuit as the underlying FCA claims or in a separate lawsuit. In either case, qui tam lawyers ordinarily do not practice employment law and will require the assistance of employment lawyers with respect to retaliation claims. Employment lawyers are often the first to know about potential FCA claims since employees are often fired or suffer other adverse employment actions due to investigating or reporting fraud. Likewise, qui tam lawyers often learn about potential retaliation claims through evaluation and pursuit of claims for substantive violations of the FCA. Employment lawyers and qui tam lawyers can mutually benefit by working together in such circumstances.
 State false claims also contain similar protections against retaliation for whistleblowers. E.g. Minn. Stat. § 181.932 (Minnesota); Fla. Stat. § 68.088 (Florida); 740 Ill. Comp. Stat. 175/4(g) (Illinois).
 U.S. ex rel. Schweizer v. Oce N.V., 677 F.3d 1228, 1237 (D.C. Cir. 2012) (internal quotation marks omitted); see also Jones-McNamara v. Holzer Health Sys., 630 F. App’x 394, 397 (6th Cir. 2015) (explaining that the purpose of the retaliation provision is “[t]o protect employees who expose fraud against the federal government”).
 U.S. ex rel. Bias v. Tangipahoa Par. Sch. Bd., 816 F.3d 315, 323 (5th Cir. 2016); see also United States ex rel. Uhlig v. Fluor Corp., 839 F.3d 628, 635 (7th Cir. 2016) (“[A] plaintiff must prove that he was engaged in protected conduct and was fired “because of” that conduct.”).
 See Schweizer, 677 F.3d at 1237.
 E.g. Young v. CHS Middle E., LLC, 611 F. App’x 130, 132 (4th Cir. 2015) (“Protected activities include collecting information about a possible fraud.”) (internal quotation marks omitted); U.S. ex rel. Grenadyor v. Ukrainian Vill. Pharmacy, Inc., 772 F.3d 1102, 1109 (7th Cir. 2014) (explaining that “retaliation for filing an internal complaint . . . is forbidden”).
 E.g. ABC v. NYU Hosps. Ctr., 629 F. App’x 46, 49 (2d Cir. 2015) (“The failure of [the plaintiff’s] qui tam action does not necessarily preclude him from seeking protection from retaliation under § 3730(h).”).
 See United States ex rel. Uhlig v. Fluor Corp., 839 F.3d 628, 635 (7th Cir. 2016) (“To determine whether an employee’s conduct was protected, we look at whether (1) the employee in good faith believes, and (2) a reasonable employee in the same or similar circumstances might believe, that the employer is committing fraud against the government.”) (internal quotation marks omitted); Jones-McNamara, 630 F. App’x at 399 (imposing a “reasonable belief requirement”).
 U.S. ex rel. Absher v. Momence Meadows Nursing Ctr., Inc., 764 F.3d 699, 715 (7th Cir. 2014) (internal quotation marks omitted).
 See Townsend v. Bayer Corp., 774 F.3d 446, 465 (8th Cir. 2014) (discussing whether “shall” in § 3730(h)(2) imposes a mandatory requirement and citing related cases).
FCA Liability for Medicare Advantage Fraud Part 1: Presentment of False Claims by Medical Providers to Medicare Advantage Organizations
Medicare fraud is one of the prime drivers of litigation under the False Claims Act (“FCA”). Under traditional Medicare, service providers are directly reimbursed with federal government funds. In 2003, Congress significantly expanded the availability of an alternative to traditional Medicare known as Medicare Advantage. Medicare Advantage differs from traditional Medicare in that private entities directly provide coverage to beneficiaries and pay reimbursements to medical providers in return for payments from the government. This blog entry addresses why this difference does not prevent FCA liability for the submission of false claims by medical providers to the private entities that provide Medicare Advantage plans.
Background of Medicare Advantage
Unlike traditional Medicare, Medicare Advantage (sometimes referred to as Medicare+Choice or Medicare Part C) plans are offered by private entities known as Medicare Advantage organizations (“MAOs”). Medicare beneficiaries receive insurance coverage directly through an MAO, and MAOs are responsible for processing and reimbursing claims from healthcare providers. In return, MAOs are funded by the federal government in the form of capitation payments. A capitation payment “is a fixed monthly payment regardless of the volume of services an enrollee uses.” Put differently, the government makes capitation payments to MAOs regardless of the actual costs of providing coverage. This means if an enrollee’s reimbursable healthcare costs exceed the capitation payment, an MAO loses money. Inversely, if an enrollee’s reimbursable healthcare costs are less than the capitation payment, an MAO profits.
The amount of the government’s capitation payment to MAOs is tied to an enrollee’s health status through a process known as “risk adjustment.” MAOs receive “less for healthier enrollees and more for less healthy enrollees” since less healthy enrollees are anticipated to require more medical services and thus will cause increased costs for MAOs. CMS calculates a capitation payment for each enrollee based on information known as “risk adjustment data.” The most important component of risk adjustment data is whether an enrollee suffers from chronic and expensive conditions. This information is conveyed to CMS through diagnostic codes. “Physicians and other health care providers submit diagnosis codes to the Medicare Advantage organizations, which in turn submit them to CMS.”
In 2003, Congress significantly expanded the availability of Medicare Advantage. Since then, Medicare Advantage has seen tremendous growth and continues to expand. A recent government report provides that 32% of all Medicare beneficiaries, or approximately 18.5 million beneficiaries, are projected to be enrolled in Medicare Advantage plans in 2017.
FCA Liability for Medicare Advantage Fraud
There are at least two avenues of FCA liability arising from Medicare Advantage: (1) asserting claims against providers for submitting false claims to MAOs and (2) asserting claims against MAOs for submitting inaccurate diagnostic information to Medicare to receive increased capitation payments. This blog only addresses the first category of liability. We will blog about the second category of liability in the future.
There are two questions with respect to whether liability exists for claims presented to an MAO: (1) does the FCA permit liability for claims submitted to MAOs rather than to the government itself, and (2) do false claims made to MAO satisfy the FCA’s definition of “claim”?
1. Liability for Presentment of False Claim to Government Agent
Before 2009, imposing FCA liability for claims presented to MAOs was difficult. The FCA previously only imposed liability for a person who “knowingly presents, or causes to be presented, to an officer or employee of the United States Government . . . a false or fraudulent claim for payment or approval.” As a result, courts interpreted the statute to only cover situations where a claim was presented “to an officer or employee of the United States Government.” Because of this interpretation, the statute did not to extend to situations where claims were presented to recipients of government funds, even where government funds were used to pay the false claims.
In 2009, Congress amended the FCA to address this issue and eliminated the language “to an officer or employee of the United States.” The FCA now provides that a person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” violates the FCA.  A legislative report explains that the 2009 Amendments “clarif[y] that liability . . . attaches whenever a person knowingly makes a false claim to obtain money or property, any part of which is provided by the Government without regard to whether the wrongdoer deals directly with the Federal Government.” 
After the 2009 Amendments, false claims presented to recipients of government funds are actionable under the FCA. Indeed, the Supreme Court recently observed that “[a] ‘claim’ now includes direct requests to the Government for payment as well as reimbursement requests made to the recipients of federal funds under federal benefits programs.” Other courts have done so as well. 
2. Whether False Claims to MAOs are “Claims” Within the FCA
In part, the FCA defines “claim” as “any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that . . . is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest, and if the United States Government . . . provides or has provided any portion of the money or property requested or demanded.” 31 U.S.C. 3279(b)(2) (2009).
Applying this definition, a reimbursement request presented by a medical provider to an MAO easily satisfies the definition of “claim.”
- A medical provider who submits an invoice to an MAO for reimbursement is making a “request or demand . . . for money.”
- It is immaterial that the Government does not “ha[ve] title to the money” being demanded by a medical provider to an MAO.
- Under these circumstances, an MAO is reimbursing medical providers “to advance a Government program or interest” because Medicare Advantage is an alternative to traditional Medicare (a Government program) and provides a mechanism by which to provide healthcare services to elderly and disabled individuals (a Government interest).
- Under these circumstances, “the Government . . . provides or has provided any portion of the money or property requested or demanded.” As explained above, the Government makes capitation payments to MAOs, and the MAOs use the capitation payment to reimburse providers.
Additionally, while case law has not resolved the issue yet, the amount of damages under these circumstances would presumably be the MAO’s total payment to the medical provider for the false claim(s). Defendants may contend that damages should be some portion of the Government’s capitation payment to the MAO, but given that capitation payments are unrelated to actual costs, it would likely be impossible to quantify the precise portion of the capitation payments that was used to pay the false claim(s). Defendants may contend that this undermines FCA liability in the first place, but as discussed above, the FCA supports liability when the Government pays “any portion” of the money. 31 U.S.C. 3279(b)(2)(A)(ii).
Following the 2009 Amendments to the FCA, false claims presented to MAOs with respect to Medicare Advantage plans are actionable under the FCA in the same way that false claims presented to the federal government with respect to traditional Medicare have always given rise to FCA liability. This makes perfect sense, as medical providers should not escape FCA liability simply because a Medicare beneficiary elects to receive coverage through a Medicare Advantage plan. Given the continued growth of Medicare Advantage, there will likely be a substantial number of FCA cases premised on Medicare Advantage fraud over the coming years.
 Id. at *3.
 United Healthcare, 2016 WL 7378731, at *3.
 31 U.S.C. 3279(a)(1) (1994).
 E.g U.S. ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004).
 31 U.S.C. 3279(a)(1)(A) (2009).
 S. REP. 111-10, 11, 2009 WL 787872, 2009 U.S.C.C.A.N. 430, 438 (2009).
 Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989, 1996 (2016).
 E.g. United States ex rel. Garbe v. Kmart Corp., 824 F.3d 632, 638 (7th Cir. 2016) (“The new language underscored Congress’s intent that FCA liability attach to any false claim made to an entity implementing a program with government funds, regardless of whether that entity was public or private.”); McCrary v. Knox Cty., Indiana, 2016 WL 4140982, at *5 (S.D. Ind. Aug. 4, 2016) (“[T]he text of the statute was amended such that the definition of ‘claim’ now explicitly includes demands for payment or reimbursement made to grantees of federal money who use that money for federal purposes or will ask for payment or reimbursement from the federal government.”);Graves v. Plaza Med. Centers, Corp., 2015 WL 11199839, at *6 (S.D. Fla. Apr. 1, 2015) (“[D]irect submission to the federal government need not be alleged in a post-[2009 Amendment] FCA claim.”).
On December 6, 2016 in State Farm Fire and Casualty Co. v. United States ex rel. Rigsby, the Supreme Court resolved a circuit split in holding that a violation of the False Claims Act’s (“FCA”) seal requirement does not automatically require dismissal of a relator’s claims. Still, relators and their counsel should stringently adhere to the seal requirement since Rigsby confirms that courts maintain discretion in fashioning appropriate sanctions for seal violations.
The False Claims Act
The FCA provides that a private person, referred to as a relator, may bring actions on behalf of the federal government to recover for the presentment of false claims to a government entity, and several states have also adopted similar statutes. The relator is required to provide the complaint and all material evidence in the relator’s possession to the government so that the government may investigate the relator’s claims. The government must then elect whether to intervene in the lawsuit, i.e. whether to formally enter the lawsuit and pursue the claims jointly with the relator.
The FCA requires that when a relator files a complaint, “[t]he complaint shall be filed in camera, shall remain under seal for at least 60 days, and shall not be served on the defendant until the court so orders.” This means that documents related to the lawsuit cannot be publicly accessed and that the relator cannot disclose anything about the lawsuit, including the existence of the lawsuit itself, to anyone except the relator’s attorneys. After the initial 60 day period, the government may request extensions of the seal period, and courts routinely grant as many extensions as the government desires. The lawsuit is not unsealed until the government completes its investigation and decides whether to intervene. The complaint is then served on the defendant and the lawsuit thereafter proceeds like other civil lawsuits.
Purpose of the Seal Requirement
As various courts have explained, the paramount purpose of the seal requirement is to provide the government with an opportunity to investigate the relator’s claims and decide whether to intervene without the defendant learning about the case. One court distilled four purposes of the seal requirement: “(1) to permit the United States to determine whether it already was investigating the fraud allegations (either criminally or civilly); (2) to permit the United States to investigate the allegations to decide whether to intervene; (3) to prevent an alleged fraudster from being tipped off about an investigation; and, (4) to protect the reputation of a defendant in that the defendant is named in a fraud action brought in the name of the United States, but the United States has not yet decided whether to intervene.”
Violating the Seal Requirement
While the FCA requires that a complaint be filed under seal, it does not specify any ramifications for a violation of the seal requirement. The most common violations are failure to file the complaint under seal or publicly disclosing the existence of or information about the lawsuit before the seal is lifted. Before the Supreme Court’s recent decision in Rigsby, the circuit courts of appeal were split as to the appropriate remedy for these and other violations. The minority view, applied only by the Sixth Circuit, was that violation of the seal requirement mandated automatic dismissal of the relator’s claims. The majority view, endorsed by the Second, Fourth, Fifth, and Ninth Circuit, was that violation of the seal requirement did not require automatic dismissal and instead requires a court to apply a balancing test of various relevant factors to determine whether a sanction is appropriate, and if so, to determine an appropriate sanction.
State Farm Fire and Casualty Co. v. United States ex rel. Rigsby
In Rigsby, two relators filed a lawsuit under the FCA against State Farm, and at the government’s request, the district court extended the initial seal period several times. While the case remained under seal, the relators’ attorney sent an email to several news organizations about State Farm’s fraud that formed the basis for the relators’ lawsuit, and the attorney’s email discussed the lawsuit itself. The news organizations issued stories about the fraud allegations but did not disclose the relators’ lawsuit. Even so, the attorney’s conduct clearly violated the seal requirement. State Farm moved to dismiss the case based on the seal violation. The district court considered three factors in evaluating whether to dismiss the lawsuit, including actual harm to the government arising from the seal violation, the severity of the seal violation, and evidence of bad faith. The district court decided that dismissal was inappropriate, and State Farm did not request any lesser sanction. On appeal, the Fifth Circuit affirmed the district court’s denial of State Farm’s motion to dismiss.
The Supreme Court granted review and affirmed the Fifth Circuit. Like the district court and the Fifth Circuit, the Supreme Court rejected a per se rule requiring dismissal for seal violations and instead found that the determination of an appropriate sanction, if any, for a seal violation rests within the discretion of the district court. The Supreme Court found that the three factors considered by the district court – “actual harm to the Government, severity of the violations, and evidence of bad faith” – appear to be appropriate factors in guiding this analysis but did not expressly adopt a test for courts to apply and suggested that there might be “other relevant considerations.” As a result, after Rigsby, courts will likely consider any relevant circumstances but focus on the three factors identified above.
Of course, Rigsby does not foreclose the possibility that a court could conclude that dismissal is an appropriate remedy for violation of the seal requirement but strongly suggests that dismissal is only appropriate for willful violations that result in substantial prejudice to the government. With that said, relators and their attorneys should scrupulously adhere to the FCA’s seal requirement. While automatic dismissal is inappropriate, it remains a possibility and at least one court has dismissed an FCA claim after Rigsby where the relator failed to file the complaint under seal upon finding that the relator “made no attempt to file the complaint under seal and afford the government an opportunity to review his allegations.” Moreover, Rigsby authorizes courts to exercise discretion in imposing a different sanction for seal violations. Finally, the government will likely be extremely displeased with seal violations while evaluating whether to intervene, and this is a particularly significant ramification of seal violations given that the likelihood of a favorable outcome for relators drastically increases with government intervention.
 137 S. Ct. 436 (2016).
 31 U.S.C. § 3730(b)(2).
 31 U.S.C. § 3730(b)(3).
 See e.g. U.S. ex rel. Summers v. LHC Grp., Inc., 623 F.3d 287, 292 (6th Cir. 2010) (“[T]he seal requirement g[i]ve[s] the Government the chance to determine whether it was already investigating the claims stated in the suit and then to consider whether it wished to intervene prior to the defendant’s learning of the litigation.”) (internal quotation marks omitted); U.S. ex rel. Lujan v. Hughes Aircraft Co., 67 F.3d 242, 245 (9th Cir. 1995) (explaining that the seal requirement “allow[s] the government the opportunity to study and evaluate the relator’s information for possible intervention in the qui tam action or in relation to an overlapping criminal investigation”).
 Am. Civil Liberties Union v. Holder, 673 F.3d 245, 250 (4th Cir. 2011).
 U.S. ex rel. Summers v. LHC Grp., Inc., 623 F.3d 287, 292 (6th Cir. 2010).
 U.S. ex rel. Lujan v. Hughes Aircraft Co., 67 F.3d 242 (9th Cir. 1995); U.S. ex rel. Pilon v. Martin Marietta Corp., 60 F.3d 995 (2d Cir. 1995); U.S., ex rel., Rigsby v. State Farm Fire & Cas. Co., 794 F.3d 457 (5th Cir. 2015); Smith v. Clark/Smoot/Russell, 796 F.3d 424, 430 (4th Cir. 2015).
 U.S. ex rel. Rigsby v. State Farm Fire & Cas. Co., 2011 WL 8107251 (S.D. Miss. Jan. 24, 2011).
 U.S., ex rel., Rigsby v. State Farm Fire & Cas. Co., 794 F.3d 457 (5th Cir. 2015).
 E.g. Meyn v. Citywide Mortg. Assocs., Inc., 2016 WL 7336415, at *2 (D. Kan. Dec. 19, 2016) (dismissing an FCA claim)
By Susan Thomas
The appeals court for the Pennsylvania-New Jersey-Delaware region recently issued an excellent ruling permitting claims of import fraud to proceed. The ruling addressed several different issues, but this article will focus only on two – finding that sufficient details had been pled based on a credible methodology for alleging that a substantial percentage of the total amount of imported goods had not been properly marked and permitting a “reverse false claim” for an importer’s failure to pay required marking duties under the Tariff Act. U.S. ex rel. Customs Fraud Investigations, LLC. v. Victaulic Co., 15-2169, 2016 WL 5799660 (3d Cir. Oct. 5, 2016)(“CFI”). This ruling should encourage anyone with knowledge of importers failing to properly mark their imported products with a “country of origin” to contact knowledgeable counsel about a possible False Claims Act (FCA) case.
Regulatory Requirements for Imported Products
The regulatory requirements are fairly straightforward – most goods imported from a foreign country are required to be marked with the English name of the country of origin. 19 U.S.C. §1304(a). More specifically, “every article of foreign origin (or its container, as provided in subsection (b) hereof) imported into the United States shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or container) will permit in such manner as to indicate to an ultimate purchaser in the United States the English name of the country of origin of the article.” Id. Although there are various specific exceptions for certain products and broader exceptions for goods that cannot be readily marked (such as individual grains of salt) or where a marking would destroy the appearance or value of the good (perhaps an original work of art) or where marking the container in which the article arrives will be sufficient, id. at (a)(3), those issues do not often arise in connection with the importation of finished consumer products for sale in the United States. The absence of a clearly marked country of origin on an article known to have been manufactured, grown, mined or otherwise produced outside the United States will warrant further scrutiny.
U.S. ex rel. Customs Fraud Investigations, LLC v. Victaulic Co. Ruling
The court’s ruling about the degree of evidence one must have to sustain claims for failure to pay marking duties is particularly significant because the FCA is governed by a rule of procedure that requires that facts be plead “with particularity.” Fed. R. Civ. Pro. 9(b). Oftentimes someone who observes this type of wrongdoing by an importer will not have specifics in terms of dates, times, number of products, specific port of entry, etc. For example, a likely whistleblower for a case like this could be someone who works somewhere along the chain of commerce that an imported article will travel once in the United States – the importer, a wholesaler, a retail operation. A buyer for a retail chain could well know that certain products were imported, yet see that they are not marked with their country of origin. This buyer might not have the details about the date and time of the shipments, however. Under more stringent readings of the FCA, a court might dismiss a case that failed to allege those specific details, even though they could be determined later in the proceedings. As the Third Circuit had explained in an earlier FCA case:
two approaches had emerged in the Courts of Appeals regarding how to comply with Rule 9(b) in a False Claims Act suit. Under one approach, “a plaintiff must show ‘representative samples’ of the alleged fraudulent conduct, specifying the time, place, and content of the acts and the identity of the actors.” We adopted a second, more lenient approach, holding that “it is sufficient for a plaintiff to allege ‘particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.’ ” We rejected the stricter alternative because, in our view, it would have required qui tam relators to offer a level of “detail at the pleading stage [that] would be ‘one small step shy of requiring production of actual documentation with the complaint, a level of proof not demanded to win at trial and significantly more than any federal pleading rule contemplates.’
Of particular significance in the CFI ruling, the evidence consisted of a sampling of pipe products found for sale on eBay. The whistleblower had analyzed the market for pipe sales in the United States and concluded that eBay was an “active and diverse secondary sales outlet for Victaulic products” and, in fact, provided a broader spectrum of total sales than a review of any given distributor. CFI, 2016 WL 5799660 at *10. This conclusion and the reliability of the sample were supported by an expert report from a statistician. From a review of product pictures on eBay, they concluded that a substantial percentage of defendant’s pipe products were unmarked with a country of origin, even though it was alleged that the products had been imported. Building on the foundation set in Foglia, the CFI ruling accepts that there can be sufficient supporting information and statistical evidence to allow a compelling inference that the alleged infringement occurred, even in the absence of a specific article being identified. CFI, 2016 WL 5799660 at *11 (accepting that plaintiff had not alleged “which shipments, during which time periods, at which ports, were supposedly unlawful”). Notably, there was a vigorous dissent, largely concluding that the statistical sampling, reliability of the eBay analysis and lack of detail about particular violations made the complaint unsustainable. Id. at *13.
A second noteworthy ruling – and one that was reached unanimously by the three-judge panel, see id. at *13, n.2 (Fuentes, J., dissenting in part) – was that the current version of the “reverse false claims provision” of the FCA permits a viable claim to be alleged based on an importer’s failure to pay the required marking duties or failure to disclose that the goods were illegally unmarked. As the court explained, pursuant to the amendments to the FCA through the Fraud Enforcement and Recovery Act of 2009 (FERA), there is no longer a requirement that a defendant affirmatively makes a false statement or record in order for FCA liability to attach. Instead, “mere knowledge and avoidance of an obligation is sufficient, without the submission of a false record.” Id. at *9, citing 31 U.S.C. § 3729(a)(1)(G). The court relied, in part, on the Senate Report on FERA, discussing the notion that customs duties for mismarking country of origin would fall within the reverse false claims provision as it was proposed to be amended. CFI, 2016 WL 5799660 at *8, citing S. Rep. 111-10, at 14 (2009), Pub. L. No. 111–21, 123 Stat. 1617 (2009).
Businesses That Misrepresent Their “Special Status” Eligibility for Contract or Grant Preferences Can Be Liable Under the False Claims Act
By Susan Thomas
“The Congress has established a number of statutory goals designed to help small businesses compete for Federal contracts. In addition to the goal of awarding at least 23 percent of all Federal prime contracting dollars to small businesses, the Congress also established Government-wide contracting goals for participation by small businesses that are located in Historically Underutilized Business Zones (at least 3 percent) or that are owned by women (at least 5 percent), socially and economically disadvantaged individuals (at least 5 percent), and service-disabled veterans (at least 3 percent)[all of the listed percentages are percentages of federal contracting dollars]. These aspirational goals help ensure that all Americans share in the jobs and opportunities created by Federal procurement.”
Presidential Memorandum on the Interagency Task Force on Federal Contracting Opportunities for Small Businesses, April 26, 2010. www.whitehouse.gov/the-press-office/presidential-memorandum-interagency-task-force-federal-contracting-opportunities-sm.
Consistent with these goals, companies can apply for grants or contracts under preferential terms or can sometimes become eligible for single-source (or non-competitive) contracts based on their status of being majority owned by women, disadvantaged individuals, or veterans who became disabled as a result of service injuries. Additionally, under the HUBZone program, there is special eligibility for small businesses that are located in Historically Underutilized Business Zones. Where an individual observes or learns that a company has lied about its eligibility status and been awarded a contract or grant based on that misrepresentation, the individual can initiate a lawsuit under the False Claims Act (FCA) to recover the loss suffered by the United States on account of the misrepresentations.
Historically Underutilized Business Zones Program
Consider the HUBZone program, for example. Congress established the Historically Underutilized Business Zones (HUBZone) program in 1997 to help inner cities and rural counties that have low median household income and above-average unemployment rates, and whose communities have suffered from a lack of investment. Small businesses that maintain their principal office in a designated HUBZone and meet other specific requirements can become certified by the Small Business Administration (SBA) as HUBZone companies. HUBZone companies can then use this certification to their advantage when bidding on government contracts. The requirements encompass being a small business, being majority owned by US citizens or Native American tribe members, having the principal place of work in a designated HUBZone, and having at least 35% of the total workforce live within a HUBZone.
Most federal agencies are expected to try to meet the overall targets, although there are no punitive consequences for not meeting the small business procurement contracting goals. Through public attention and Congressional scrutiny, the government attempts to secure compliance. For example, agency performance is often cited by Members during their questioning of federal agency witnesses during Congressional hearings. Despite these efforts, and considerable programmatic resources put into the contracting efforts, as measured in 2013, federal agencies collectively met the federal contracting goal for small disadvantaged businesses, but not the other goals. Federal agencies awarded 22.24% of the value of their small business eligible contracts to small businesses, 8.00% to small disadvantaged businesses, 4.00% to women-owned small businesses, 2.01% to HUBZone small businesses, and 3.03% to service-disabled veteran-owned small businesses. See Small Business Administration HUBZone Program, Dec 17, 2013, Congressional Research Service, https://www.fas.org/sgp/crs/misc/R41268.pdf.
Of particular interest to individuals and lawyers considering potential FCA actions, the SBA provides that lies or misrepresentations of HUBZone eligibility in connection with any contract, grant or other award of government business result in a presumption that the total amount expended on any such business will be considered the loss to the government.
Although there was judicial precedent for assessing damages in that manner, see, e.g., United States ex rel. Longhi v. Lithium Power Techs., Inc., 530 F. Supp. 2d 888 (S.D. Tex. 2008); aff’d, 575 F.3d 458 (5th Cir. 2009) (assessing damages resulting from four contracts obtained by fraud in the inducement, and finding that the government received no “benefit of the bargain”); U.S. ex rel. Feldman v. Wilfred Van Gorp and Cornell Univ. Med. College, 2010 U.S. Dist. Lexis 47039 (S.D.N.Y. 2010), it remained an open matter in various courts and under different circumstances. Damages could be assigned based on a benefit of the bargain theory, or as the difference between what the government contracted for and what it received (which might be nothing if the contract was fully performed in accordance with its specs – other than the HUBZone participant requirement), Ab-Tech Construction v. United States, 31 Fed. Cl. 429 (Fed. Cl. 1994), aff’d., 57 F.3d 1084 (Fed. Cir. 1995); United States ex. rel. Harrison v. Westinghouse Savannah River Co., 352 F.3d 908 (4th Cir. 2003); United States ex. rel. Stebner v. Steward & Stevenson, 305 F.Supp. 2d 694, 701 (S.D. Tex Jan. 30, 2004), or as some measure of the government’s programmatic loss caused by not having the work flow to the specific eligibility contractor.
The differences in the calculation of damages can be enormous, of course, and often dictate whether anyone deems the initial status misrepresentation as even being worth pursuing through litigation. Determining that the total amount expended on the government business – essentially, the total value of the contract or grant — is deemed the loss to the government is the most aggressive stance that could be taken. Here, through this regulation, the SBA comes close to that line, in terms of potential damages, but it only establishes a presumption of such loss based on the total amount expended. There is some elaboration of what the presumption is based on, although virtually nothing about what would be a sufficient quantum of contrary evidence to rebut the presumption. The regulation itself provides that it does not apply in case of unintentional errors or similar malfunctions that indicate the misrepresentation was not willful or intentional, 13 C.F.R. § 126.900(d) and, of course, the FCA itself requires some degree of knowing conduct for liability to attach. 31 USC 3729. The regulation also provides some shelter to prime contractors who are misled by subcontractors, although there will be an inquiry into the efforts the prime contractor took to insure compliance and legitimate eligibility by the sub. Basically, common sense factors that indicate a lack of deliberate effort to defraud and some good faith measures to protect against fraudulent conduct by others will provide protection to the accused company. 13 C.F.R. § 126.900(d). Aside from the regulatory provisions, there is virtually no case law fleshing out the nature of the presumption or what would be required to rebut it. But the presumption that a misrepresentation about a business’ eligibility under HUBZone will lead to damages measured as the total value of the contract or grant provides strong incentive for people to file lawsuits to recover those damages.
HUBZone Lawsuits and Investigations
According to a string of federal investigations and assessments over the past ten years, there is plenty of fraud to fuel such lawsuits. Investigations by the Government Accountability Office, Office of Inspector General of the SBA and other federal oversight agencies have pointed to widespread fraud and abuse in the HUBZone and other set-aside programs, and inadequate resources or political will to rein it in. See, e.g., GAO, Small Business Contracting: Opportunities Exist to Further Improve HUBZone Oversight, GAO-15-234, (Washington, D.C.: Feb. 12, 2015); GAO, HUBZone Program: Actions Taken on February 2015 GAO Recommendations, http://www.gao.gov/assets/680/676049.pdf; Questionable Acquisitions: Problematic IT Contracting At The IRS, Staff Report Committee On Oversight And Government Reform, U.S. House Of Representatives, 2013, http://oversight.house.gov/wp-content/uploads/2013/06/Strong-Castle-IRS-Final-Report.pdf (revealing violations of HUBZone, small business, service-injured veteran and other programs, leading to over $500 million of IRS contracts); Kate M. Manuel & Erika K. Lunder, Cong. Research Serv., Set-Asides for Small Business: Legal Requirements & Issues, CRS No. R42981, Feb. 28, 2012, at 4-5; U.S. Gov’t Accountability Office, Small Business Admin.: Undercover Tests Show HUBZone Program Remains Vulnerable to Fraud & Abuse, GAO-10-759, June 2010; U.S. Gov’t Accountability Office, 8(a) Program: Fourteen Ineligible Firms Received $325 Million in SoleSource & Set-Aside Contracts, GAO-10-425, Mar. 30, 2010; HUBZONE PROGRAM: Fraud and Abuse Identified in Four Metropolitan Areas, GAO-09-440: Mar 25, 2009, http://www.gao.gov/products/GAO-09-440. In the last few years, there have also been some substantial settlements reached with companies accused of violating the HUBZone or other special eligibility programs. E.g., https://www.justice.gov/usao-ndoh/pr/canton-man-sentenced-prison-ordered-repay-67-million-fraud-getting-federal-contracts, Sept 15, 2015 (sentence of one year in prison and $6.7 million restitution for wire fraud by misrepresenting company’s office location to qualify for HUBZone certification); Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Gilbane Building Company to Pay $1.1 Million to Resolve False Claims Allegations (Mar. 18, 2015), available at http://www.justice.gov/opa/pr/gilbane-building-company-pay-11-million-resolve-false-claims-allegations (misrepresenting disabled veteran status); Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, LB&B Associates Inc. Agrees to Pay $7.8 Million for Alleged False Claims Related to Small Business Administration Set Aside Contracts (July 6, 2015), available at http://www.justice.gov/opa/pr/lbb-associates-inc-agrees-pay-78-million-allegedfalse-claims-related-small-business (false representation of eligibility for set-aside contracts for socially and economically disadvantaged persons under SBA 8(a) program); Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Manhattan U.S. Attorney Files And Settles Civil Fraud Lawsuit Against UFC Aerospace And Douglas B. Davis For Engaging In Fraudulent Conduct In Violation Of The Small Business Act (Oct. 8, 2015), available at http://www.justice.gov/usaosdny/pr/manhattan-us-attorney-files-and-settles-civil-fraud-lawsuit-against-ufc-aerospace-and (false representations of status as women-owned small business). See also U.S. ex. rel. Scollick v. Narula, 14-CV-01339-RCL, 2016 WL 6078246, at *13 (D.D.C. Oct. 17, 2016)(allegations that company was a front for purposes of allowing bidding on SDVOSB set-aside contracts and falsely identifying company as operating out of a HUBZone).
Especially with the very favorable regulation governing the extent of damages, these lawsuits have the potential to impose substantial costs on the offending companies, and handsome rewards to the courageous folks who blow the whistle!
 13 C.F.R. § 126.900(a) provides as follows:
Presumption of Loss Based on the Total Amount Expended. In every contract, subcontract, cooperative agreement, cooperative research and development agreement, or grant which is set aside, reserved, or otherwise classified as intended for award to HUBZone SBCs, there shall be a presumption of loss to the United States based on the total amount expended on the contract, subcontract, cooperative agreement, cooperative research and development agreement, or grant whenever it is established that a business concern other than a HUBZone SBC willfully sought and received the award by misrepresentation. This was first enacted as part of the Small Business Jobs Act of 2010, Pub. L. No. 111-240 §1311-1347 (September 27, 2010).
 Among other colorful evidence of fraud, Strong Castle received service-disabled, veteran-owned small business certification based on an injury to the corporate principal’s left foot, sustained in 1984 while he was enrolled at the U.S. Military Academy Preparatory School, which he attended for a single school year as a “redshirt” football player. That one year at USMAPS represented his only connection to military service. Moreover, documents and testimony provided to the House Committee on Oversight and Government Reform raised questions about the extent of the injury since the individual graduated from USMAPS and eventually attended the University of San Diego, where he played quarterback and linebacker on the football team. Questionable Acquisitions: Problematic IT Contracting At The IRS, Staff Report Committee On Oversight And Government Reform, U.S. House Of Representatives, 2013, http://oversight.house.gov/wp-content/uploads/2013/06/Strong-Castle-IRS-Final-Report.pdf