The US Department of Justice (DOJ) yesterday, June 30, 2016, issued an interim rule increasing penalties under the False Claims Act, 31 U.S.C. §3729 et seq. (FCA) from the current range of $5,500 to $11,000 per false claim, to a new range of $10,781 to $21,562. The interim rule takes effect August 1, 2016, and applies to false claims made after November 2, 2015. The increased penalty range has significant implications for FCA litigation. In many cases the gross disparity between the government’s actual damages and the associated civil penalties will raise questions of constitutionality under the Excessive Fines Clause of the Eighth Amendment; in all cases the markedly increased penalty range will complicate settlement negotiations.

FCA penalties were last raised in 1996, pursuant to the Omnibus Consolidated Rescissions and Appropriations Act of 1996, Pub. L. 104–134. Section 31001 of that Act, also known as the Debt Collection Improvement Act of 1996, amended the Federal Civil Monetary Penalties Inflation Adjustment Act of 1990, Pub. L. 101–410, “to provide for more effective tools for government wide collection of delinquent debt.”

In November 2015 Congress passed the Bipartisan Budget Act of 2015, Public Law 114–74 (Nov. 2, 2015). Section 701 of that Act, the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, required all federal agencies to amend their regulations to provide for adjustments in the minimum and maximum amounts of civil monetary penalties under their purview. The concept of the mandatory increase was that penalties needed to “catch up” to adjust for inflation. Going forward, the Bipartisan Budget Act requires annual adjustments to penalty amounts, beginning on January 15, 2017, based on a formula tied to the Consumer Price Index for all Urban Consumers (CPI–U). The Office of Management and Budget will issue guidance on the annual adjustments by December 15, 2016.

Comments on the interim rule must be submitted on or before August 29, 2016. See 81 Fed. Reg. 42492 (June 30, 2016).

Penalties under the FCA are mandatory for each false claim, although the court has discretion to award any amount within the statutory range. 31 U.S.C. §3729(a). The FCA is “essentially punitive in nature,” as the Supreme Court held in Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 784 (2000) and reiterated in the landmark FCA decision last month, Universal Health Services, Inc., v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016). However, in many cases going forward the new and draconian penalty range will generate challenges that the penalty to damages ratio exceeds the 4:1 threshold for potential violation of the Eighth Amendment that Vermont adopted from State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 425, (2003).

Historically, contractors have been unsuccessful in constitutional challenges to penalties assessed in FCA cases that are disproportionate to the government's actual damages. The Fourth Circuit relied on Vermont's 4:1 ratio in U.S. ex rel. Drakeford v. Tuomey, 792 F.3d 364 (4th Cir. 2015). In that case, the court upheld as constitutional the ratio of punitive damages to compensatory damages at approximately 3.6:1. Previously, in U.S. ex rel. Bunk v. Gosselin World Wide Moving, N.V., 741 F.3d 390 (4th Cir. 2013), the Fourth Circuit upheld a massive FCA penalty—$24 million, for services worth $3.3 million—against an Eighth Amendment challenge. In both of those cases, however, the new penalty range might have changed the courts' rulings.

In addition to constitutional concerns, the prospect of enormous penalties is likely to significantly affect the DOJ’s position in settlement discussions, as well as contractors' assessments of potential litigation risks. Between the clarifications the Supreme Court made in Escobar concerning the judicial doctrine of implied certification and the related FCA elements of falsity, scienter and materiality, which bring much-needed additional certainty to FCA case law, and the new range of penalties, the landscape for FCA cases continues to evolve.