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Prestigious Universities and Research Institutions Commit Grant Fraud Too

By Sherrie Savett

Major universities rely on government grant money to supplement their revenues from tuition, endowments, and contributions.  Purely research entities which are not full universities and where there is little or no tuition revenue depend even more heavily on government grant money, especially in the area of medical and scientific research.  The National Institutes of Health (“NIH”) provides major grant money to such institutions to promote medical and scientific research.

False Time and Effort Reporting

The frauds often occur in the area of “effort reporting”.  In applying for and receiving ongoing funding for multi-year grants, the NIH requires accurate reporting of the amount of effort expected to be expended by the principal investigators (“PIs”) and the other researchers on a specific grant.

If a PI exaggerates the amount of time and effort (usually required to be expressed as a percentage of all the PI’s working time) to be spent on an existing awarded grant, the government is being defrauded because it is not getting the benefit of its bargain.

The grant application is evaluated based on many things, but one important element is the amount of the PI’s time that will be spent on the research.  If the PI or his top assistants represent, for example, that a 50% effort is to be expended on a particular grant each year over a multi-year period, but in fact only 35% is spent, the government is being defrauded.

False Claims Motivated by Institutions

Most PIs have multiple responsibilities outside of fulfilling the research promised in an awarded or several awarded grants.  For example, PIs have teaching and administrative responsibilities and are also urged to, or in some entities required to, write new grant proposals to keep the flow of government money coming into the university or research institution.

The government grant payments may only cover awarded grants and not new grant applications or applications for renewals of existing awarded grants.  NIH grants do not cover teaching and administrative time, unless it is directly related to the approved grant.

If an institution puts pressure on its PIs to cover 100% of their salaries (a maximum of approximately $185,000 per year) and also expects such PIs to write and research new grant applications and perform administrative duties, there is a high probability of fraud which violates the False Claims Act (FCA).  These false claims are motivated by the institutions.

Compliance functions must be enforced strictly within these universities and research institutions to avoid false effort reporting, which leads to cheating the government out of the crucial research that was the basis for the grant awarded.  If the accounting functions and forms within the institution seeking the government grant funds are ambiguous or vague about which time is allocated to the active government grant versus other functions, the institution is likely to be held responsible for FCA violations which involve return of grant money unlawfully obtained, treble damages, and statutory damages of over $11,000 for each false claim.

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The Anti-Kickback Statute vs. The Stark Law

By Russell Paul

There is much confusion between the Federal Anti-Kickback Statute and the Stark Law because both laws deal with remuneration related to improper referrals. But there are fundamental distinctions between the two laws.

Anti-Kickback Statute [42 U.S §1320a-7b(b)]

The federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), (“AKS”) arose out of congressional concern that remuneration provided to those who can influence healthcare decisions would result in goods and services being provided that are medically unnecessary, of poor quality, or harmful to a vulnerable patient population. To protect the integrity of the Medicare and Medicaid programs from these harms, Congress enacted a prohibition against the payment of kickbacks in any form.

First enacted in 1972, Congress strengthened the statute in 1977 and 1987 to ensure that kickbacks masquerading as legitimate transactions did not evade its reach.  See Social Security Amendments of 1972, Pub. L. No. 92-603, §§ 242(b) and (c); 42 U.S.C. § 1320a-7b, Medicare-Medicaid Antifraud and Abuse Amendments, Pub. L. No. 95-142; Medicare and Medicaid Patient and Program Protection Act of 1987, Pub. L. No. 100-93.

The AKS prohibits any person or entity from offering, making, soliciting, or accepting remuneration, in cash or in kind, directly or indirectly, to induce or reward any person for purchasing, ordering, or recommending or arranging for the purchasing or ordering of federally-funded medical goods or services.

The AKS was amended to expressly state that a violation of the AKS constitutes a “false or fraudulent” claim under the False Claims Act.  42 U.S.C. § 1320(a)-7b(g).

Physician Self-Referral Law [42 U.S.C. § 1395nn]

The Stark Law prohibits physicians from referring patients to receive designated health services (DHS) payable by Medicare or Medicaid from entities with which the physician or an immediate family member has a financial relationship, unless an exception applies. Immediate family members of the physician are defined as spouse, natural or adoptive parents, children, siblings, step- siblings, in-laws, grandparents, and grandchildren.

Specifically, the Stark Law does the following:

  1. It prohibits a physician from making referrals for certain designated health services payable by Medicare to an entity with which he or she (or an immediate family member) has a financial relationship (ownership, investment, or compensation), unless an exception applies.
  2. It prohibits the entity described above from presenting or causing to be presented claims to Medicare (or billing another individual, entity, or third party payer) for those referred services.
  3. It establishes a number of specific exceptions for financial relationships between a physician and an entity that do not pose a risk of program or patient abuse.

 

The following items or services are considered designated health services under the Stark Law:

  1. Clinical laboratory services.
  2. Physical therapy services.
  3. Occupational therapy services.
  4. Outpatient speech-language pathology services.
  5. Radiology and certain other imaging services.
  6. Radiation therapy services and supplies.
  7. Durable medical equipment and supplies.
  8. Parenteral and enteral nutrients, equipment, and supplies.
  9. Prosthetics, orthotics, and prosthetic devices and supplies.
  10. Home health services.
  11. Outpatient prescription drugs.
  12. Inpatient and outpatient hospital services.

 

Civil penalties for physicians who violate the Stark Law include fines as well as exclusion from participation in Federal healthcare programs. There are certain codified exceptions, with detailed criteria that must be met.

In addition, if claims are submitted to government payers as a result of a self-referral arrangement that violates the Stark Law, those claims are considered false claims, and the parties to the arrangement may be liable under the False Claims Act.

While these statutes both aim to eliminate malfeasance in the healthcare sector, they each have important differences.

Prohibited Physician Behavior

Under the AKS, the physician cannot pay, offer, solicit, or receive anything of value aimed at awarding the referral of patients to, or generating business for, a federal healthcare program.  This contrasts with the Stark Law, which prohibits a physician from referring a patient to a healthcare entity in which he or she has a financial interest, unless he or she falls under one of the exceptions set out in the statute.

Prohibited Items or Services

The AKS prohibits referrals for any kind of item or service where a kickback is involved, while the Stark Laws prohibits only the referral of designated health services where a financial interest is involved.

Prohibited Referrals

The AKS prohibits any kind of referral, while the Stark Law only prohibits a referral from a physician.

Penalties Allowed

Penalties under the AKS include criminal and civil and administrative penalties, whereas violations under the Stark Law are civil only.

Intent Required

The AKS requires proof of actual unlawful intent. The Stark Law is a strict liability statute – no intent is required to be shown.

Exceptions to the Statutes

The AKS contains voluntary safe harbors, while the Stark Law contains mandatory exceptions.

Implicated Government Healthcare Programs

The AKS applies to all federal healthcare programs, and the Stark Law applies only to Medicare and Medicaid.

Below is a comparison chart made available by the Department of Health and Human Services:

Anti-Kickback Statute vs. Stark Law Chart

[1]

[1] https://oig.hhs.gov/compliance/provider-compliance-training/files/starkandakscharthandout508.pdf

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What is the Stark Law?

By Russell Paul

Section 1877 of the Social Security Act (the Act) (42 U.S.C. 1395nn) is also known as the physician self-referral law and is commonly referred to as the “Stark Law”:[1]

The Stark Law was enacted in 1989 with the simple purpose of curbing physician self-referral. It was originally titled the Ethics in Patient Referrals Act, which was dubbed Stark I after Rep. Pete Stark, a Democrat from California, who sponsored the initial bill.

The original statute simply sought to ban physician self-referral for designated services when a patient was covered by Medicare or another government payer. Self-referral occurs when physicians refer patients for designated health services to hospitals, labs, and other entities from which they or an immediate family member benefit financially, including from owning part of such hospital, lab, or other entity.

Stark I was originally intended to eliminate any financial motivation for physicians to send patients for unnecessary testing that could raise overall healthcare costs.  Stark I was expanded in January 1995, when Stark II went into effect.

Over the next decade, CMS published a series of regulations implementing Stark I and Stark II. Today, there is a widespread group of regulations and statutes collectively named Stark Law.

Stark Law Basics

In essence, the Stark Law does the following:

  1. It prohibits a physician from making referrals for certain designated health services (DHS) payable by Medicare to an entity with which he or she (or an immediate family member) has a financial relationship (ownership, investment, or compensation), unless an exception applies.
  2. It prohibits the entity described above from presenting or causing to be presented claims to Medicare (or billing another individual, entity, or third party payer) for those referred services.
  3. It establishes a number of specific exceptions for financial relationships between a physician and an entity that do not pose a risk of program or patient abuse.

Stark Law Designated Health Services

The following items or services are considered designated health services under the Stark Law:

  1. Clinical laboratory services.
  2. Physical therapy services.
  3. Occupational therapy services.
  4. Outpatient speech-language pathology services.
  5. Radiology and certain other imaging services.
  6. Radiation therapy services and supplies.
  7. Durable medical equipment and supplies.
  8. Parenteral and enteral nutrients, equipment, and supplies.
  9. Prosthetics, orthotics, and prosthetic devices and supplies.
  10. Home health services.
  11. Outpatient prescription drugs.
  12. Inpatient and outpatient hospital services.

Stark Law Exceptions

The Stark Law has numerous exceptions, each of which has detailed requirements. Many of the exceptions require that any compensation paid to a physician not take into account the value or volume of a physician’s referrals or other business generated between the parties to a gainsharing agreement. Many exceptions also require the arrangement to be commercially reasonable and compensation to be at fair market value.

Stark Law Violation

Any provider or organization that violates Stark must repay all Medicare funds paid under the improper arrangement, and the organization could face Medicare exclusion and False Claims Act liability as well.

In addition, if claims are submitted to government payers as a result of a self-referral arrangement that violates the Stark Law, those claims are considered false claims, and the parties to the arrangement may be liable under the False Claims Act.

Whistleblowers who pursue such actions would be entitled to up to 30 percent of the government’s recovery. The penalties that can be levied under the False Claims Act range from $10,781 to $21,563 per claim.

[1] https://www.cms.gov/Medicare/Fraud-and-Abuse/PhysicianSelfReferral/index.html

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A Relator’s Reliance is Irrelevant in a Public Disclosure Bar Inquiry

By Sherrie Savett and Jonathan DeSantis

The False Claims Act (“FCA”) contains a public disclosure bar which, generally speaking, prohibits a relator from pursuing FCA claims where the false or fraudulent conduct on which the claims are based has already been publicly disclosed.[1]  Various courts have concluded that the public disclosure bar applies even where a relator did not know about the public disclosures and did not rely upon the public disclosures in bringing FCA claims. Ordinarily, this rule harms relators but, as addressed below, it can work in relators’ favor in some circumstances.

The Public Disclosure Bar

The public disclosure bar provides that “[t]he court shall dismiss an action or claim . .  . if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed” through certain sources, including media and government reports.[2]  The critical questions under the public disclosure bar are whether the underlying fraud was publicly disclosed and if so, whether a relator’s claims are substantially similar to the disclosed fraud.[3]  If yes, then a court is required to dismiss a relator’s claims, even if the claims are otherwise meritorious.  To answer these questions, courts ask “whether the disclosures in question exposed all the essential elements of the alleged fraud.”[4]

A Relator’s Knowledge of or Reliance Upon Public Disclosures is Irrelevant

Courts have consistently and repeatedly held that a relator’s knowledge of or reliance on public disclosures is irrelevant in determining whether the public disclosure bar applies.[5] Put differently, the public disclosure bar applies even if a relator independently discovered the underlying fraudulent conduct without reference to any public disclosures. Under these circumstances, a relator does not in any way benefit from the public disclosures, and the relator’s lawsuit is not in any way derived from the public disclosures; still, the public disclosure will preclude the relator from moving forward with FCA claims.[6]

Typically, this rule works against relators, because it means that a relator cannot pursue an otherwise meritorious FCA lawsuit even where the relator did not base his or her claims on publicly disclosed materials. For example, if a newspaper article discussed all of the material elements of a fraud and a relator later files an FCA case based upon the same fraudulent conduct disclosed in the newspaper article, it is irrelevant that the relator never read the newspaper article and thus did not rely upon the newspaper article at all in forming his or her FCA claims.

Using the Rule to a Relator’s Advantage

However, this rule could actually benefit relators in certain circumstances best illustrated through the following hypothetical:

  • During the deposition of a relator in an FCA lawsuit, a clever defense attorney asks the relator artful questions meant to engender responses suggesting that a public disclosure revealed a defendant’s fraudulent conduct. For example, a defense attorney might ask: “Isn’t it true that a reasonable person could discern from this newspaper article that this company was engaged in the fraud you are alleging?”
  • Perhaps fooled by the clever question or not appreciating the ostensible significance of his or her response with respect to the public disclosure bar inquiry, the relator responds affirmatively.
  • Actual review of the newspaper article illustrates that it does not reveal the essential element of the defendant’s fraud. Put differently, there is no way that anyone could have known the defendant was engaged in fraud from the newspaper article.
  • The defendant then uses isolated snippets of the relator’s testimony in a subsequent motion seeking dismissal of the lawsuit under the public disclosure bar.

Under the above-described rule, a court should reject the relator’s deposition testimony as irrelevant to the public disclosure bar inquiry. If a relator’s knowledge of or reliance upon public disclosures is irrelevant, it follows that a relator’s own testimony as to the contents or significance (or lack thereof) of a public disclosure is also irrelevant.

Rather, courts must look to the public disclosures themselves and ask whether they disclose all of the essential elements of the fraud alleged by the relator. Simply put, public disclosures either disclose all of the essential elements of a defendant’s fraudulent conducts or they do not, and a relator’s testimony cannot change the contents or significance of the public disclosures.

Conclusion

In conclusion, a relator’s characterization of his or her knowledge of or reliance upon publicly disclosed materials is irrelevant to the public disclosure bar inquiry.  Whether there is a public disclosure which can bar an FCA claim depends on an analysis of the public disclosure itself. Consequently, courts should reject attempts by defendants in FCA cases to use a relator’s own testimony as evidentiary support for a public disclosure bar argument.

 

[1] 31 U.S.C. § 3730(e)(4). The public disclosure bar is subject to exceptions, including when the Government opposes dismissal on public disclosure grounds or a relator satisfies the “original source” exception.  These exceptions are beyond the scope of this article.

[2] Id.

[3] E.g. United States ex rel. Shea v. Cellco P’ship, 863 F.3d 923, 933 (D.C. Cir. 2017); United States ex rel. Colquitt v. Abbott Labs., 858 F.3d 365, 373 (5th Cir. 2017).

[4] U.S. ex rel. Kester v. Novartis Pharm. Corp., 43 F. Supp. 3d 332, 347 (S.D.N.Y. 2014) (internal quotation marks omitted).

[5] See e.g. U.S. ex rel Mistick PBT v. Hous. Auth. of City of Pittsburgh, 186 F.3d 376, 388 (3d Cir. 1999) (“All of the other circuits that have reached this question have disagreed with the Fourth Circuit and have held that ‘based upon’ means ‘supported by’ or ‘substantially similar to,’ so that the relator’s independent knowledge of the information is irrelevant.”).

[6] See e.g. U.S. ex rel. Biddle v. Bd. of Trustees of Leland Stanford, Jr. Univ., 161 F.3d 533, 540 (9th Cir. 1998).

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Dismissing a False Claims Act Case: Is the Whistleblower Still Eligible for a Reward?

By Russell Paul

Consider the following scenario:

  • A whistleblower files a complaint against a defendant under the False Claims Act (“FCA”).
  • Then, the whistleblower voluntarily dismisses that complaint (perhaps because the government has declined to intervene, and the whistleblower does not wish to pursue the case at that time.)
  • But then, the government ultimately settles with that defendant.

In this situation, is the whistleblower entitled to a percentage of the amount of the settlement?

U.S. v. L-3 Communications Holdings Inc. et al.

In U.S. v. L-3 Communications Holdings Inc. et al., case number 1:15-cv-09262, in the U.S. District Court for the Southern District of New York, the court ruled that a whistleblower’s voluntary dismissal of his False Claims Act suit against an L-3 Communications unit, accusing it of selling faulty gun sights to the government, meant he could not claim a share of a $25.6 million settlement later reached with the company.

The court held that relator’s voluntarily dismissal of his qui tam FCA suit allowed the federal government to settle with L-3 Communications without requiring it to share any part of the settlement amount with relator.

“In short, DaSilva’s decision to voluntarily dismiss his qui tam action in 2014 precludes him from clambering back on board for a share of the government’s proceeds as though he had never dismissed his own action,” the Judge said.

About the Case

Relator filed a complaint in April 2014 accusing the company of selling defective holographic weapon sights to military and law enforcement clients that were thrown off by extreme temperatures, according to the opinion.

Shortly after making those disclosures, relator was convicted of an unrelated criminal charge and fled to Brazil, the opinion states. After this, his discussions with the government broke down, and he later filed a qui tam FCA suit.  The suit was ultimately voluntarily dismissed, without prejudice, in August 2014.

In November 2015, the government then filed its own FCA complaint against L-3, before filing a $25.6 million stipulation of settlement and dismissal the next day. Relator then asked the court to declare that he was entitled to at least a 15 percent share of that settlement, because it was an “alternate remedy” to the suit he had originally filed.

The Judge found that the terms of the FCA “unambiguously preclude” relators who have voluntarily dismissed their suit from sharing in any later recovery.

The term “alternative remedy” only refers to the government pursuing a claim outside of the choices of either intervening in an ongoing qui tam suit, or declining to intervene in that suit and instead allowing the relator to move forward. In these scenarios, the relator would have been entitled to a share of the settlement. The Judge said that when there is no ongoing qui tam suit, such as when the relator has voluntarily dismissed the case, then the government filing its own action is not considered an “alternative remedy” that would allow relator to recover.

The case is currently on appeal, U.S. v. DaSilva, case number 17-621, in the U.S. Court of Appeals for the Second Circuit.  Relator disputes that his dismissal was voluntary, stating that his dismissal had been effectively coerced by the government. The government argues that allowing Relator to share in the settlement would encourage “opportunistic” relators to file qui tam suits, dismiss them voluntarily, then claim a portion of any proceeds if and when the government brings and prosecutes a case

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False and Misleading Statements by Omission Can Be Actionable Under the False Claims Act

By Joy Clairmont

In bringing a claim under the False Claims Act (“FCA”), typically there are some sort of false or fraudulent statements made to the government.  See 31 U.S.C. § 3729(a)(1)(A), (B).  However, it should be noted that FCA claims may be committed by an affirmative misrepresentation or omissionSee Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989, 1999 (2016) (“[T]he False Claims Act encompasses claims that make fraudulent misrepresentations, which include certain misleading omissions.”).  False and misleading omissions can in fact be actionable under the False Claims Act.

Pleading Fraud by Omission with Particularity in Satisfaction of Rule 9(b)

All claims under the FCA must be pled with particularity:  Federal Rule of Civil Procedure 9(b) requires that “[i]n alleging fraud . . . a party must state with particularity the circumstances constituting fraud.”  Generally speaking, the “circumstances constituting fraud” that must be pled “include such matters as the time, place and contents of false representations, as well as the identity of the person making the misrepresentation and what was obtained or given up thereby.” Bennett v. Berg, 685 F.2d 1053, 1062 (8th Cir. 1982) (internal quotation marks omitted).

Unlike affirmatively fraudulent statements, misleading statements by omission “cannot be described in terms of the time, place, and contents of the misrepresentation or the identity of the person making the misrepresentation. “ Flynn v. Everything Yogurt, 1993 WL 454355, at *9 (D. Md. Sept. 14, 1993).

Thus, in cases involving fraudulent omissions, a “[p]laintiff is unable to specify the time and place because no act occurred.” Weaver v. Chrysler Corp., 172 F.R.D. 96, 101 (S.D.N.Y. 1997); see also Daher v. G.D. Searle & Co., 695 F. Supp. 436, 440 (D. Minn. 1988) (“’[M]alicious silence’ is, by its very nature, difficult to plead with particularity.”).

Put differently, “[l]ike Sherlock Holmes’ dog that did not bark in the night, an actionable omission obviously cannot be particularized as to ‘the time, place, and contents of the false representations’ or ‘the identity of the person making the misrepresentation.’” Bonfield v. AAMCO Transmissions, Inc., 708 F. Supp. 867, 875 (N.D. Ill. 1989).

As one court explained, “[r]equiring a plaintiff to identify (or suffer dismissal) the precise time, place, and content of an event that (by definition) did not occur would effectively gut . . . laws prohibiting fraud-by-omission.” In re Whirlpool Corp. Front-Loading Washer Prod. Liab. Litig., 684 F. Supp. 2d 942, 961 (N.D. Ohio 2009).

Rule 9(b) Particularity Requirements are Relaxed in Some Jurisdictions

In light of the inherent difficulty in pleading identifying details of an omission, various courts have held that the “particularity requirements are less strictly applied with respect to claims of fraud by concealment.”   Shaw v. Brown & Williamson Tobacco Corp., 973 F. Supp. 539, 552 (D. Md. 1997); see also Woodard v. Labrada, 2017 WL 3309765, at *8 (C.D. Cal. July 31, 2017) (“A fraud by omission or fraud by concealment claim can succeed without the same level of specificity required by a normal fraud claim.”) (internal quotation marks omitted); Hilkene v. WD-40 Co., 2005 WL 3050434, at *2 (D. Kan. Nov. 14, 2005) (agreeing that “Rule 9(b) cannot be rigidly applied to the alleged omissions in this case”); Asghari v. Volkswagen Grp. of Am., Inc., 42 F. Supp. 3d 1306, 1325 (C.D. Cal. 2013) (“When a claim rests on allegations of fraudulent omission, . . . the Rule 9(b) standard is somewhat relaxed because a plaintiff cannot plead either the specific time of [an] omission or the place, as he is not alleging an act, but a failure to act.”) (internal quotation marks omitted); Schwartz v. Pella Corp., 2014 WL 7264948, at *6 (D.S.C. Dec. 18, 2014) (“[M]any courts have recognized the difficulty of applying Rule 9(b)’s particularity requirement to fraudulent concealment or omission claims, and have instead applied a relaxed, less formulaic version of the rule.”).

Courts Have Fashioned Different “Tests” to Determine if Rule 9(b) is Met

Given the incompatibility between the customary “who, what, why, when and where” requirements of Rule 9(b) and pleading fraudulent omissions, courts have fashioned different tests to determine whether fraudulent omission claims are pled with the requisite particularity.  For example:

  • “In order to comply with the pleading requirements of Rule 9(b) with respect to fraud by omission, a plaintiff usually will be required to allege the following with reasonable particularity: (1) the relationship or situation giving rise to the duty to speak, (2) the event or events triggering the duty to speak, and/or the general time period over which the relationship arose and the fraudulent conduct occurred, (3) the general content of the information that was withheld and the reason for its materiality, (4) the identity of those under a duty who failed to make such disclosures, (5) what those defendant(s) gained by withholding information, (6) why plaintiff’s reliance on the omission was both reasonable and detrimental, and (7) the damages proximately flowing from such reliance.” Breeden v. Richmond Cmty. Coll., 171 F.R.D. 189, 195 (M.D.N.C. 1997).
  • “In cases where the alleged fraud consists of an omission and the Plaintiff is unable to specify the time and place because no act occurred, the Complaint must still allege what the omissions were, the person responsible for failing to disclose, the context of the omission and the manner in which it misled Plaintiff, and what Defendant obtained through the fraud.” Weaver v. Chrysler Corp., 172 F.R.D. 96, 101 (S.D.N.Y. 1997).
  • “[O]ther districts have recognized that ‘fraud by omission’ claims need not be pled with quite the same degree of specificity required of ‘affirmative fraud’ claims” but held that “even in a fraud-by-omission case, a plaintiff must show that the defendant had a duty to disclose but did not do so.” Sanford v. Maid-Rite Corp., 2014 WL 1608301, at *12 (D. Minn. Apr. 21, 2014) (internal quotation marks omitted), rev’d and remanded on other grounds, 816 F.3d 546 (8th Cir. 2016).

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Declined vs. Intervened False Claims Act Cases

By Joy Clairmont

The False Claims Act allows a private individual to bring a case on behalf of the federal government for fraud against the government.  In other words, if an individual (a “relator”) knows of another person or entity who is cheating the government through fraud, the False Claims allows the relator to bring a case on behalf of the government and receive a portion of the proceeds if the case is successful.

The Government Investigates the False Claims Act Case Before Deciding to Decline or Intervene

After filing a False Claims Act case on behalf of the government, the government attorneys will conduct an investigation into the relator’s allegations of fraud.  The case is initially filed under seal so that the government’s investigation will be private.  The case will not appear on the court docket, and the lawsuit will not be revealed to the defendant.

As part of their investigation, the government will typically interview the relator (with his/her attorneys present), interview witnesses, and analyze documents and data.  At the conclusion of the government’s investigation (but sometimes at a different stage of the case, such as at settlement), the government has a decision to make – whether to decline or intervene in the case.

The Government’s Declination/Intervention Decision

The government’s decision to decline or intervene in a False Claims Act case is an important juncture in a case:

  • Decline/Declination: When the government declines to intervene, they are no longer willing to take the lead in litigating the case.  There may be a number of reasons for a declination such as finite government resources, an insolvent defendant, lack of evidence or low potential damages.  A declination is not necessarily a reflection of the merits of the lawsuit.  The government declines to intervene in the vast majority (approximately 80%) of False Claims Act cases.  At that point, relator and relator’s counsel need to determine if they want to proceed with the litigation on their own or voluntarily dismiss the case.
  • Intervene/Intervention: For approximately 20% of cases filed, the government decides to intervene and litigate the case. This means that the government adopts the case as their own.  Relator and relator’s counsel are available to assist and support the government as needed, but the government drives the litigation of the case forward.  A majority of intervened cases result in a recovery for the government (and relator).

The Relator’s Share in a Declined Case or Intervened Case

In a successful False Claims Act case, the relator is entitled to a share of the government’s recovery.  The relator’s share amount depends on whether the government declined or intervened in the case.  For those cases in which the government declined and the relator and relator’s counsel achieved the successful result on their own, relator is entitled to 25-30 percent of the recovery.  For intervened cases, the relator receives in the range of 15-20 percent of the settlement or verdict amount.

Berger & Montague Has Successfully Litigated Declined False Claims Act Cases

If the government declines to intervene, some law firms representing relators typically will not litigate False Claims Act cases on their own and will seek voluntary dismissal.  Berger & Montague does not follow that practice, but considers the strengths and weakness of each case individually in consultation with the relator to determine whether to litigate a declined case.

Berger & Montague has reached successful settlements in many declined cases.  In the past two years alone, Berger has reached favorable settlements in seven previously-declined cases against many of the nation’s largest companies.

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The Public Disclosure Bar and “Substantially Similar”

By Shauna Itri

After finding that transactions of fraud have been publicly disclosed, the next step in the public disclosure analysis is determining if the allegations in the complaint are “substantially the same” as those publicly disclosed transactions of fraud. See Moore, 812 F.3d at 301.

The Public Disclosure Bar Language Pre/Post 2010

The language of the Public Disclosure Bar changed in 2010. The pre-2010 Public Disclosure Bar stated: “No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions. . . . “ See 31 U.S.C. § 3730(e)(4)(1) (2006) (emphasis added).

The post-2010 Public Disclosure Bar stated: a court “shall dismiss an action or claim . . . if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed. . . .” 31 U.S.C. § 3730(e)(4)(1) (2010) (emphasis added).

Although the language of this portion of the statute was revised by the 2010 amendment, the standard in this Circuit remains the same. Before the amendment, the Third Circuit held “that the term ‘based upon’ means ‘supported by’ or ‘substantially similar to.” U.S. ex rel. Paranich v. Sorgnard, 396 F.3d 326, 334 (3d Cir. 2005). The 2010 amendment “essentially codifies” this interpretation. 1 John T. Boese, Civil False Claims and Qui Tam Actions § 4.02[A][2] (3d ed. 2006).

Defining “Substantially Similar” in the Public Disclosure Bar

There is currently no definition of “substantially the same” in the Third Circuit.  The only two Circuits that have approached defining “substantially the same” are the Seventh and Ninth Circuits.

The Seventh Circuit’s Definition of “Substantially Similar”

The Seventh Circuit in Leveski developed certain cognizable parameters for future courts considering the issue.  The Leveski court reasoned that a relator’s allegations must not be viewed “at the highest level of generality . . . in order to wipe out qui tam suits that rest on genuinely new and material information.” Leveski v. ITT Educ. Servs., Inc., 719 F.3d 818, 831 (7th Cir. 2013) (citing United States ex rel. Goldberg v. Rush Univ. Med. Ctr., 680 F.3d 933, 936 (7th Cir. 2012)).

In terms of what “material” information is, the court noted that material information includes “vital facts,” often in the form of “relevant names, meetings, and other details” to the proceedings, but that such facts need not allege an entirely new scheme of fraudulent behavior in order to be different from the publicly disclosed transactions.  Id. at 832; see also Baltazar, 635 F.3d at 869 (“Baltazar’s suit, by contrast, supplied vital facts that were not in the public domain”).  In fact, information that adds more nuance or sophistication to an already publicly known scheme is sufficient. Leveski, 719 F.3d at 832; Goldberg, 680 F.3d at 935.

While the case involved industry-wide fraud, the Seventh Circuit’s decision disregarded discussions of the industry in question, noting that so long as “new facts and new details [are added] to . . . general knowledge that were not previously in the public domain,” it frankly does not matter if the industry in question is narrow, centralized, and under suspicion.  Leveski, 719 F.3d at 834.

The Ninth Circuit’s Definition of “Substantially Similar”

Finding the Seventh Circuit’s approach to be persuasive, the Ninth Circuit articulated its own approach to analyzing the “substantially the same as” prong of the public disclosure bar as it relates to industry-wide fraud as follows:

Allowing a public document describing ‘problems’ – or even some generalized fraud in a massive project or across a swath of an industry – to bar all FCA suits identifying specific instances of fraud in that project or industry would deprive the Government of information that could lead to recovery of misspent Government funds and prevention of further fraud. United States ex rel. Mateski v. Raytheon Co.  816 F.3d 565, 577 (9th Cir. 2016); see also United States ex rel. Goldberg v. Rush Univ. Med. Ctr., 680 F.3d 933, 936 (7th Cir. 2012) (“boosting the level of generality in order to wipe out qui tam suits that rest on genuinely new and material information is not sound.”).

In Mateski, public government reports identified a series of problems in connection with a particular defense contracting project, including allegations that defendant Raytheon (a subcontractor) had deviated from the prime contractor’s management and policy directives, and that Raytheon’s process engineering and performance were inadequate.  Id. at 572.

Subsequently, the relator alleged that Raytheon violated the False Claims Act by “failing to comply with numerous contractual requirements in the development of VIIRS, fraudulently covering up areas of noncompliance, and improperly billing the Government for erroneous and incomplete work.”  Id. at 568.

The Mateski court compared, at a granular level, the allegations in the Complaint and the alleged public disclosures.  Id. at 573.  Notwithstanding the fact that the public reports identified both the project in question and the defendant (Raytheon), Mateski noted that these disclosures discussed Raytheon’s general failures in connection with the contract, whereas the allegations in the Complaint discuss particular problems which were not specifically discussed in the publicly disclosed information, and details regarding those particulars.  Id. at 578 (“Although prior public reports had described general problems with Raytheon’s work on VIIRS, none provided specific examples or the level of detail offered by Mateski”).

The methodology identified in the Seventh Circuit and endorsed by the Ninth Circuit makes the inquiry quite simple: does relator bring forth specific, non-public allegations that would materially assist the government’s investigation?

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FERA and the False Claims Act, Part I: No Direct Presentment Required

By Jonathan DeSantis

In May 2009, Congress passed the Fraud Enforcement and Recovery Act of 2009 (“FERA”), which implemented substantial changes to the False Claims Act (“FCA”) for the first time in two decades.[1]  This three-part series of blog articles will discusses three of the most important changes, including (1) a clarification that the FCA applies to false claims made to third-parties when government funds are involved, (2) an enhancement of retaliation protections for whistleblowers, and (3) an expansion of “reverse” FCA liability.

Direct Presentment Prior to FERA

Prior to FERA, the FCA imposed liability for any 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.”[2]  In light of the “to an officer or employee of the United States Government” language, courts interpreted the FCA as only creating liability where a claim was presented to the Government, i.e. that liability did not exist in situations where false claims were presented to recipients of government funds, even where government funds were used to pay the false claims.

For example, in the seminal pre-FERA case on this issue, Amtrak received federal grant money to purchase new railcars for Amtrak trains, and Amtrak contracted with companies to supply the railcars.[3] The companies submitted payment invoices to Amtrak for railcars that did not satisfy contractual specifications, and Amtrak paid the invoices using federal grant money.  A relator asserted FCA claims against the companies based on this conduct, but the court found that the FCA only imposes liability when false claims are submitted directly to the federal government.  The court concluded that the “claims were presented only to Amtrak for payment or approval, and Amtrak is not the Government.”[4]  This became known as the “presentment” requirement and led courts to conclude that false claims presented to recipients of federal funds (like Amtrak) were not within the scope of the FCA.[5]

The Presentment Requirement Drastically Limited FCA Liability

This limitation was extremely problematic given that the federal government often supports initiatives through appropriating funds to third-parties, who in turn use the federal funds to operate a variety of important programs.  Given that the purpose of the FCA is to punish those who attempt to wrongly obtain federal funds,[6] the “presentment” requirement served to both substantially limit the breadth of the FCA and undercut its purpose.

For example, under the traditional Medicare program, the Government directly provides healthcare coverage to seniors and disabled individuals. In 2003, Congress created an alternative to traditional Medicare known as Medicare Advantage. Unlike traditional Medicare, Medicare Advantage plans are offered by private non-governmental entities.  Medicare Advantage beneficiaries receive insurance coverage directly through these entities, and the entities are responsible for processing and reimbursing claims from healthcare providers.   If a “presentment” requirement exists, then false claims made to the Government under traditional Medicare would be within the scope of the FCA, but false claims made to the private entities that provide Medicare Advantage plans would not despite the fact that they use federal funds to implement a federal program.

FERA Removes All Doubt: There is No Presentment Requirement

In FERA, Congress expressly rejected the “presentment” requirement and in fact clarified that there never had been such a requirement.  FERA eliminated the language “to an officer or employee of the United States” from the FCA, such that the FCA now imposes liability for anyone who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.”[7]

In enacting FERA, Congress explained that it was “amend[ing] the FCA to clarify and correct erroneous interpretations of the law” and that the presentment” requirement “runs contrary to the clear language and congressional intent of the FCA by exempting subcontractors who knowingly submit false claims to general contractors and are paid with Government funds.”[8] Congress specified that liability under the FCA “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.”[9]  Put differently, Congress said that the courts had gotten it wrong, but that it amended the FCA to specifically clarify this issue.

Post-FERA: No Direct Presentment Requirement

Courts have faithfully adhered to FERA’s clarification that the FCA does not contain a “presentment” requirement.  For example, 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.”[10] Another court  similarly explained that “[t]he 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.”[11]

Conclusion

Following FERA, the FCA now clearly applies to false claims presented to third-parties when federal funds are involved.

 

[1] FRAUD ENFORCEMENT AND RECOVERY ACT OF 2009 (FERA), PL 111-21, May 20, 2009, 123 Stat 1617 (May 20, 2009).

[2] 31 U.S.C. 3729(a)(1) (1994) (emphasis added).

[3] U.S. ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004).

[4] Id. at 502.

[5] See e.g. U.S. ex rel. Atkins v. McInteer, 345 F. Supp. 2d 1302 (N.D. Ala. 2004) (“[A] false claim, if presented to an entity that, in turn, has received or subsequently receives money from the United States with which to pay the claim, is not actionable, despite the fact that the money, in whole or in part, comes from the United States.”); U.S. ex rel. Rafizadeh v. Cont’l Common, Inc., 2006 WL 980676, at *2 (E.D. La. Apr. 11, 2006).

[6] U.S. ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295, 304 (3d Cir. 2011) (“The primary purpose of the FCA is to indemnify the government-through its restitutionary penalty provisions-against losses caused by a defendant’s fraud.”) (internal quotation marks omitted).

[7] 31 U.S.C. § 3729(a)(1)(A).

[8] S. REP. 111-10, 10, 2009 U.S.C.C.A.N. 430, 438, 2009 WL 787872 (Mar. 23, 2009).

[9] Id.

[10] Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989, 1996 (2016) (emphasis added).

[11] United States ex rel. Garbe v. Kmart Corp., 824 F.3d 632, 638 (7th Cir. 2016).

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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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