2021 False Claims Act Year in Review: Judicial and Congressional Developments (II of II)
As for the Judiciary, the U.S. Supreme Court did not issue any relevant decisions nor grant certiorari in any notable FCA cases in FY21. To the contrary, they denied petitions to review appellate cases of potential significance (e.g., in June 2021 the Supreme Court declined to review a case from the Seventh Circuit regarding the government’s ability to move to dismiss over a relator’s objection). In January 2022 (FY22), the Supreme Court did invite the views of the United States (via the Solicitor General) on the pleading standards in FCA cases, specifically the issue whether Federal Rule of Civil Procedure 9(b) requires plaintiffs in an FCA cases who plead a fraudulent scheme to also plead specific details of false claims. See Johnson, et al. v. Bethany Hospice and Palliative Care LLC, No. 21-462 (Jan. 18, 2022). This suggests that the Court may weigh in on the FCA in FY22. We’ll keep you posted.
There were approximately 80 FCA cases considered by the Courts of Appeal in 2021; the following are a few noteworthy decisions:
GOVERNMENT INTERVENTION AND DISMISSAL: In United States v. Republic of Honduras, 21 F.4th 1353 (11th Cir. 2021), the Eleventh Circuit for the first time weighed in on the issues: (1) whether the Government must first formally intervene upon a showing of good cause prior to filing a motion to dismiss, and (2) what is the standard of review at a hearing on the matter. Noting that the FCA “statute is silent concerning whether the Government must formally intervene before filing a motion to dismiss and does not inform the court what standard the Government must meet to obtain a dismissal,” and discussing the varying approaches in the other Circuits, the Eleventh Circuit determined “the Government does not have to formally intervene before moving to dismiss a qui tam case even though it had earlier declined to intervene” (emphasis added). The court further held that district courts must respect prosecutorial discretion and grant government motions to dismiss qui tam FCA actions, unless the government’s decision to dismiss is “based on a constitutionally impermissible standard such as race, religion, other arbitrary classification, or vindictiveness.” In other words, prosecutorial discretion is broad, but not unfettered.
In Polansky v. Executive Health Resources Inc, 17 F.4th 376, 380 (3d Cir. 2021), the Third Circuit “wade[d] into the fray,” and addressed the “two key questions that have divided our sister circuits,” (1) whether the Government must intervene before moving to dismiss and (2) if the government properly moves for dismissal, “what, if any, standard must it meet for its motion to be granted?” The Third Circuit agreed with the Seventh Circuit concluded that the government is required to intervene before moving to dismiss and that its motion must meet the standard of Federal Rule of Civil Procedure 41(a), meaning that the relator must receive notice and an opportunity to be heard, but the government’s discretion to move for dismissal is quite broad.
In United States v. Eli Lilly & Co., Inc., 4 F.4th 255, 267 (5th Cir. 2021), the Fifth Circuit, noting the “deeply entrenched circuit split,” and that it had “not yet had an opportunity to determine what is required for the government to dismiss a case,” assumed without deciding that the Ninth Circuit’s “more burdensome test” applies. Under that test, the government must show that there is a valid government purpose and a rational relation between dismissal and accomplishment of that purpose. If it makes this required showing, then the relator must prove that the government’s motion to dismiss is “fraudulent, arbitrary and capricious, or illegal.”
The Circuit Courts’ “tests” for the government’s required showing on a motion to dismiss a qui tam action ranges from an essentially “nearly unfettered discretion,” subject only to fraud upon the court, to a required demonstration of a “rational relation” between dismissal and accomplishment of the government’s goals. As discussed further below, Congress is considering amendments to the FCA (S.2428) which would, among other things, resolve the Circuit split and adopt the more demanding test, which provides that the government must “identify a valid government purpose and a rational relation between dismissal and accomplishment of the purpose,” after which a relator would “have the burden of demonstrating that the dismissal is fraudulent, arbitrary and capricious or illegal.” This is essentially the “rational-relation” standard followed by the Ninth and Tenth Circuits.
EXCESSIVE FINES: In a “matter of first impression,” the Eleventh Circuit joined the Fourth, Eighth, and Ninth Circuits in holding that an FCA monetary award is a “fine” for the purposes of the Eighth Amendment Excessive Fines clause, even in cases where the government has not intervened. Yates v. Pinellas Hematology & Oncology, P.A., 21 F.4th 1288 (11th Cir. 2021).
PUBLIC DISCLOSURE BAR: In United States ex rel. Foreman v. AECOM, 19 F.4th 85, 125 (2d Cir. 2021), the Second Circuit for the first time weighed in on the issue whether disclosures to government officials constitute “public disclosures” for purposes of the public disclosure bar. Following the reasoning of most other federal appellate courts to have addressed the issue, the Second Circuit held that disclosures to government officials do not constitute public disclosures for purposes of the public disclosure bar.
In United States ex rel. Schweizer v. Canon, Inc., 9 F.4th 269 (5th Cir. 2021), the Fifth Circuit also addressed the public disclosure bar. Specifically, the court held that an earlier, settled FCA action against a defendant constituted a public disclosure sufficient to bar a later action against a defendant that acquired the settling company. Notably, the government filed a statement of interest in the district court in opposition to the successor/defendant’s interpretation of the “government action bar,” distinct from the public disclosure bar, arguing that relevant section (3730(e)(3)) “only applies when the United States ‘is’ a party in a live civil suit in which a relator’s allegations ‘are’ the subject of the litigation. It does not apply when the United States was a party in a case, like [the earlier action], that has been settled, dismissed, or tried to judgment and where new allegations by a relator, even the same one, are made against a different defendant and are not the subject of any ongoing proceeding in which the government is a party.”
SCIENTER: In United States v. Supervalu Inc., 9 F.4th 455 (7th Cir. 2021), the Seventh Circuit considered the “novel question,” whether a defendant who acted under an incorrect, but objectively reasonable, interpretation of a relevant statute or regulation acted with the “reckless disregard,” required to satisfy the FCA’s scienter requirement. The Seventh Circuit joined four other circuits to have addressed the issue (the Third, Eighth, Ninth, and D.C. Circuits) in holding that the Supreme Court’s decision in Safeco Insurance Company of America v. Burr, 551 U.S. 47, regarding the scienter requirement under the Fair Credit Reporting Act, applies with equal force to the FCA’s scienter provision. Accordingly, the Seventh Circuit held, a district court must inquire “whether the defendant has a permissible interpretation of the relevant provision and whether authoritative guidance nevertheless warned it away from that reading.” In a dissenting opinion, Circuit Judge Hamilton argued that the majority created “a safe harbor for deliberate or reckless fraudsters whose lawyers can concoct a post hoc legal rationale that can pass a laugh test.”
RETROACTIVITY: In United States ex rel. Int’l Bhd. of Elec. Workers Loc. Union No. 98 v. Farfield Co., 5 F.4th 315, 323 (3d Cir. 2021), the Third Circuit retroactively applied FCA amendments enacted in 2009 (as part of the Fraud Enforcement and Recovery Act of 2009 (FERA)) to conduct that predated the effective date of the amendments. FERA included a retroactivity provision which applied to “all claims under the False Claims Act” pending on or after June 7, 2008, but there is a circuit split regarding the meaning of a “claim” under that provision. In this case, the Third Circuit joined the Sixth and Seventh Circuits in holding that a “claim” refers to “cases or lawsuits,” as opposed to the underlying claim for payment (“Congress’s 2009 amendments to 31 U.S.C. § 3729(a)(1)(B) apply retroactively to cases pending on or after June 7, 2008, no matter when the underlying conduct occurred”). This threshold issue of retroactivity was outcome determinative because it was undisputed that the defendant would not have met the stricter intent requirement under the FCA pre-FERA amendments (FERA eliminated a requirement that a defendant “specifically intend” that the misconduct caused the government to pay).
CAUSATION: In United States ex rel. Cimino v. Int’l Bus. Machines Corp., 3 F.4th 412, 417 (D.C. Cir. 2021), the D.C. Circuit “clarified” that “but-for causation is necessary to establish a fraudulent inducement claim under the FCA.” Because “the FCA does not make actionable every misrepresentation to the government,” the relator had to prove that the alleged fraud “in fact caused the government to enter into a contract.”
RETALIATION: In United States ex rel. Felten v. William Beaumont Hosp., 993 F.3d 428, 430 (6th Cir. 2021), the district court certified for interlocutory appeal the question whether the FCA’s anti-retaliation provision protects a relator from a defendant’s retaliation after the relator’s termination. Deciding an issue of first impression in the circuit, the Sixth Circuit held that the FCA’s anti-retaliation provision only applies to retaliatory actions taken during the course of a plaintiff’s employment. As noted immediately below, Congress is considering FCA amendments (S.2428) that would extend relief from post-employment retaliatory actions to former employees.
Finally, CONGRESS was active in 2021 as well. On July 22, 2021, a bipartisan group of senators led by Senator Chuck Grassley, introduced S.2428, the False Claims Amendments Act of 2021 (117th Congress), in an attempt to “beef up” the Act and help the government continue to combat fraud. See Senators Introduce Bipartisan Legislation To Fight Government Waste, Fraud (July 26, 2021). In relevant part, the amendments as introduced would: (i) clarify current law regarding the “materiality” requirement by providing that the “decision of the Government to forego a refund or to pay a claim despite actual knowledge of fraud or falsity shall not be considered dispositive if other reasons exist for the decision of the Government with respect to such refund or payment;” (ii) require the “requesting party” to reimburse the government for costs associated with the discovery process, “unless the party can demonstrate that the information sought is relevant, proportionate to the needs of the case, and not unduly burdensome on the Government;” (iii) give qui tam relators the “opportunity to show that the reasons are fraudulent, arbitrary and capricious, or contrary to law,” when the government moves to dismiss a qui tam action; and (iv) extend relief from post-employment retaliatory actions to former employees. A revised (and weaker) version of the bill was placed on the Senate Legislative Calendar on November 16, 2021.
CONCLUSION (OR IS THIS JUST A PRELUDE?)
Despite the global pandemic, the government and private qui tam relators did not relent in their initiation and pursuit of FCA cases in FY21. Combined, the DOJ and private individuals opened 801 new matters – an average of more than 2 new matters per day. As the federal government’s primary weapon for combatting fraud and abuse in federal programs, with substantial monetary penalties and treble damages provisions, and with considerable monetary incentives for private individuals to expose and report fraud, we fully expect to see a great deal of FCA litigation and enforcement activity in FY22 and beyond.
We also have a relatively new justice department under Merrick Garland (confirmed in FY21), an imminent new appointment to the Supreme Court (to replace Justice Breyer), approximately 45 Biden-appointed federal judges confirmed and another 40 or so nominated and awaiting confirmation as of the date of this publication, and pending legislation in Congress proposing amendments to strengthen the FCA. All sources and signs point to an interesting year ahead for the FCA in all three branches of government.