United States: The Impact Of The Fraud Enforcement And Recovery Act Of 2009 On The Civil False Claims Act

The Fraud Enforcement and Recovery Act of 2009 (FERA), P.L. 111-21, was signed into law by President Obama on May 20. Prior to its passage, most of the public scrutiny of FERA focused on its provisions that reclassified mortgage lenders as financial institutions and expanded federal criminal liability for mortgage fraud, securities fraud and major fraud against the U.S. involving Troubled Asset Relief Program (TARP) funds. In fact, FERA was passed to improve "enforcement of mortgage fraud, securities and commodities fraud, financial institution fraud, and other frauds related to federal assistance and relief programs, for the recovery of funds lost to these frauds, and for other purposes."

The current financial crisis and the resulting Government bailout initiatives also provided the momentum necessary for Congress to revise the civil False Claims Act (FCA) through FERA's § 4, which is entitled "Clarifications to the False Claims Act to Reflect the Original Intent of the Law." See P.L. 111-21, 123 Stat. 1621. While the FCA has been applied to a broad range of conduct since its 1986 amendments, the majority of cases and dollars recovered have been from the defense and health care industries. The fact that the U.S. Supreme Court and other federal courts have recently interpreted the scope of the FCA narrowly, combined with the Government's provisioning of massive amounts of bailout and stimulus funding, led Congress to act. Congress wanted to ensure that, as the Government was spending unprecedented amounts of taxpayer funds, it could limit and recover for fraudulent uses of those funds.

FERA substantially amends the FCA and will have a major impact on contractors with, and recipients of financial assistance from, the Government. For example, FERA's amendments to the FCA significantly increase the FCA's scope and applicability while eliminating certain previous legal defenses to FCA violations. Nevertheless, as noted, FERA claims that its FCA amendments reflect the original intent of the FCA. This Feature Comment examines FERA's substantive and procedural changes to the FCA.

Substantive Changes to the FCA—While entities—e.g., contractors, grantees and other recipients of federal funds or property—potentially subject to the FCA should be aware of both the substantive and procedural FCA changes, the substantive changes are likely to have the most impact on how entities conduct business on a day-to-day basis and how they structure their compliance programs, which must be robust and are, as discussed below, a crucial line of defense to FCA actions. The procedural changes are more likely to affect the actual investigations in which some entities will find themselves embroiled.

Overruling of Allison Engine and Expansion of FCA Scope: In part, FERA's amendments to the FCA are intended to respond to, i.e., legislatively overrule, the Supreme Court's unanimous decision in Allison Engine Co. v. U.S. ex rel. Sanders, 128 S.Ct. 2123 (2008), a qui tam case in which the Justice Department declined to intervene. In that case, the Court held that a Navy subcontractor was not liable under the FCA because the subcontractor had submitted its false certifications (of compliance with Navy specifications) only to the prime contractor and not to the Government; the claims were paid by the prime contractor and not by the Government; and the relator failed to prove that the subcontractor "intended that the false record or statement be material to the Government's decision to pay or approve the false claim."

Under the former FCA provision—applicable in Allison Engine—which prohibited the submission of false or fraudulent records and statements, to constitute a violation, the record or statement needed to be submitted in order "to get a false or fraudulent claim paid or approved by the Government." 31 USCA § 3729(a)(2) (1986). As revised, to constitute an FCA violation, the false record or statement now need only be "material to a false or fraudulent claim." 31 USCA § 3729(a)(1)(B).

More specifically, Congress legislatively overruled Allison Engine by redefining the term "claim" to include situations in which Government funds are directly or indirectly at issue. A "claim" is now defined as a request or demand for money or property—regardless of "whether or not the United States has title to the money or property"—provided that the request or demand is either (1) presented to a U.S. officer, employee or agent; or (2) "the money or property is to be spent or used on the Government's behalf or to advance a Government program or interest" and the Government provides some portion of the requested money or property or will reimburse any portion of the requested money or property. 31 USCA § 3729(b) (2).

Thus, under the revised FCA, it no longer matters whether the submitter of the record or statement intends that the Government rely on it when deciding to pay a claim, or whether the submitter knows that Government funds are involved. It matters only whether the record or statement has "a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property." 31 USCA § 3729(b)(4). Thus, unlike in Allison Engine, now a subcontractor would be liable under the FCA if it intended to defraud its prime contractor and its false statement influenced the Government's decision to pay the prime contractor.

To emphasize its point that the Supreme Court misinterpreted the FCA in Allison Engine, Congress made this specific change retroactive to June 7, 2008, two days before the Supreme Court's decision was issued. (As noted, FERA claims that its FCA amendments reflect the original intent of the FCA.) Defendants no doubt will challenge this retroactivity provision on constitutional and other grounds, and the Government and relators may seek reconsideration of dismissals of cases that were based on the Allison Engine holding. The greater significance of this provision, however, lies in the expansion of the provision to apply to contexts well beyond the facts of Allison Engine.

Elimination of the Presentment Requirement: Before his appointment to the Supreme Court, then-D.C. Circuit Judge John Roberts authored a significant decision in U.S. ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004). In that case involving the manufacture of toilets for Amtrak trains, the D.C. Circuit held that the defendant contractor could not be liable under the FCA because it had submitted the allegedly false claims to Amtrak, which was not a Government entity although it received funds from the Government. Therefore, the defendant had not "presented" the claims to a Government officer or employee as required under the FCA's 1986 version. See 31 USCA § 3729(a)(1) (1986) (violation to "present[ ], or cause[ ] to be presented, to an officer or employee of the United States Government ... a false or fraudulent claim for payment or approval").

FERA revises the definition of "claim" to include either a request for payment or property (without regard to whether the Government has title over the funds or property) presented to the U.S., or the request for payment or property made to a "contractor, grantee, or other recipient" where "the money or property is to be spent or used on the Government's behalf or to advance a Government program or interest" and the Government provides some portion of the requested money or property, or will reimburse any portion of the requested money or property. 31 USCA § 3729(b)(2). Because the statute no longer requires that the claim be presented to a U.S. Government official, so long as Government funds are involved, the Bombardier decision involving Amtrak—if litigated today—would almost certainly have a different result and the FCA would be found applicable.

To further illustrate the potential impact of this change, the American Recovery and Reinvestment Act of 2009 (Recovery Act) requires prime contractors to submit quarterly reports to the Government, and conditions receipt of Recovery Act, i.e., stimulus, funds on submission of the reports. If a Recovery Act subcontractor submits to its prime contractor a status report that falsely describes the subcontractor's progress, the subcontractor could be subject to FCA liability even if its report to the prime was not submitted to the Government or directly tied to the prime's payment to the subcontractor. This is so because, under the new FERA language, the subcontractor has "caused to be presented" a false statement—even though the statement was not presented to the Government specifically to obtain payment.

This change carries sweeping implications because, among other things, it allows for the "tracing" of federal funds through state, local and other government agencies, as well as other public or private entities, as long as some portion of the funding comes from the U.S. Government and "is to be spent or used on the Government's behalf or to advance a Government program or interest." (If construed broadly by the Justice Department and the courts, the FERA revisions could place liability on second- and thirdor lower-tier subcontractors and subgrantees.) In the defense industry, for example, there is now clear jurisdiction over the submission of false claims to non-U.S. Government coalition groups (e.g., the Coalition Provisional Authority for Iraq) for which the U.S. Government provided some but not all funding or property (and no longer has title over the funds or property). See 31 USCA § 3729(b)(2). Thus, FERA statutorily confirms the U.S. Court of Appeals for the Fourth Circuit's reversal of the Eastern District of Virginia's decision in U.S. ex rel. DRC v. Custer Battles, 444 F. Supp. 2d 678 (E.D. Va. 2006), rev'd in part, 562 F.3d 295 (4th Cir. 2009). In the health care context, it resolves the debate as to whether the submission of false claims to a state Medicaid program can provide the basis for liability under the FCA. Compare U.S. ex rel. Brunson v. Narrows Health & Wellness, 469 F. Supp.2d 1048 (N.D. Ala. 2006), with U.S. ex rel. Tyson v. Amerigroup Ill., 2005 WL 2667207 (N.D. Ill. 2005). Clearly, now it can. See 31 USCA § 3729(b)(2).

Imposition of "Materiality" Element: Although the prior version of the FCA contained no explicit reference to "materiality," many courts nevertheless had considered whether materiality was implicit in the statute and, if so, which standard of materiality should apply. The revised statute now specifies that for purposes of establishing a violation of § 3729(a)(1)(B)—i.e., prohibiting the submission of false records or statements—the false record or statement must be "material to a false or fraudulent claim." 31 USCA § 3729(a)(1)(B). "Materiality" is defined, in turn, as "having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property." 31 USCA § 3729(b)(4). The statute thus adopts the majority judicial view regarding the definition of materiality in the FCA context. Compare U.S. v. N. Am. Bus. Indus., 546 F.3d 288, 299 (4th Cir. 2008), and U.S. ex rel. A+ Homecare Inc. v. Medshares Mgmt. Group Inc., 400 F.3d 428, 440- 445 (6th Cir. 2005), to Costner v. URS Consultants, 153 F.3d 667, 677 (8th Cir. 1998) (applying "outcome materiality" test, under which defendant's actions must have had purpose and effect of causing the U.S. to pay money it is not obligated to pay, or which intentionally deprive the U.S. of money it is lawfully due).

Retention of Overpayments and "Reverse False Claims": An additional substantive change imposed by the new law is the expansion of the "reverse false claim" provision to now make the retention of funds known to have been paid in error to be a violation. While this provision is expected to significantly impact the health care industry, other industries should note its implications as well. The prior version of the statute's so-called "reverse false claims" provision made it unlawful to use a false record or statement to conceal, avoid or decrease an obligation to pay money to the U.S. See 31 USCA § 3729(a)(7) (1986). Although the Government often argued that this provision applied in circumstances in which a defendant had received a payment improperly (either following the submission of a false claim, or simply in error) and failed to repay it, the provision was seldom applied by the courts or even relied on in earnest by the Government in litigating such situations, since typically these situations did not involve the use of a false record or statement to affirmatively conceal, avoid or decrease the obligation to pay money.

The revised FCA expands the reverse false claim provision by now making it a violation to "knowingly conceal[ ] or knowingly and improperly avoid[ ] or decrease[ ] an obligation to pay" the U.S. 31 USCA § 3729(a)(1)(G). In other words, the new provision does not require the submission of any false record or statement, but simply the act of concealing or even merely avoiding the "obligation" to pay back funds. Further, the statute defines "obligation" very broadly—to include an "established duty, whether or not fixed"—that can arise from various relationships, statutes or regulations, or even "from the retention of any overpayment." 31 USCA § 3729(b)(3). The revisions also, for the first time, make it unlawful to conspire to violate the reverse false claim provision. 31 USCA § 3729(a)(1)(C).

Obviously this reverse false claim provision can and will apply in many contexts outside health care, but it carries particular significance for health care providers, which constantly receive payment for services rendered, any number of which may contain overpayments. It is unlikely that any sizable health care provider did not receive at least one overpayment over the past year from a federal health care program. To the extent providers and their counsel have ruminated in the past over their legal obligation to return the overpayment amount, it is now clear that returning it is mandatory and the failure to do so can subject the provider to treble damages and penalties under the FCA.

The statute raises, but fails to answer, a number of important practical questions. For example, at what point does the retention of an overpayment become "improper"? Is a contractor exposed to liability between the time it first identifies the possibility that a claim was inaccurately paid and the date it cuts a refund check or otherwise offsets the claim, or is a reasonable time period to repay the overpayment implied? If the contractor first learns of alleged overpayments through the issuance of audit findings by, for example, a Medicare contractor and appeals those findings, knowing that the likelihood of prevailing on some of the findings is very low, does that failure to repay the likely overpayments constitute a violation and, if so, who decides the claims as to which the provider "knowingly and improperly" refused to repay versus those that were properly appealed? If a contractor becomes aware of the possibility that claims were submitted inaccurately, at what point does its conduct become "knowingly and improperly avoid[ing] or decreas[ing]" its obligation to repay the money? Is it at the moment the initial allegation is made known, after the contractor has concluded its investigation and determined that in fact an overpayment was received, or after the contractor has had a reasonable time to issue a refund check following the investigation's conclusion? At what point does the contractor have a duty under the FCA to investigate an allegation that an overpayment was received? What is the significance of the language prohibiting "avoid[ing] or decreas[ing] an obligation to pay" versus "conceal[ing]"? Is some affirmative act required to trigger this prohibition? And, what if the overpayment was received more than six years ago, outside the statute of limitations for federal common law claims and arguably even the FCA?

This is far from an exhaustive list of questions that will no doubt be raised and explored in future investigations and litigation, not to mention in conversations between contractors, their compliance departments and their counsel. Although various Government officials have stated publicly and privately that they intend to interpret the provision reasonably, the substantial risk remains that the Government's and providers' interpretations of reasonableness may differ significantly, and, in any event, the relators' bar will likely take an aggressive approach to the meaning of reasonableness.

Revision of Whistleblower Protection: Under the 1986 FCA, any employee against whom an employer retaliated "because of lawful acts done by the employee ... in furtherance of an action under this section" was entitled to relief including reinstatement, back pay and special damages. The revised statute redefines and expands the category of individuals who can receive such compensation.

Significantly, FERA extends the statute's protections to include not only employees, but also contractors and agents. The statute, however, as revised, no longer protects lawful acts taken by the individual in furtherance of a qui tam action. Instead, it only protects "lawful acts ... in furtherance of other efforts to stop 1 or more violations of this subchapter." 31 USCA § 3730(h)(1). By applying the protections to efforts to stop the fraud rather than to efforts to benefit from it by filing suit, this revision appears aimed at incentivizing the would-be relator to try to stop violations before reporting them to the Government and financially benefiting from them. This change may also address the perception that whistleblowers more often are subjected to retaliation for notifying their employers of alleged misconduct than for their activities involving filing and litigating the qui tam suit, many of which are unknown by their employer at the time they occur.

Procedural Changes—FERA also made several procedural changes to the way FCA cases are investigated and litigated. Some of these changes amount to mere clarifications, while others may dramatically change the investigation and litigation landscape.

Government Complaints: The revised statute now clearly states that, when the Government intervenes in a qui tam case, it may file its own complaint or amend the relator's complaint "to clarify or add detail to the claims" in which it is intervening, and also "to add any additional claims with respect to which the Government contends it is entitled to relief." 31 USCA § 3731(c). This essentially codifies the existing practice. Prior to FERA, the Government typically filed its own complaint after intervening, and usually such complaints offered far more specific allegations than had the relator's initial complaint. Also, the Government's regular practice has been to add common law claims that the relator has no standing to allege, such as unjust enrichment, common law fraud and payment by mistake.

In recent years, the courts have wrestled with qui tam cases naming numerous defendants, in which the Government has taken many years to investigate and intervene against some of those defendants. Some courts had held that the statute of limitations as to the Government began to run when the Government first received the relator's complaint, and that the Government's claims do not relate back to the relator's complaint when the Government takes an unreasonably long period of time to investigate and intervene. See U.S. v. Baylor Univ. Med. Ctr., 469 F.3d 263, 268 (2d Cir. 2006); U.S. ex rel. Ramadoss v. Caremark, Inc., 586 F.Supp.2d 668, 700–701 (W.D. Tex. 2008). Once again, Congress has legislatively overruled the case law by inserting statutory language providing that "[f]or statute of limitations purposes, any such Government pleading shall relate back to the filing date of the complaint of the person who originally brought the action," so long as the Government claim "arises out of the conduct, transactions, or occurrences set forth, or attempted to be set forth, in the prior complaint of that person." 31 USCA § 3731(c). This language, which effectively lengthens the statute of limitations for the Government, also appears to clarify that not only the Government's FCA claims, but also its related common law claims, will be considered timely so long as they arise out of the same facts set forth in the relator's initial complaint.

Service on States: Over the last several years, an increasing number of qui tam cases have alleged violations not only of the federal FCA, but also of analogous state laws, particularly in the context of enforcement actions against pharmaceutical manufacturers. A recurrent question in such situations— pre-U.S. Government intervention—has been whether the relator was permitted to serve the state officials responsible for enforcing the state laws without violating the federal seal on the qui tam action. See 31 USCA § 3730(b). FERA resolves the question by providing that whenever a state or local government is named as a co-plaintiff with the U.S., the federal seal does not preclude the U.S. Government or relator from providing the state or local government with the complaint, any other pleadings, or a written disclosure. 31 USCA § 3732(c).

Civil Investigative Demands: Perhaps the most significant procedural change is in the context of civil investigative demands (CIDs), which constitute pre-intervention investigative discovery by the Justice Department. 31 USCA § 3733. CIDs can be issued for documents, interrogatories, oral depositions or any combination thereof, during the course of the Government's investigation. They can be very powerful tools in investigating a relator's allegations, but until now they have been rarely used because only the U.S. attorney general could issue CIDs. As a result, the process of requesting and obtaining the CIDs was so cumbersome that few Justice Department attorneys and assistant U.S. attorneys (AUSAs) requested them, and fewer actually succeeded in obtaining them.

Under the amended FCA, however, the attorney general can now delegate the authority to issue CIDs. 31 USCA §3733(a)(1). It remains to be seen how far down the chain of command the attorney general will delegate this authority and whether the authority will be delegated to the U.S. Attorneys' Offices, or whether the authority will continue to reside exclusively with Main Justice. The Justice Department is expected to issue regulations detailing the delegation of authority.

Regardless of how far down the chain of command such delegation is permitted in the Justice Department, this change may significantly alter the way many FCA cases are investigated, but not all of the changes are necessarily in favor of the Government. Until now, Justice Department attorneys and AUSAs have relied on their client agencies to issue subpoenas for documents. In those situations, the client agency subjected the subpoenas to a review process that usually took between a few days and a couple of weeks. It is unlikely that the CID process will offer a timing advantage to the Government with respect to obtaining document subpoenas, and it may actually delay such subpoenas.

But CIDs offer significant other advantages to the Justice Department with respect to witness testimony. To obtain information from witnesses, in the past, Justice Department attorneys and AUSAs generally have relied on their client agency agents (e.g., Department of Health and Human Services Office of Inspector General agents) and Federal Bureau of Investigation agents, where such agency support was available. In districts that lacked such support, the attorneys relied on in-house investigators or even conducted interviews themselves. In most cases, the attorneys would not participate in the interviews, but would receive oral and written reports from the agents describing their recollection of what was said during the interview. Witnesses and defendants do not have access to those interview summaries during the investigatory phase, and, even in litigation, defendants sometimes are not able to obtain those interview reports. If Justice Department attorneys and AUSAs begin using CIDs, however, they usually will be talking directly with the witnesses, or at least listening directly to their testimony, and in the comfort of a Government building rather than the doorstep of a witness's home. And if the witness asserts his or her Fifth Amendment rights, such assertion may harm the defendant's interest if the Government is able to obtain an adverse inference against the company based on that assertion.

Nevertheless, the Justice Department's increased use of CID deposition testimony to develop the facts of the investigation may also benefit defendants. The witness is entitled to have counsel present at the deposition. This often will be either company counsel or counsel friendly to the company. In addition, the witness likely will have prepared for the deposition rather than being surprised by an agent at 7 a.m. at his or her home, and the witness will be entitled to review and correct a transcript of the deposition. Normally the witness also will be entitled to obtain a copy of the final transcript. These elements may actually help to level the playing field between the Government and the defendant during the investigation as defense counsel should have a better idea of what information the Government is both seeking and obtaining in the course of its investigation.

The amended statute also explicitly authorizes the Justice Department to share information obtained through a CID with a whistleblower, an administrative agency and a state investigative agency for the purposes of advancing or pursuing an FCA matter. Notably, this could occur before the defendant is even aware that a lawsuit has been filed against it. 31 USCA § 3733(a)(1).

Increased Federal Funding to Combat Fraud—For fiscal years 2010 and 2011, FERA authorizes more than $500 million for additional Government fraud enforcement. For example, for each of those FYs, FERA authorizes the Justice Department to appropriate $165 million for investigating and prosecuting alleged fraud involving financial institutions as well as federal assistance programs. In addition, FERA authorizes appropriations for other agencies to combat fraud, including the Securities and Exchange Commission ($20 million per year), the Postal Inspection Service ($30 million per year), Department of Housing and Urban Development ($30 million per year) and the Secret Service ($20 million per year). See FERA § 3(a)–(e) (identifying amounts appropriated to each agency). These agencies investigate and assist in civil and criminal actions involving financial institutions and federal assistance programs, as well as (among other items) securities, commodities and insider trading fraud, mortgage fraud, health care fraud, credit fraud, and mail and wire fraud. See FERA § 3(f). These funds may also be used more generally to provide training, develop policing strategies, and establish information-sharing among federal, state and local agencies. The bottom line is that the Government will have substantially increased resources to combat fraud and pursue FCA actions.

Compliance and Training—Although this Feature Comment has focused on FERA's significant changes to the Civil False Claims Act, certain key FCA provisions remain unchanged: either a relator or the Justice Department may initiate an action under the FCA; a defendant must act with actual knowledge, deliberate ignorance or reckless disregard as to the falsity of the claim submitted or statement made; and relators generally are entitled to 15–30 percent of the Government's recovery. But in today's context of increased Government funds being paid to the private sector—in the form of bailouts and stimulus funding—as well as increased health care and other spending, and the federal courts' general trend toward limiting the scope of the FCA, Congress has responded by definitively expanding many of the law's provisions to apply to a variety of conduct to which the statute previously did not apply. All contractors, grantees and recipients of federal funds, which will include industries that previously were not generally affected by the FCA, must focus carefully on these changes and increase their compliance efforts. At the same time, FCA practitioners should reevaluate their former strategies for approaching FCA investigations and litigation.

The financial meltdown and resulting recession have caused many companies that previously focused principally (or solely) on commercial business to pursue federal opportunities because many commercial business opportunities do not currently exist. Many of these companies have turned—often for the first time—to the large, expansively funded federal recovery and TARP programs. Although federal money is (or soon will be) flowing into those programs, those pursuing such opportunities must pay close attention to the extensive "strings" that are attached. Many new compliance, tracking and reporting obligations have been enacted to prevent and detect improper uses of the federal funds. As demonstrated above, significant new FCA (and criminal) sanctions are now available to the Government. Even companies that make good-faith efforts to comply with the laws and help resolve the financial crisis will likely come under investigation for FCA (and other) violations.

Companies can most effectively protect themselves from these risks by instituting robust compliance programs and training that will educate their workforce, and by establishing internal policies and controls that will allow them to monitor for and prevent fraud, and explain how the Government's funds were obtained, used and accounted for. Less than a year ago, comprehensive compliance and ethics programs became required for most U.S. Government contractors. See 73 Fed. Reg. 67064 (Nov. 12, 2008). Many companies have not properly instituted these new requirements. Even companies with fairly comprehensive (and preexisting) compliance and ethics programs must review their policies to ensure that they incorporate recent legislative and regulatory changes affecting their business. Without such programs, these companies will be vulnerable to FCA and related litigation.

Reprinted from The Government Contractor, with permission of Thomson Reuters. Copyright (c) 2009. Further use without the permission of West is prohibited. For further information about this publication, please visit www.west.thomson.com/store, or call 800.328.9352.

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