The FCA continues to be the federal government’s primary civil enforcement tool for investigating allegations that healthcare providers or government contractors defrauded the federal government. In the coming weeks, we continue to take a closer look at recent legal developments involving the FCA. This week, we examine developments regarding penalties and damages under the FCA, which make the FCA such a potent enforcement tool for the government.
For providers facing potential FCA liability, the potential scope of exposure will continue to expand, whether driven by a nearly doubled increase in the penalties recoverable under the FCA, large negotiated settlements backed-up by statistical extrapolation of false claims, or the significant increase in relator-driven litigation in government-declined cases. Questions regarding the manner in which FCA damages should be calculated also are likely to persist.
Substantial Penalty Increase
Effective August 1, 2016, penalties under the FCA nearly doubled. Penalties for each false claim in the range of $5,500 to $11,000 per claim, were remarkably increased to a minimum of $10,781 up to $21,563 per claim. The increase applies to penalties imposed pursuant to the FCA for conduct occurring after November 1, 2016. When applying penalties in FCA cases, courts have the discretion to apply penalties within the penalty range provided, but do not have the discretion to impose penalties below or above the range. Ordinarily, penalties are assigned to each false claim submission to the government, potentially generating enormous liability well in excess of actual damages being asserted by the government or a relator.
Civil penalties were last adjusted under the Inflation Adjustment Act of 1996, and were increased by the Bipartisan Budget Act of 2015 (Budget Act) passed in November 2015, designed to “catch up” penalties and adjust for inflation. The Budget Act also requires federal agencies to make annual adjustments to penalties in future years, and removed a provision from the earlier Inflation Adjustment Act that limited any increase in monetary penalties to 10%. Because the Budget Act also applied the penalty increase to those imposed under the Social Security Act, CMPs also have been increased.
Given that the previous maximum FCA penalty ($11,000) is now the approximate floor ($10,781), the increase is expected to have a significant impact on settlement and litigation strategy for FCA defendants. Furthermore, the dramatic increase – combined with subsequent annual increases – will continue to fuel debates about FCA defendants’ rights under the Eighth Amendment’s Excessive Fines Clause where cumulative penalties resulting from the number of claims substantially outweigh the government’s demonstrated actual damages.
The method of calculating damages under the FCA continues to be an issue taken up by courts; whether cases involving actual damages directly attributable to the alleged falsity or whether cases involving claims “tainted” by falsity but which may have no correlation to the value of the service or benefit ultimately provided to the government.
Limiting the calculation of damages to the amount directly resulting from the conduct in violation of the FCA was addressed by the Sixth Circuit in U.S. ex rel. Wall v. Circle C. Construction, LLC, 813 F.3d 616 (6th Cir. 2016). In that case, Circle C entered into a contract to construct warehouses at a U.S. Army base. Pursuant to the federal Davis-Bacon Act, Circle C (and its subcontractor) was required to pay its electrical workers a specific wage, and submit a certified payroll. Circle C failed to properly monitor its electrical subcontractor’s compliance, and despite its certifications, the subcontractor failed to pay the wages required by the Davis-Bacon Act by $9,916. As a result, the government claimed that the entire electrical work on the project was tainted by the payroll compliance failure, and asserted damages equal to all payments for the electrical work under the contract in the amount of $259,298.18, trebled for a total of $777,894.54, minus $15,000 already repaid by the subcontractor.
The Sixth Circuit rejected the government’s theory, explaining that “actual damages by definition are damages grounded in reality” and are determined by the difference in the value between what the government bargained for and what it received. The Sixth Circuit reasoned that the government bargained for two things: the buildings to be built and compliance with the Davis-Bacon Act. The buildings were built and in use, but the government was shorted the payment of compliant wages that should have been paid to electrical workers in the amount of $9,916, which the Sixth Circuit held was the amount of actual damages. The Sixth Circuit rejected the government’s “tainted claims” argument because the shortage in wage payment did not lead to payment for worthless services or goods, noting that the buildings were in use and the lights were on. Nor, as in other cases, was there an “unalterable moral taint” making the goods worthless because no payment of money could compensate the government as a result of the taint. Instead, the Sixth Circuit held that payment of the $9,916 provided an adequate remedy.
The Sixth Circuit’s decision in Circle C is similar to its prior consideration of FCA damages in United States v. United Techs., 782 F.3d 718 (6th Cir. 2015), which was another military contract case, where the contractor allegedly made false statements to the government when competing with others to be awarded a contract to build engines for fighter jets. In reviewing a substantial damages award to the government by the district court, the Sixth Circuit found that despite the contractor’s misstatements, the government had to show a loss or impact – and remanded for further analysis and consideration of fair market value. The Sixth Circuit stated that when the government gets what it paid for, “it has suffered no actual damages” notwithstanding the fraudulent misstatements. Consequently, the Sixth Circuit rejected the damages award and remanded the case for a determination of whether the government suffered any actual damages by considering evidence of fair market value.
The Sixth Circuit’s ruling in Circle C is also consistent with the Seventh Circuit decision in U.S. v. Anchor Mortgage Corp., 711 F.3d 745 (7th Cir. 2013), which limited the government’s damages recoverable to the “net” damages – providing mitigation equal to the value or benefit the government actually received to calculate damages rather than including the entire amount the government paid. Anchor Mortgage typically is cited as authority for the trebling of damages only after determining the net damages, for a “net trebling,” by accounting for any credits, payments or value received prior to the trebling required by the FCA. When determining what damages to treble, the court in Anchor Mortgage indicated that “[B]asing damages on net loss is the norm in civil litigation” and “[M]itigation of damages is almost universal.” Id. at 749.
The government’s theory of damages in FCA cases involving “tainted claims” continues to prevail, however, in matters typically involving healthcare providers. In FCA cases involving tainted claims, the government has argued that claims are tainted and should be included in damages calculations because had the government known of the taint (conduct or misrepresentations), it would not have paid the claims. Many courts have agreed and held that because of the taint, the government did not receive the value it bargained for as a result of the false claims, and would not have paid the claims had it known. If so, the tainted claims are totaled and used to calculate the resulting damages to be trebled and to which the FCA penalty attaches.
The inconsistency in the damages theories may be best reflected by comparing the Seventh Circuit’s ruling in Anchor Mortgage with its earlier decision in U.S. v. Rogan, 517 F.3d 449 (7th Cir. 2008). In Rogan, the Seventh Circuit agreed that government’s FCA damages calculations resulting from violations of the AKS and Stark consisted of the total amount paid because had the government known about the asserted conduct, it would not have paid the claims at all. Under the government’s theory of damages like that asserted in Rogan, the ensuing damages to the government need not stem from any unnecessary, inadequate or worthless service. For example, in Rogan, where there was FCA liability as a result of the payment of kickbacks, the court stated that “[n]or do we think it important that most of the patients for which claims were submitted received some medical care – perhaps all the care reflected in the claim forms… [W]hen the conditions are not satisfied, nothing is due.” Id. at 453. Rather, because of the defendant’s conduct, the government could not have received the value it had paid to the defendant, and asserted damages as the entirety of the claims paid.
Recent cases continue this theory of recovery under the FCA, and FCA cases and settlements reflect this position as the government’s predominate view. For example, DOJ announced that it had settled its $237 million dollar judgment against Tuomey Healthcare System resulting from a jury trial, in exchange for the payment of $72.4 million by the hospital. The case involved what DOJ referred to as “sweetheart deals” between the hospitals and physicians, and involved more than 21,000 false claims for which penalties were applied. There was no dispute that the services represented by the claims were otherwise properly provided.