The False Claims Act is a frequent topic of discussion here at the Monitor, not least because the relator’s bar continues to introduce the FCA into new areas.  (To grasp this point, one need look no further than DOJ’s celebratory announcement late last year that it had recovered an “unprecedented” $3.1 billion from banks and other financial institutions under the False Claims Act.)   But, in addition to attempts to use the FCA to combat new industries or sectors, there is another, arguably more troubling, development afoot: relators and the United States are now arguing that they should be able to recover under the FCA without having to prove the falsity of each claim submitted for payment.  A decision by a federal district court last month in United States ex rel. Michaels v. Agape Senior Community, Inc. et al., C/A No. 0:12-3466-JFA, 2015 WL 3903675 (D.S.C.) highlights the immediacy of this issue.

In Agape, the relators alleged that the defendants orchestrated a widespread fraudulent scheme of submitting false claims for payment to federal healthcare programs for treatments that were not medically necessary.  Id. at *1.  The court characterized the number of claims at issue – somewhere between 53,000 and 61,000 claims – as “staggering.”  Id.  In addition, determining the falsity of each claim would require a highly fact intensive inquiry involving expert medical testimony after a thorough review of the medical records of each underlying patient, which the relators estimated could cost between $16 and $30 million dollars.   Id. at *1-*2. Given these facts, the relators asked the court to decide whether they would be able to prove liability and damages by using a statistical sampling method.  The proposed method would involve the careful examination of a specified percentage of randomly selected claims.  Id. at *1*2.  If it could be proven that a certain percentage of those claims were in fact fraudulent, then the relators would project that percentage on the total universe of claims submitted by the defendants to the Government.

Following briefing and argument, the court ruled it would not allow the relators to use statistical sampling, reasoning that the underlying evidence had not dissipated, and thus direct evidence of damages was possible.  Indeed, all of the patients’ medical charts remain intact and available for review by either party. Id. at *6 -*7 .  By contrast, the court acknowledged that there may be scenarios where statistical sampling is the only manner for a plaintiff to prove liability and damages, such as where packages were invoiced based on weight but subsequently had been unpacked, making it impossible to determine if their weight had been manipulated.  Id. at *7.   The court went on to list the salient cases to date that have addressed the use of statistical sampling to prove liability and damages in False Claims Act disputes.  Id. at *7 (collecting cases).  Suffice it to say that, as is common in our great common law system, there is significant disagreement amongst district and circuit courts about the use of statistical sampling in FCA cases.

After the court’s ruling, the parties subsequently entered into mediation and reached a tentative agreement to settle the case for $2.5 million; however, despite its prior declination to intervene, the United States objected to the settlement under 31 U.S.C. sec. 3730(b)(1), which on its face gives the Attorney General the right to prevent a settlement even in a case where the Government has declined to intervene.  Id. at *2.  The Government contended that the case was worth at least $25 million, yet declined to provide supporting calculations or documentation for its figure, arguing it is not a party to the case and is not required to respond to discovery requests.  Id. at *6.  (The government ultimately conceded that “statistical sampling of the entire universe of claims played a major part in its calculation of the value of the case.”  Id.)  The court reluctantly sustained the Government’s objection and refusal to substantiate its valuation of the case.  Id. at *4, *6.

However, recognizing that a final resolution of the issues regarding statistical sampling and the government’s objection would control the outcome of the case, the court certified two questions for interlocutory appeal to the Fourth Circuit: 1) whether the Government’s right to reject a settlement in a qui tam action to which it has not intervened is absolute; and 2)  whether plaintiffs can use statistical sampling to prove liability and damages.  Id. at *8-*9.

The troubling legal, practical, and policy implications of allowing the use of statistical sampling to prove liability, let alone damages, cannot be understated.  The FCA, with its threat of treble damages, statutory penalties, and potential debarment, is punitive in nature, and a significant verdict against a corporate defendant could prove an existential threat.  The notion that a plaintiff can obtain damages and penalties (and bar a company from doing business with the federal government) under the FCA without having to prove that the claims in questions are in fact false, is  frightening, not to mention offensive to the idea of due process.

While the interlocutory appeal works its way through the Fourth Circuit, it is worth noting that SCOTUS recently agreed to take up the issue of statistical sampling, albeit in the context of employment class actions.  In Tyson Foods, Inc. v. Bouaphakeo, Dkt. 14-1146, SCOTUS will decide whether differences among individual class members may be ignored and a class action certified under Federal Rule of Civil Procedure 23(b)(3), or a collective action certified under the Fair Labor Standards Act, where liability and damages will be determined with statistical techniques that presume all class members are identical to the average observed in a sample.  The outcome in Tyson Foods could help shape the development of the use of statistical sampling to prove liability and damages in FCA cases.

We will continue to follow these cases as they develop.  In the meantime, there is little question that statistical sampling is one of the critical issues in the False Claims Act realm, and one that companies doing business with the federal government should keep in mind.