On Wednesday, the Justice Department took the first step to implementing a major increase in monetary penalties for violations of the civil False Claims Act (“FCA”) and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). Via an Interim Final Rule, DOJ announced that the FCA penalty range will increase to $10,781–$21,563 (from the current $5,500–$11,000 range) and FIRREA penalties will increase to $1,893,610 (per violation) and up to $9,468,050 (for continuing violations). As we previously have warned, these penalty increases present new Excessive Fines concerns in FCA and FIRREA cases and may unfairly enhance the enormous settlement leverage the Justice Department already has against many defendants in the civil fraud enforcement arena. See FraudMail Alert No. 15-10-30.
Background of FCA and FIRREA Penalty Adjustments
The last time FCA and FIRREA civil penalties were increased was in 1999, pursuant to the Civil Penalties Inflation Adjustment Act of 1990, as amended by the Debt Collection Improvement Act of 1996. Pub. L. No. 104-134, § 31001(s), 110 Stat. 1321, 1321-373 (1996). At that time, both FCA and FIRREA penalties increased by a modest 10% (from the penalty ranges established in the 1986 FCA amendments and at the time of FIRREA’s enactment in 1989). 28 C.F.R. §§ 85.3(a)(6)–(7), (9). Indeed, in the 1996 Act, Congress specified that the initial penalty adjustments could not be more than 10% and that future increases based on inflation could be made only once every four years thereafter.
The adjustments announced on Wednesday are being made pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, part of the Bipartisan Budget Act of 2015. Pub. L. No. 114-74, § 701, 129 Stat. 584, 599 (2015). And these current increases are just the beginning as the Improvements Act also provides a new statutory formula for calculating inflation adjustments on an annual basis going forward, so we should expect FCA and FIRREA penalties to increase again in January 2017, and annually thereafter. See Shaun Donovan, Director, Office of Management and Budget, Memorandum to the Heads of Executive Departments and Agencies, “Implementation of the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015,” at 4 (Feb. 24, 2016) (“Donovan Memo”).
The New FCA and FIRREA Penalties
As announced in the Interim Final Rule, the new penalty range for FCA violations will increase to $10,781–$21,563. Civil Monetary Penalties Inflation Adjustment, 81 Fed. Reg. 42,491, 42,494 (June 30, 2016). Penalties for violations of the Program Fraud Civil Remedies Act likewise will increase from $5,500 to $10,781. The new penalties for FIRREA violations will increase (from $1.1 million for a single violation or between $1.1 million and $5.5 million for a continuing violation) to $1,893,610 for a single violation and between $1,893,610 and $9,468,050 for a continuing violation. Id. These increased penalty amounts are applicable to violations occurring after November 2, 2015, and that are assessed on or after August 1, 2016.
While the Justice Department’s Interim Final Rule solicits public comments over the next 60 days, the Rule is final rather than proposed, and we do not expect any material revisions to the new penalties as a result of any comments. And although the Justice Department had the authority to increase the civil penalties by less than the statutory maximum if it determined that the maximum increase would “have a negative economic impact” or if “the social costs would outweigh the benefits,” Donovan Memo at 3, the Justice Department announced (without explanation) that it was “not invoking that authority in this rule.” 81 Fed. Reg. at 42,493.
Cause for Concern
The full impact of these penalty increases remains to be seen, but there is cause for concern, as the risk of abuse and potential for constitutional violations are great. In FCA and FIRREA cases, the mere threat of penalties—particularly in healthcare, mortgage, and other cases where thousands of potential “false claims” often are at issue—already tips the scales in favor of the Justice Department in terms of settlement leverage against companies facing the prospect of such debilitating fines. That advantage is exacerbated by these latest increases. It will be incumbent upon the Justice Department to take appropriate steps to prevent and police abuse of that leverage in cases going forward.
And, apart from the potential for abuse, these enormous penalty increases—particularly where they result in penalties that are grossly disproportionate to any actual, proven government loss—make it far more likely that they will face constitutional challenge under the Eighth Amendment’s Excessive Fines Clause. Indeed, Excessive Fines concerns should lead to more instances where the Justice Department voluntarily decreases or limits penalties in an attempt to avoid constitutional challenge, as has occurred in past FCA cases. See FraudMail Alert No. 15-10-30; FraudMail Alert No. 13-12-20.
