The U.S. Court of Appeals for the Ninth Circuit recently weakened the impact of Federal Rule of Civil Procedure 9(b) in False Claims Act ("FCA") cases. The FCA allows whistleblowers (called "relators") to bring lawsuits against contractors on behalf of the federal government. Relators can receive up to 30 percent of the government's ultimate recovery. This bounty incentivizes relators to bring FCA lawsuits. It also causes some relators to see the FCA as a retirement-advancing lottery, and their complaints often characterize innocent business challenges as fraudulent schemes.
Contractors attempt to eliminate these meritless suits by
arguing that the complaints lack sufficient detail. Under
Federal Rule of Civil Procedure 9(b), FCA complaints must
"state with particularity the circumstances constituting
fraud." In fraudulent scheme complaints, the relators
recite the proverbial "parade of horribles,"
overemphasizing perceived inadequacies in billing practices,
quality control systems, manufacturing processes, or other
system-wide business practices. However, they fail to identify
any false claims (such as invoices or certificates of
compliance). Instead, they hypothesize that because the
contractor had systemic problems, it must have submitted false
claims to the government.
Courts of Appeals are split on the viability of fraudulent scheme
complaints. The majority reject them because the
"submission of a claim is ... the sine qua non of a
False Claims Act violation," and thus the complaint must
allege an actual false claim. United States ex rel. Clauson v. Lab. Corp. of
Am., Inc., 290 F.3d 1301, 1311 (11th Cir. 2002); see
also United States ex rel. Bledsoe v. Cmty. Health
Sys., Inc., 501 F.3d 493, 509 (6th Cir. 2007); United States ex rel. Joshi v. St. Luke's
Hosp., Inc., 441 F.3d 552, 557 (8th Cir. 2006); United States ex rel. Karvelas v.
Melrose-Wakefield Hosp., 360 F.3d 220, 232 (1st Cir.
2004). In cases where many claims are at issue, such as an
alleged long-running Medicare fraud, the complaint satisfies Rule
9(b) if it provides actual, representative examples of false
claims. Claims are only representative if they are
"illustrative of the class of all claims covered by the
fraudulent scheme." Bledsoe, 501 F.3d at 510-11
(internal quotation marks omitted).
Momentum is shifting, however, and more recent decisions have been
willing to accept fraudulent scheme complaints, even if they do not
allege any specific false claims. Last month, the Ninth
Circuit joined the Fifth Circuit in holding that "it is
sufficient 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.'" Ebeid v. Lungwitz, No. 09-16122, slip op.
at 11259 (9th Cir. Aug. 9, 2010) (quoting United States ex rel. Grubbs v.
Kanneganti, 565 F.3d 180, 190 (5th Cir.
2009)). Although relators need not identify actual false
claims, the complaints must nevertheless link the scheme to the
likelihood that the contractor submitted false claims.
This is a costly shift for contractors. Spurious complaints
may now survive the motion to dismiss stage, forcing contractors to
spend a significant amount of time and money on discovery. It
also defeats the FCA's original intent that relators should be
insiders with evidence of improper activity. As the Eleventh
Circuit stated, "while an insider might have an easier time
obtaining information about [the scheme] and meeting the pleading
requirements under the False Claims Act, neither the Federal Rules
nor the Act offer any special leniency under these particular
circumstances to justify [an outsider] failing to allege with the
required specificity the circumstances of the fraudulent
conduct." Clauson, 290 F.3d at 1314.
The Supreme Court recently
had the opportunity to clarify how Rule 9(b) applies to scheme
liability complaints. However, after the petition for
certiorari was filed, Congress amended the public disclosure bar,
thus mitigating a major dispute in the case. The Solicitor
General asked the court to deny the petition, and it
did. Contractors and FCA practitioners will have to wait for a
future opportunity to resolve the circuit split on the viability of
complaints alleging fraudulent schemes.
For continued discussion of Rule 9(b) in False Claims Act
litigation, please see
Meanwhile, Sixth Circuit Remains Firm on Rule 9(b) in False
Claims Act Litigation, also published today.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.