Upon enactment, the “Bipartisan Budget Act of 2015,” just passed by Congress, will require federal agencies to impose significant increases in civil monetary penalties, including the statutory penalties mandated by the False Claims Act (“FCA”), the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), and the Program Fraud Civil Remedies Act (“PFCRA”). Drafted in the innocentsounding verbiage of inflation adjustments tied to the Consumer Price Index (“CPI”), the amendment’s potential impact on civil fraud defendants is substantial.
The Penalties Adjustment Section of the Budget Bill
A section of the Bipartisan Budget Act of 2015 entitled the “Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015” requires federal agencies to update the levels of their civil monetary penalties to account for inflation. See H.R. 1314, 114th Cong. § 701 (as passed by the House and Senate, Oct. 30, 2015) (amending the Federal Civil Penalties Inflation Adjustment Act of 1990, 28 U.S.C. § 2461 note). The “catch up adjustment” – which applies a cost-of-living adjustment percentage derived from the amount by which the CPI in October 2015 exceeds the CPI in October of the year in which the penalty amount was established or adjusted – would be implemented through “interim final rulemaking” that must take effect no later than August 1, 2016. Agencies are allowed to exercise discretion to increase the initial catch up penalty by less than the mandated amount, but must do so through a cumbersome process – involving economic and social cost analyses and OMB Director approval – that seems unlikely to be invoked.
Moreover, after the initial adjustment, the Bipartisan Budget Act of 2015 provides for further, automatic annual adjustments without any agency assessment of the need for an increase. This annual adjustment provision raises the potential for an Administrative Procedure Act (“APA”) challenge, and like the underlying amendment itself, seems ill-considered (at least as applied to civil fraud statutes and especially the FCA).
Constitutional and Other Concerns
In 1986, with the enactment of watershed amendments, FCA statutory penalties increased from $2,000 to between $5,000 and $10,000. In 1999, FCA penalties were elevated to their present level of between $5,500 and $11,000. Even at their current levels, FCA penalty amounts can be and often are grossly disproportionate to the actual losses suffered by the government from the alleged FCA violation.
Since 1986, FCA recoveries have increased astronomically, as has the potential for recovering draconian mandatory per-claim penalties. In cases where there are large numbers of relatively small monetary claims, defendants often fear the FCA’s penalties provision because courts must assess FCA penalties on a per-claim basis, regardless of the amount of actual, proven damages, 31 U.S.C. § 3729(a), unless the resulting total penalty is deemed unconstitutional under an Eighth Amendment Excessive Fines Clause analysis. See FraudMail Alert Nos. 13-12-20; 14-10-07. The Justice Department itself has voluntarily decreased or limited the penalties sought in an attempt to avoid constitutional challenge. See, e.g., United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., 741 F.3d 390 (4th Cir. 2013), cert. denied, 135 S. Ct. 83 (2014); United States v. Bickel, No. 02-3144, 2006 WL 1120439 (C.D. Ill. Feb. 22, 2006); United States v. Mackby, 221 F. Supp. 2d 1106 (N.D. Cal. 2002), aff’d, 68 F. App’x 776 (9th Cir. 2003). Enactment of the Bipartisan Budget Act of 2015 will only exacerbate constitutional concerns in penalties-heavy FCA cases and increase the government’s and relators’ settlement leverage (as the potential for ruinous outcomes from large penalties drives settlements based on business considerations having nothing to do with the merits of the underlying FCA allegations).
The Bipartisan Budget Act of 2015 raises other troubling questions as well, including whether it is wise to tether civil fraud penalties adjustments to the CPI, whether the Justice Department’s ad hoc policy of exercising discretion to forego FCA penalties in order to avoid violating the Eighth Amendment is the best way to serve the public interest, and whether raising such penalties without notice and comment under the APA is appropriate.