In a surprising move that could dramatically impact government enforcement actions against life science companies, the health care industry, and government contractors, this week a federal board increased federal False Claims Act penalties by more than 100 percent. 

Overview

On May 2, 2016, the Railroad Retirement Board (a relatively obscure agency with occasional False Claims Act cases involving fraudulent benefit claims) announced False Claims Act penalties will more than double under a federal regulation released as part of an interim final rule. The agency is the first to adjust False Claims Act penalties for inflation in accordance with the Bipartisan Budget Act of 2015, passed by Congress in October 2015. Pursuant to the Budget Act, all federal agencies must implement the adjustments by August 1, 2016.

Currently, the False Claims Act provides for treble damages, plus penalties of $5,500 to $11,000 for each false claim filed. Under the Board’s regulations, penalties for false claims actions that fall within the jurisdiction of the Railroad Retirement Board will be increased to $10,781 to $21,563 beginning this August. The calculations used to determine the increase may be the same as those adopted by the Department of Justice and other federal agencies primarily responsible for enforcement of the False Claims Act.

The increase far exceeds many earlier estimates. Early predictions indicated that the new maximum penalties would be roughly $15,000 to $16,000 based on inflation from 1996, when the penalties were last adjusted. Instead, the Board calculated the adjustment based on inflation from 1986, resulting in an increase of more than double the previous penalty amounts.

Background

The Board’s increase to the False Claims Act penalties were mandated by a section of the 2015 Budget Act, titled the “Federal Civil Penalty Adjustment Act Improvements Acts.” An initial “catch-up” adjustment must be implemented by August 1, 2016, and annual adjustments also will be made by January 15th of each subsequent year.

The last time that False Claims Act penalties were adjusted was 1996, pursuant to the Debt Collection Improvement Act of 1996, which imposed a 10 percent cap on the adjustment. While some thought that the current adjustment would be based on inflation since 1996, the Board disregarded the 1996 adjustment. According to the Board, the Budget Act eliminated the relevant sections of the Debt Collection Act and requires that the penalties should be adjusted based on the rise of the consumer price index since 1986.

The Budget Act gives agencies discretion to implement a lower penalty increase if the full penalty increase would have a significant economic impact on a substantial number of small entities. The Board, however, declined to analyze the economic impact, determining that its regulations would only impact individuals. The DOJ and other agencies, on the other hand, will likely need to conduct an economic impact analysis as part of their rulemaking, and, thus, may adopt a lower penalty increase.

Impact on Life Science Industry, Health Care Industry, and Government Contractors

Any increase in False Claims Act penalties will have substantial impact on life science companies, the health care industry, and government contractors facing False Claims Act investigations and litigation. Those subject to False Claims Act scrutiny may feel added pressure to settle or litigate False Claims Act claims, should already onerous penalties increase significantly. On the other hand, the increased penalties may result in more successful challenges to False Claims Act penalties under the Eighth Amendment, which prohibits excessive fines.

Should the DOJ and other agencies follow the lead of the Railroad Retirement Board and issue regulations doubling the civil penalties under the False Claims Act, the life science industry, health care industry, and government contractors would be well served to vigorously challenge the agencies’ rulemakings.