United States: A Look Back At FCA Developments In 2012

Last Updated: March 1 2013
Article by David M Nadler

The False Claims Act has been the government's primary fraud enforcement and recovery tool since the statute was substantially broadened in 1986. Each passing year has seen ever increasing recoveries, and 2012 was no different. Indeed, at the close of the 2012 government fiscal year, the United States had recovered some $4.9 billion in settlements and judgments, which included a number of single recoveries in excess of $1 billion each. A recap of some of the significant judicial decisions from 2012 illustrates that this trend will continue into 2013 and beyond.

In last year's cases, we saw courts hold that estimates and opinions, as opposed to statements of fact, can be actionable under the FCA while also expanding the universe of cases that are subject to the amendments to the statute under the Fraud Enforcement and Recovery Act of 2009 , which extended FCA liability to conduct that previously was not actionable.

We also saw courts toll the statute of limitations for government procurements during times of military conflict short of a formal declaration of war and which further allowed government employees to serve as private whistleblowers under the statute's qui tam provisions when the only reason they even learned of the alleged fraud was because it was disclosed to them in the course of their work for the government.

However, 2012 wasn't all bad news for defendants, as elsewhere we observed efforts to place sensible boundaries on the FCA, such as curbing the damages that can be imposed and reaffirming the line between normal contract administration issues and fraud by reinforcing the concept that the FCA was never intended to police every technical violation of complex, and indeed often ambiguous, regulatory schemes. Regardless, the courts' continuing efforts to interpret the proper scope of the FCA will ensure that it remains a significant area of concern for government contractors for years to come.

Expanded Liability Theories

In Hooper v. Lockheed Martin Corp., 688 F.3d 1037 (9th Cir. 2012), the Ninth Circuit Court of Appeals dealt with an issue of first impression in the jurisdiction — whether an allegedly false estimate or opinion, rather than a factual averment, could constitute a false or fraudulent statement under the FCA. Hooper, a former employee, brought a qui tam action alleging that Lockheed had defrauded the government in a cost-reimbursement contract for the Range Standardization and Automation IIA program regarding certain software and hardware services provided in connection with space launch operations at Vandenberg Air Force Base and Cape Kennedy. There was evidence in the proceedings before the district court that Lockheed's cost estimates were below what it may have believed would be its costs to perform the solicited work scopes.

Notwithstanding the fact that the estimates were expressed as such, and were not certified, the Ninth Circuit (primarily relying on an older case from the Fourth Circuit) held that "false estimates," even if labeled as estimates, could be a source of liability under the FCA. While there was some evidence suggesting that Lockheed may have known that its estimates were unrealistic from the beginning, the court's decision nevertheless blurs the distinction between what qualifies as a "false statement" under the FCA and the statute's separate requirement as to whether the statement was "knowingly" made. Indeed, the Ninth Circuit's decision is contrary to numerous administrative and judicial decisions that have excluded estimates, guesses, or opinions from the type of statements that are actionable under the FCA, because they are inherently subjective in judgment and, thus, arguably incapable of objective falsity.

Indeed, the Fourth Circuit (on which the Ninth Circuit relied) later rejected estimates as a basis of FCA liability. See United States ex rel. DRC Inc. v. Custer Battles LLC, 562 F.3d 295 (4th Cir. 2009). The Ninth Circuit's decision in Hooper thus muddies the waters as to what may qualify as a false statement under the FCA, provides relators and the government with ammunition that a mere estimate can be actionable under the FCA, and has broader implications, including fixed-price, commercial item procurements where no certified cost or pricing data is typically required, given that, under the Ninth Circuit's reasoning, even noncertified estimates can have FCA repercussions.

Likewise, in Sanders v. Allison Engine Co., --- F.3d ----, (6th Cir. Nov. 2, 2012), the Sixth Circuit Court of Appeals addressed whether the relaxation of the FCA's liability provisions introduced by the FERA amendments in 2009 applied retroactively to "cases" or only to "claims for payment" that were pending as of the June 7, 2008, date prescribed in the amendments.

The issue has significant ramifications to a defendant's potential liability under the FCA because while the U.S. Supreme Court had construed the prior version of the statute to impose liability only where the alleged false claims had been paid by the government, as opposed to an intermediary using government funds, the post-FERA version of the FCA allows liability simply if government funds were used, regardless of who made the payments. This distinction was critical in Allison Engine, because the defendants there were only subcontractors who, though paid with government funds, had been paid by the prime contractor and not directly by the government itself.

The Sixth Circuit held that the FERA amendments retroactively applied to cases and not claims for payment, notwithstanding that the statutory language used the term claims. Thus, the court held that the FERA amendments to the FCA applied to any cases that were pending as of June 7, 2008. In so holding, the Sixth Circuit agreed with the Second and Seventh Circuits, and furthered the existing split with Ninth and Eleventh Circuit decisions, which hold that this particular section of the FERA is retroactive only as to claims for payment that were pending as of that date.

Expanded Plaintiff Pool

In 2012, the Fifth Circuit Court of Appeals joined other circuits in holding that government employees may serve as relators under the FCA's qui tam provisions. In Little v. Shell Exploration & Production Co., 690 F.3d 282 (5th Cir. 2012), the relators (who were government auditors) alleged that the defendant had defrauded and deprived the United States of certain royalty payments by taking various improper deductions which reduced the amounts that were owed to the government. The relators learned the factual predicate for their claims in the course of performing their jobs. It was undisputed that the relators were obligated to report their findings to their superiors as part of their duties.

After the defendant (joined by the United States) argued that the relators should be precluded from serving as qui tam relators over conduct that they learned as part of performing their official responsibilities, the Fifth Circuit held that the relators had constitutional standing, because nothing in the FCA excluded such individuals from being relators under the statute.

However, as with other circuits that have addressed the question, the Fifth Circuit held that a government employee whose job it is to uncover misconduct or fraud cannot be an original source under the FCA's public disclosure bar, which precludes a relator from bringing suit for allegations that have already been disclosed in the public domain; as government auditors who were required to report fraud, they cannot be said to have voluntarily provided the information to the government, as required by the statute.

The Fifth Circuit's decision further broadens the universe of potential plaintiffs under the FCA in a way that should give contractors pause, particularly in today's mandatory disclosure environment where contractors may be required to disclose often sensitive information to government officials that could form the basis for an FCA complaint and may be providing that information directly to a future relator. While the Fifth Circuit held that government employees whose job is to report potential fraud cannot be an original source under the FCA's public disclosure jurisdictional bar, the limitation may provide little comfort because it would apply only if a public disclosure has occurred. Where no such disclosure has occurred, such uniquely situated government employees may be able to pursue qui tam suits armed with information that they obtained as part of their job.

Expanded Statute of Limitations

In United States v. BNP Paribas SA, --- F. Supp. 2d ----, (S.D. Tex. Aug. 6, 2012), the government brought an FCA action against the defendants in 2011. The complaint alleged that the defendants (who were U.S. exporters and foreign importers that were allegedly under common) had submitted false claims between 1998 and 2005 in connection with their participation in the Supplier Credit Guarantee Program (SCGP), which provides government-backed guarantees to U.S. exporting companies to allow them to access financing before payments are due from foreign importers.

The government alleged that the defendants had violated the program's eligibility requirements because they were under common control because the SCGP bars exporters from participating if they are directly or indirectly owned or controlled by the foreign importer. Among other defenses, the defendants argued that the complaint was barred under the FCA's six-year statute of limitations because the last claim was alleged to have been submitted in September 2005, which was more than six years before the October 2011 complaint. While the court rejected the government's arguments that its complaint was within the FCA's limitations period, it concluded that there were fact questions as to whether the government was entitled to the statute's three-year tolling provision such that the complaint could not be dismissed at the pleadings stage.

The court further held that the government's case was also saved by the Wartime Suspension of Limitations Act (WSLA). The 2005 version of the WSLA provided that when the United States is at war, any statute of limitations applicable to any offense regarding fraud or attempted fraud on the government is to be suspended for five years after the termination of hostilities. In 2008, the WSLA was amended to also apply to any situation where Congress had enacted a specific authorization for the use of armed forces that was short of a formal declaration of war.

The court held that the WSLA applied to civil claims under the FCA, rejecting the defendants' argument that the term "offense" limited the statute to criminal cases. The court further held that even though they fell short of formal declarations of war, the Sept. 18, 2001, Authorization for Use of Military Force issued by Congress, along with the subsequent Oct. 11, 2002, Authorization for the Use of Military Force Against Iraq, placed the nation at war in 2005 when the last of the defendants' alleged misconduct was alleged to have occurred.

Alternatively, the court held that the 2008 amendments to the WSLA, which added the authorization of military force short of a formal declaration as an additional trigger for suspending statutes of limitations, also applied to the case because the pertinent statute of limitations law to apply was the one that was in effect at the time that the complaint was filed in 2011.

The Paribas case has significant repercussions for contractors. The court's holding that the WSLA tolls the FCA statute of limitations, even in civil cases, is not limited to war procurements, but more broadly applies to any government contract procured during a period of conflict. Thus, under Paribas, even where a formal war declaration has not been made, civil FCA cases will be immune to a statute of limitations defense as no such period would run until five years after the end of hostilities. If Paribas is adopted by other courts, with the Afghanistan conflict not expected to conclude until 2014, the effect could be to deprive contractors of a statute of limitations defense for many years to come.

Limits on FCA Damages

In United States ex rel. Davis v. District of Columbia, 679 F.3d 832 (D.C. Cir. 2012), the D.C. Circuit Court of Appeals picked up where it left off in its 2010 decision in United States v. Science Applications International Corp., 626 F.3d 1257 (D.C. Cir. 2010) regarding the proper measure of damages in FCA cases, where the contractor (though perhaps not in full compliance with technical requirements) has nevertheless provided actual value to the government customer. The Davis relator alleged that the District of Columbia and its public schools had violated the FCA by submitting a Medicaid claim for reimbursement without maintaining adequate supporting documentation.

However, there was no allegation that any of the services paid for by the federal government had not been actually provided and, therefore, there was no question regarding the value of the medical care that was provided by the District. Under these circumstances, the D.C. Circuit concluded that because the maintenance of documents had no independent value, there were no actual damages (though there were potential penalties), rejecting the relator's fraud-in-the-inducement argument that the measure of damages was the entire amount of the payments because the government would not have paid the invoices had it known there were insufficient supporting documents.

The D.C. Circuit reasoned that because damages are intended to put the government in the same position as it would have been had the defendant's claim not been false, in order to demonstrate damages, the government must show not only that it would have withheld payment had it known the true facts, but also that the performance that the government received was worth less than what it believed it had purchased.

Because the Davis relator could not demonstrate any diminished value in the services that were provided by the district, and the government received what it paid for, the D.C. Circuit held that there were no damages in the case. Although relators and the government continue to pursue disgorgement theories in seeking FCA damages despite Davis, the decision is still useful support for contractors in opposing such efforts.

Limits on Knowing Conduct and Materiality Under the FCA

Finally, in United States ex rel. Williams v. Renal Care Group Inc., 696 F.3d 518 (6th Cir. 2012), the Sixth Circuit not only reversed the district court's grant of summary judgment to the relator and the government (which intervened in the case), but because it found that the defendants had not acted in reckless disregard of applicable Medicare regulations, it granted them summary judgment on certain claims. In this case, the plaintiffs successfully argued to the district court that because the defendants (one a home equipment dialysis supplier, while the other a renal dialysis facility provider) were allegedly alter egos of each other, they violated Medicare regulations that prohibited equipment suppliers from seeking reimbursement if they were also a dialysis facility.

On appeal, the Sixth Circuit found no evidence to pierce the corporate veil and concluded that in the face of arguably ambiguous regulations, the defendants had taken reasonable efforts to clarify the propriety of their ownership structure, which included seeking the advice of counsel, inquiring with pertinent agency officials on the issue, and examining industry practice. There was also evidence that the government was aware of the defendants' ownership structure.

On these facts, the Sixth Circuit held that the defendants could not have acted in reckless disregard or known that they were submitting false claims. The Sixth Circuit also rejected the plaintiffs' argument that the defendants had separately violated the FCA because they were not in compliance with certain equipment supplier standards prescribed in other regulations that carried their own independent sanctions for violations.

The Sixth Circuit found that whether the defendants had violated the regulations was largely irrelevant because the regulations, which were not a precondition to payment, were not material to any government payment decision. Significantly, the court commented that the FCA is not a vehicle for policing technical compliance with complex federal regulations, and it concluded that even though the regulations at issue were a condition of participation, their violation did not result in FCA liability.

The Sixth Circuit's decision is noteworthy for contractors as it (1) suggests a relaxation of the FCA's materiality requirements that defendants can leverage, particularly in cases where the plaintiff has advanced an implied certification theory of liability based on the notion that the contractor has violated a condition of program participation; and (2) provides further support, in line with other decisions, for the proposition that the FCA should not be used to displace an agency's inherent discretion to administer and enforce its own regulations.

Originally published byLaw360

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