$5 Billion! That's the approximate amount recovered by the federal government from settlements and judgments in cases filed under the federal False Claims Act, 31 U.S.C. §§ 3729-3733 (the "FCA" or the "Act"), in 2012.[1] More than 782 new FCA matters were filed in that year, and more than 640 of those were initiated by "whistleblowers" filing suit under the FCA's qui tam provisions[2]--which provide for generous rewards of up 30% of the total recovery for those who file FCA suits on the government's behalf.[3] "Record-breaking" FCA settlements in a variety of industries, including healthcare, financial industries, aerospace, and education, are virtually a daily occurrence, and courts continue to adopt theories of FCA liability that push it to the absolute outer bounds--if not far beyond--the original intent of what was once called "Lincoln's Law," meant to halt and punish traditional fraud against the government.

And not surprisingly (given our prediction at the end of 2012), this trend has continued in the first half of 2013. Legislation, especially at the state level, has continued at a frantic pace, with states enacting their own "mini-FCAs" to meet federal government conditions on their receipt of certain federal funds and to enhance their own ability to prosecute the ever-expanding universe of what investigators choose to characterize as "fraud against the government." FCA settlements and judgments pour in, with the largest recent recovery being a $664 million judgment against a defendant for allegedly misrepresenting in a price proposal how pricing to the government would be calculated.[4] And the trend in judicial decisions continues to favor the government and qui tam whistleblowers, expanding the theories and scope of what is actionable under the FCA.

As in years past, this mid-year alert first discusses legislative activity that occurred in connection with the federal FCA and states' "mini-FCAs" during the first half of 2013. Next, we discuss important FCA judgments and settlements that have occurred during the first half of this year. And finally, we discuss important case law developments that have occurred during the last six months. A collection of Gibson Dunn's recent publications on the FCA, including more in-depth discussions of the FCA's framework and operation along with practical guidance to help companies avoid or limit liability under the FCA, may be found on our Website.

I. Legislative Action in the First Six Months of 2013

  1. Federal Activity

Most of the FCA legislative activity in the first six months of 2013 occurred at the state level. However, there have been a number of substantial developments with respect to rules and regulations governing the health care industry that bear on potential FCA exposure. As noted in our 2012 Year-End False Claims Act Update, the health care industry has continued to be one of the primary targets for FCA litigation, with a record-breaking $3 billion in FCA settlements and judgments coming from that industry in 2012 alone.[5] Among the important developments over the first six months of 2013 are the following:

  • Updated Self-Disclosure Protocol – We previously reported on HHS OIG's solicitation of industry comment regarding its Self-Disclosure Protocol (SDP), which delineates steps a healthcare provider or company may take to self-report potential fraud, including that potentially actionable under the FCA, in exchange for the possibility of prosecutorial leniency.[6] On April 17, 2013, OIG released an Updated SDP, expressly superseding and replacing the previous Provider SDP.[7] The Updated SDP highlights three particular benefits of disclosing potential fraud: (1) a presumption against requiring integrity agreement obligations in exchange for a release of OIG's authority to exclude the disclosing party from federal health programs, as such obligations would likely be duplicative of existing compliance efforts that led to the disclosure; (2) suspension of the sixty-day period to return any identified overpayments, the retention of which could trigger FCA liability; and (3) lower multipliers of single damages when calculating civil monetary penalties, to be determined on a case-by-case basis.[8] Among other additions, the Updated SDP also requires a disclosing party to identify the specific civil, criminal, or administrative provision that is potentially violated by the disclosed conduct. Although this Updated SDP provides welcome benefits for those considering self-disclosure of potential fraud, it may not go far enough to make it easier to decide to disclose potential fraud. The threat of FCA actions still looms for conduct disclosed under this program, and the potential exposure to damages and penalties from both DOJ and OIG actions remains a substantial risk of self-disclosure.
  • Increased Whistleblower Rewards – In April 2013, CMS issued a proposed rule that would significantly increase the rewards available to whistleblowers providing information leading to recovery of improper Medicare payments and other administrative sanctions.[9] Under the new rule, the maximum reward CMS can pay for such information under its own Medicare Incentive Reward Program--which is separate from the FCA--would be increased from 10 percent of the amount recovered, currently capped at $1,000, to 15 percent of the recovery, capped at $9.9 million.[10] CMS believes that this increase "will provide additional incentives to individuals who otherwise would not have brought the information to the government's attention by filing a qui tam lawsuit."[11] Notably, the proposed rule leaves intact the provision that, under the Incentive Reward Program, "CMS does not reveal a participant's identity to any person, except as required by law."[12] This could cause a massive increase in those trying to take advantage of the Incentive Reward Programs.
  • No Action On PPACA – As discussed in the 2012 Year-End False Claims Act Update, CMS published a proposed rule on Medicare and Medicaid overpayments pursuant to the Patient Protection and Affordable Care Act (PPACA).[13] PPACA amended the Social Security Act (SSA) to require that individuals and entities report and return any Medicaid or Medicare overpayments within sixty days of identifying them or when any corresponding cost report is due.[14] CMS's rule largely mirrors the PPACA language, with the addition of a "lookback period" that requires reporting and repayments of any overpayment identified within ten years of when the overpayment was received.[15] Though the comment period of this CMS rule closed on April 16, 2012, CMS has yet to issue a final regulation. As before, the knowing retention of an overpayment continues to create a risk of FCA liability.
  1. State Activity

As mentioned, the bulk of FCA legislative activity during the last year has occurred at the state level. Indeed the 2005 Federal Deficit Reduction Act (DRA), 42 U.S.C. § 1396(h), included a financial incentive designed to prompt states to adopt false claims act provisions "at least as effective as" the federal FCA in combatting false or fraudulent Medicaid claims. The DRA allows states that enact such laws, as judged by HHS OIG, to collect an additional 10 percent of any federal Medicaid funds recovered through a state action. With new revisions under the PPACA, the Fraud Enforcement and Recovery Act of 2009, and the Dodd-Frank Wall Street Reform and Consumer Protection Act, OIG also provided a two-year grace period during which states with false claims acts that OIG previously approved could continue to receive the incentive. For two states, that grace period ended on March 31, 2013; for nine others it ends on August 31, 2013.[16] In our 2012 updates, we noted a flurry of activity around the expiration of the grace period for a number of states seeking to preserve the financial incentive to comply with the DRA. That trend has continued in 2013.

Four states and the District of Columbia recently enacted new false claims laws:

  • Texas: In June 2013, Texas enacted amendments to the Texas Medicaid Fraud Prevention Act (TMFPA) to bring the statute into compliance with the DRA.[17] Responding to OIG's concerns about the previous version of the statute,[18] the TMFPA amendments expand liability by broadening the definition of a reverse false claim and strengthening the Act's qui tam provisions.
  • Florida: In June 2013, Governor Rick Scott signed two bills designed to modernize the Florida False Claims Act by partially bringing it in line with the federal FCA.[19] The bills update the current law by, among other things, including state subdivisions and instrumentalities within the parameters of the law; vesting exclusive state prosecution authority and subpoena power to the Florida Department of Legal Affairs and the state's Department of Financial Services; and changing the statute of limitations to three years. Id. The OIG has indicated that the amendments do not appear to address OIG's previously-stated concerns about the effectiveness of the statute's qui tam provisions as compared to the federal FCA.[20]
  • Illinois: In 2012, Illinois amended its Illinois Whistleblower Reward and Protection Act by extending the statute of limitations to three years and updating its public disclosure provision.[21] HHS OIG recently approved the Illinois FCA as compliant with DRA requirements.[22]
  • Montana: In May 2013, Montana amended its False Claims Act to bring the law's qui tam and statute of limitations provisions closer in line with the federal FCA, among other changes.[23]
  • District of Columbia: The District of Columbia has passed the Medicaid Fraud Enforcement and Recovery Amendment Act of 2012,[24] which was intended to achieve DRA compliance by bringing its scope of liability and qui tam provisions closer to the federal FCA, among other changes.

There has been other activity at the state level as well. During the first half of 2013, a number of state lawmakers introduced bills to enact or expand false claims laws, which bills remain in various stages of the legislative process. These efforts include proposed amendments from four states whose laws OIG deemed not to meet the DRA requirements – Rhode Island (H.B. 5493), Colorado (S.B. 205), Michigan (H.B. 4010), and New Mexico (S.B. 153) – and five states in which new false claims laws have been proposed – Pennsylvania (H.B. 1493), South Carolina (S.B. 73), Mississippi (H.B. 1436), Alabama (S.B. 183), and Wyoming (S.F. 83). In previous updates we reported amendments by Georgia and Tennessee to bring their false claims laws in line with DRA incentive guidelines.[25] However, OIG has informed these states that their laws do not qualify for the incentive because they have a more limited scope of liability and less effective qui tam provisions than the federal FCA.[26] Tennessee is now considering legislation to address these issues,[27] and Georgia is expected to do the same before the August 31, 2013 expiration of its grace period.

We anticipate this slew of state-level FCA activity will continue during the second half of 2013. Additionally, we expect to see increased activity by state authorities and prosecutors taking advantage of these new laws and expanding their enforcement efforts in areas where public funds are used. In Massachusetts, for instance, state Attorney General Martha Coakley recently signaled the state's interest in bringing enforcement actions against for-profit schools whose students receive federal funds, comparing them to the mortgage lenders that have been subject to greatly increased scrutiny since the subprime crisis.[28] Such statements are a harbinger of action to come across the country, as local authorities attempt to increase their use of local false claims laws and also coordinate their efforts across states.

II. Noteworthy Settlements Announced During the First Half of 2013

The government's pace of recovery has not slowed during the first half of 2013 and a number of significant resolutions were announced during this period. Among others, DOJ announced a $500 million criminal and civil settlement ($350 million of which represented FCA damages) to resolve allegations involving manufacturing practices by a generic drug manufacturer. The first half of 2013 also saw the government's largest recovery to date in an FCA case taken to trial, as well as one of the largest payments by an individual to resolve FCA claims. We discuss these settlements and judgments by industry below.

  1. Health Care

As we have stated in prior alerts, health care matters have been the primary driver behind the government's massive FCA recoveries in recent years: since January 2009, the government has recovered more than $10.4 billion under the FCA in health care cases.[29] 2013 will not be an exception to that trend. In fiscal year 2012, DOJ opened 885 new civil health care fraud investigations and had 1,023 civil health care fraud matters pending at the end of the fiscal year.[30] Notable settlements and judgments in this area during the last six months include:

  • In January 2013, a Florida-based sleep diagnostic company agreed to pay $15.3 million to resolve allegations that it submitted false claims to federal healthcare programs by misrepresenting the credentials of its technicians. Federal programs require that technicians be licensed or certified by a state or national credentialing body for claims to be eligible for reimbursement; the government contends that the company knew that it was violating the law when it submitted claims for testing done by uncertified technicians. The company also agreed to enter into a Corporate Integrity Agreement. The relator received over $2.6 million from the settlement.[31]
  • In January 2013, a major New Jersey hospital system agreed to pay $12.6 million to resolve allegations that it had violated the FCA by billing Medicare and Medicaid for services resulting from tainted referrals. The allegations stemmed from a qui tam suit that accused the hospital of making improper payments to physicians in return for patient referrals and which was brought by a physician whom the hospital allegedly attempted to recruit for that purpose.[32]
  • In February 2013, a Florida physician agreed to pay $26.1 million to resolve allegations that he violated the FCA by billing Medicare for medically unnecessary services and by making claims tainted by the receipt of illegal kickbacks from a pathology laboratory. The physician also will be excluded from participating in federal healthcare programs. A whistleblower, who formerly worked at the pathology lab in question, initiated the lawsuit and will receive more than $4 million of the settlement amount. According to DOJ, this settlement is one of the largest ever with an individual in the history of the FCA.[33]
  • In March 2013, a New Jersey-based pharmaceutical company pleaded guilty to criminal charges and resolved civil allegations that it unlawfully marketed and promoted a prescription drug for uses not approved by the FDA (off-label promotion). The total settlement was $45 million, of which $22.5 represented civil damages. The company also agreed to enter into a Corporate Integrity Agreement.[34] As a condition of settlement, the company dismissed a declaratory judgment suit it had filed against the government, in which it argued that the government's restrictions on off-label promotion violated the First Amendment.[35] The whistleblowers will receive $4.4 million of the settlement.[36]
  • In March 2013, an Arizona hospice management company agreed to pay $12 million to resolve allegations that it violated the FCA by over-billing Medicare and charging for patients who were ineligible to receive benefits. The company also agreed to enter into a Corporate Integrity Agreement. The relator who filed the underlying qui tam action will receive $1.8 million as her share.[37]
  • In April 2013, the company that operates the largest healthcare system in Utah agreed to pay $25.5 million to settle claims that it violated the FCA by engaging in improper financial relationships with referring physicians. The company had self-disclosed these alleged issues to the government.[38]
  • In April 2013, a California-based biotechnology company agreed to pay $24.9 million to resolve allegations that it violated the FCA by paying kickbacks to long-term care pharmacy providers. The government accused the company of offering performance-based rebates tied to market share or volume thresholds in exchange for switching Medicare and Medicaid beneficiaries from a competitor drug. The government also alleged that the company encouraged consultant pharmacists and nursing home staff to administer its drug to patients for whom the drug was not indicated.[39]
  • In May 2013, a California-based medical care company agreed to pay $14.1 million to settle claims that it provided improper kickbacks and payments in exchange for physician referrals. The company also agreed to enter into a Corporate Integrity Agreement. The whistleblowers in the case will collectively receive over $2.8 million from the settlement fund.[40]
  • In May 2013, a jury in the Eastern District of North Carolina returned a $39 million verdict against a South Carolina hospital for allegedly defrauding Medicare in violation of the FCA. The government had argued that the hospital entered into contracts that overpaid physicians for their services, and submitted claims to Medicare for payment based on improper patient referrals. The finding of an FCA violation entitles the United States to seek treble damages on the verdict and statutory penalties.[41] This jury verdict follows the second trial of these issues. After the first trial, the jury found that the physician contracts and referrals violated the Stark Law, but not the FCA. The trial judge dismissed the verdict, however, and ordered a new trial on the FCA claims. Curiously, the court then ordered the hospital to pay over $44 million in common law damages. The Fourth Circuit vacated that judgment on the basis that it violated the hospital's Seventh Amendment right to a jury trial, and ordered a new trial.
  • In May 2013, a U.S. subsidiary of an Indian generic pharmaceutical manufacturer agreed to plead guilty and pay a total of $500 million to settle allegations that the company made false statements to the FDA regarding the quality of its drugs and failed to comply with current good manufacturing practices. Of the $500 million, $350 million represented civil damages under the FCA. The company had previously consented to entry of a permanent injunction imposing extensive compliance obligations. The settlement stemmed from a qui tam action initiated by a former executive of the company, who received $48.6 million from the federal share of the settlement amount. According to DOJ, this was the nation's largest criminal and civil resolution with a generic pharmaceutical company.[42]
  • In May 2013, a New Jersey-based medical products manufacturer entered into a Non-Prosecution Agreement and agreed to pay $48.26 million to resolve allegations that the company had knowingly caused false claims to be submitted to Medicare by providing illegal remuneration to induce customers and physicians to use its products to treat prostate cancer. A former manager at the company initiated the suit under the qui tam provisions of the FCA, and received approximately $10 million as her share of the civil settlement.[43]
  • In May 2013, a Texas-based provider of dialysis services agreed to pay $7.3 million to resolve allegations that it had billed for phantom services in violation of the FCA by charging Medicare for more of a dialysis drug than it actually administered. The relator who initiated the underlying qui tam action received over $1.3 million of the settlement.[44]
  • In May 2013, a pharmaceutical company pleaded guilty to a felony charge and agreed to pay $33.5 million, of which $15 million was allocated to settle FCA claims, arising from its alleged off-label promotion of a prescription drug and violations of the Anti-Kickback Statute. The qui tam whistleblower received $2.5 million of the federal recovery.[45]
  • In April 2013, an operator of nursing, rehabilitative care, home health, hospice, assisted living, and urgent care services announced that it had reached a tentative agreement with the DOJ to pay $48 million to settle allegations that it had overbilled federal health programs in California.[46] The company indicated that the settlement payment would be made in the second or third quarter of 2013.
  1. Procurement and Defense

Notable 2013 settlements and judgments in the most traditional form of FCA cases, relating to the government's procurement of goods, include:

  • In January 2013, a company and its president paid $5 million to resolve allegations that they provided unqualified linguists to the Department of Defense (DOD) for work in war zones. Among other things, the company was accused of having provided linguists with inadequate or no proficiency who were unable to meet the tasks for which they were needed, billing the government for services which were not provided, and falsely certifying its compliance with contractual testing requirements. The claims stemmed from a qui tam lawsuit filed by two of the company's former employees, who together received $925,000 from the settlement fund.[47]
  • In March 2013, a Department of Energy contractor agreed to enter into a Non-Prosecution Agreement and pay a total of $18.5 million, of which $16.55 million represented civil damages under the FCA, to resolve allegations of time-card fraud during its operation of a mixed radioactive and hazardous waste site over a nine-year period.[48] The civil allegations were initiated by a qui tam suit filed by a former employee, but as one of nine individuals to plead guilty to criminal charges related to the scheme, that employee was prohibited from sharing in the government's recovery.[49]
  • In March 2013, a New York-based corporation agreed to pay $5.65 million to resolve claims that it violated the FCA by overcharging the U.S. General Services Administration (GSA). The allegations were related to the corporation's performance under a contract to provide the federal government with laboratory research products through the GSA's Multiple Award Schedule (MAS) program, which sets certain standards for contractor performance. The government accused the corporation of failing to meet its contractual obligation to provide GSA with accurate pricing and sales information, and of making false statements to the government regarding the same. The qui tam relator, a former company sales representative, received $904,000 from the settlement fund.[50]
  • In March 2013, a company that resells information technology, equipment, services, office supplies, and related products agreed to pay $5.66 million to resolve allegations that it had defrauded the GSA by submitting false claims in connection with a GSA contract. The company was accused of improperly charging government purchasers for shipping, selling to the U.S. products forbidden by the Trade Agreements Act, and underreporting sales to avoid paying certain GSA fees. The payment resolves a suit brought by a former sales representative of the company, who will receive more than $1.5 million as a relator.[51]
  • In June 2013, a Virginia-based provider of scientific, engineering, and technical services agreed to pay $11.75 million to resolve claims that over a ten-year period it overcharged the U.S. government to train first responders.[52] The government alleged that the company, which received a sub-grant from a federally-funded program, had falsely represented how much it would cost to train personnel to prevent and respond to terrorism threats involving explosive devices. The suit was initiated as a qui tam action by the company's former project manager for the training program at issue, whose share of the settlement was established at $1.88 million, which at 16% is very near the bottom of the 15-25% range provided by the statute.[53] As the Justice Department noted in its press release announcing the settlement, the claims resolved by this settlement were allegations only, and there was no determination or admission of liability on the part of the defendant.
  • In June 2013, the U.S. District Court for the Southern District of Ohio found a Connecticut-based provider of high-technology products and services to the global aerospace and building systems industries liable for over $473 million in damages and penalties, of which $364 million represented damages and penalties under the FCA, for allegedly misrepresenting how it calculated proposed prices for a contract to provide the Air Force with fighter aircraft engines for F-15 and F-16 aircraft. The government had alleged that the company failed to include in its price proposal historical discounts that it received from its suppliers, instead using outdated information that excluded those discounts.[54] In July 2013, the court also added $191 million in prejudgment interest on the common law claims, bringing the total amount of the judgment to $664,364,996.[55] The court's finding was the latest turn in the long saga of this case that began when the government first filed suit in 1999 and included a bench trial in 2004 and an appeal in 2010. The DOJ claims that this case represents the highest recovery obtained by the government in a case tried under the FCA.
  • In June 2013, a manufacturer of integrated systems and components for commercial, corporate, military, and marine aircraft agreed to pay $6.58 million to resolve allegations that it submitted false claims in connection with multiple DOD contracts. The allegations included failing to comply with contract specifications, failing to undertake proper quality control procedures, and falsely representing that the company had performed a complete inspection of certain parts that were supplied and that the parts conformed to all contract specifications. The suit was initiated as a qui tam action by a former employee of the company; his share of the settlement has not yet been determined.[56]
  1. Other

As we described before, and as noted above, the government and qui tam relators use the FCA to combat fraud in virtually every government program, including banking/financial services and education. Other notable settlements during the first half of 2013 include:

  • In January 2013, a Pittsburgh-based bank agreed to pay $7.1 million to resolve claims that it had violated the FCA by allegedly failing to exercise prudent lending standards when making loans under the purview of a Small Business Administration (SBA) program. The government alleged that the bank relied upon unaudited financial statements when issuing loans guaranteed by the SBA and failed to check whether the information contained in the financial statements was accurate.[57]
  • In May 2013, a for-profit education company agreed to pay up to $2.5 million to resolve allegations that it violated the FCA by falsely certifying that it had complied with the 90/10 eligibility requirement for federal student aid programs. The "90/10 Rule" requires for-profit colleges to obtain at least ten percent of their revenues from sources other than Title IV student aid programs. The qui tam suit from which the settlement stemmed alleged that the company manipulated certain short-term private loans to artificially inflate the percentage of private revenue flowing to the company's schools. The two whistleblowers who initiated the action together received $170,000 from the government's recovery and could receive an additional $255,000 if the company becomes obligated to pay an additional contingent portion of the settlement.[58]

III. Case Law Developments

There were a number of interesting case law developments during the first half of 2013. These are discussed below.

  1. Do Alleged Violations of Conditions of Participation in Government Programs Provide the Basis for an FCA Case?

The question of what types of alleged violations of the law may provide the basis for an FCA case has become one of the most frequently litigated issues in recent FCA cases. While relators and the government sometimes argue broadly that violations of any "condition of participation" in a government program (i.e., those things a government contractor agrees to do when asking to participate in a government program) can provide the basis for an FCA case, defendants argue that liability under the FCA must be more narrow and should be limited to material violations of those rules that are actually identified in the law or elsewhere as conditions on the government's payment decision under the program. In United States ex rel. Hobbs v. MedQuest Assocs., 711 F.3d 707, 709 (6th Cir. 2013), the government alleged that the defendant violated the FCA by falsely certifying compliance with certain Medicare regulations and using an old billing number on payment forms. The Sixth Circuit found that, at least in the Medicare context, the FCA requires a showing that the regulation violated was a condition of payment, "meaning that the government would not have paid the claim had it known the provider was not in compliance." Id. at 714. The Hobbs court found that the regulations identified by the relator could not provide the basis for an FCA case because the regulations were "conditions of participation." Id. This case provides the latest salvo in the long-waging battle of whether conditions of participation alone can somehow provide the basis for an FCA case. In this matter, when it comes to the Medicare program, the Sixth Circuit found that they cannot.

  1. How Are Treble Damages Calculated?

Another often debated issue in FCA cases is how treble damages under the FCA should be calculated: before or after the benefit to the government from the services or goods involved are discounted? In other words, should the court take the damages to the government, discount those damages by the value of what the government received, and then treble the resulting amount? Or should the discounting occur after trebling the government's damages (without any discount being accounted for first)? This obviously can make a huge difference to the potential damages in any FCA case. Imagine, for instance, a contractor with a $100 million contract, where that contractor provided services that valued $90 million. If the first approach is taken, potential damages after trebling are $30 million ($100 million, minus $90 million, trebled). If the second approach is taken, potential damages are $210 million ($100 million, trebled, minus $90 million).

In United States v. Anchor Mortg. Corp., 711 F.3d 745, 748-49 (7th Cir. 2013), the Seventh Circuit took the former approach, siding with the defendant's "net trebling" method rather than the government's "gross trebling" method, finding that the amount that the government had recovered from its losses should be subtracted from the government's damages before trebling occurred. Id. at 749. The court stated that given that "the norm is net trebling" and "mitigation of damages is almost universal" the "net trebling" method is appropriate in this case. Id. In its argument for "gross trebling," the government relied on the Supreme Court's decision in United States v. Bornstein, 423 U.S. 303 (1976), which doubled damages from a breach of contract claim before subtracting a subsequent mitigating payment from a third party. The Anchor court found Bornstein inapplicable, noting that "[a]ppellate decisions since Bornstein generally use a net trebling approach" and pointing to footnote 13 in Bornstein which "unambiguously uses the contract measure of loss, supporting a net trebling approach." Id. at 750.

Anchor is a good case for defendants arguing that trebling should occur only after subtracting the benefit to the government from the government's damages.

  1. Developments Related to the "First-To-File" Bar

The first-to-file bar of the FCA, 31 U.S.C. § 3730(b)(5), prevents a qui tam relator from filing a related action that is based on the facts underlying a pending action under the FCA. The idea is that the subsequent action duplicates the relief sought on the government's behalf, and therefore is not needed and is wasteful. During the first half of 2013, there have been two significant developments in the case law relating to this important provision.

First, in United States ex rel. Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013), the court found that although the first-to-file bar requires the dismissal of a qui tam relator's complaint that is based upon a pending action under the FCA, that dismissal should only be without prejudice. Id. at 183. The court reasoned that once the earlier-filed action is no longer "pending" under the FCA, the relator should be free to refile his suit. Id. at 181. Granted, the relator's complaint may face other hurdles, but the Fourth Circuit found that the first-to-file provision should not be one of them.

Second, in United States ex rel. Heineman-Guta v. Guidant Corp., No. 12-1867, 2013 U.S. App. LEXIS 11017, at *2 (1st Cir. May 31, 2013), the First Circuit weighed in on the debate over whether an earlier-filed lawsuit can serve to bar a later suit under the first-to-file bar even if the complaint in that earlier lawsuit fails (or appears to fail) to satisfy the requirements of Rule 9(b). The First Circuit found that it could. Id. at *23-25. The First Circuit justified this decision by relying on the different purposes of Rule 9(b) and the first-to-file bar, noting that the first-to-file bar is intended to incentivize relators to give the government prompt notice of the "essential facts of a fraudulent scheme," id. at *15 (quoting United States ex rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13, 32 (1st Cir. 2009)), while Rule 9(b) aims to protect defendants from baseless claims. Id. at *22. Therefore, the purpose of the first-to-file bar is furthered even if a previously-filed complaint does not satisfy Rule 9(b), as long as the complaint provides "the essential facts to give the government sufficient notice to initiate an investigation into allegedly fraudulent practices." Id. at *25.

  1. Can an FCA Defendant's Self-Disclosure Create a "Public Disclosure" Potentially Barring Later Qui Tam Actions?

In addition to the first-to-file bar, the so-called public disclosure bar of the FCA, 31 U.S.C. § 3730(e)(4), provides another important defense to defendants. This provision precludes a qui tam relator from bringing a case based upon allegations that already have been publicly disclosed in certain forums, unless the relator can show he or she is an "original source" under the FCA. This raises the question: can a defendant create a "public disclosure" that triggers this bar?

In United States ex rel. Estate of Cunningham v. Millennium Labs. of Cal., 713 F.3d 662 (1st Cir. 2013), the First Circuit found that the answer to this question may be "yes"--an FCA defendant's self-disclosure of an alleged fraud may bar a subsequent FCA claim under the public disclosure doctrine. In Cunningham, the public disclosure occurred by the defendant publicly filing a complaint against the relator's employer, a competitor of the defendant--prior to the relator filing the qui tam complaint. Id. at 671-75. This complaint by the defendant against the relator's employer attached e-mails suggesting the fraudulent activity later alleged in the relator's qui tam complaint and also described the alleged activity. Id. The court found that this public disclosure of the alleged fraud--although made by the defendant--could constitute a public disclosure under the FCA for purposes of triggering the public disclosure bar. The court further stated: "While we share Relator's concern that a person or entity committing fraud against the government could theoretically shield itself from a qui tam action through preemptively filing its own action, thus creating a sanitized public disclosure while barring a future whistleblower action, the Supreme Court has been clear that self-disclosure can bar such suit under the FCA, and it has further characterized concerns about insulation from FCA liability as unwarranted in most cases." Id. at 672.

This decision only adds to the very careful and critical analyses that parties must undergo when they discover evidence of potential fraud. Among other considerations specifically under the FCA is the fact that even if there was a public disclosure of the allegations at issue in the case, a relator can still move forward if he or she can show that he or she is an "original source" under the FCA. Further, the public disclosure bar does not protect against actions by the government. And, finally, the First Circuit earlier held in United States ex rel. Rost v. Pfizer, Inc., 507 F.3d 720 (1st Cir. 2007) that self-disclosure to the government does not in and of itself count as a "public disclosure" under the FCA; so, even in the First Circuit, if a defendant desires to create a "public disclosure" under the rule outlined in Cunningham, it can do so only even possibly through one of the ways enumerated by the FCA.[59]

  1. What Level of Pleading Is Required in an FCA Case and How Does That Affect Discovery?

It is now beyond dispute that Federal Rule of Civil Procedure 9(b)--requiring particularity of pleading--applies to FCA cases. But a substantial difference of opinion among the courts remains as to what this means. In United States ex rel. Nathan v. Takeda Pharms. N. Am., Inc., 707 F.3d 451, 454 (4th Cir. 2013), the Fourth Circuit addressed Rule 9(b)'s application to FCA claims and affirmed dismissal of a relator's amended complaint for failing to allege with particularity that the defendant presented false claims to the government. The court held "that when a defendant's actions, as alleged and as reasonably inferred from the allegations, could have led, but need not necessarily have led, to the submission of false claims, a relator must allege with particularity that specific false claims actually were presented to the government for payment." Id. at 457.

Recent developments in the Fifth Circuit also reflect the ongoing dialogue and debate, even within the same circuit. In United States ex rel. Nunnally v. W. Calcasieu Cameron Hosp., No. 12-30656, 2013 U.S. App. LEXIS 6733 at *12-13 (5th Cir. Apr. 3, 2013), the Fifth Circuit claimed to clarify and reaffirm its previous holding in United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180 (5th Cir. 2009) as to the application of Rule 9(b). While Grubbs held that a relator may satisfy Rule 9(b) without including details regarding every alleged false claim, Nunnally addressed Grubbs by stating that the Fifth Circuit "reaffirms the importance of Rule 9(b) in FCA claims" and dismissing the relator's FCA case because the relator's allegations of a kickback scheme were "broad and sweeping, providing no indicia of any actual knowledge of any FCA-violating fraud," and therefore did not satisfy Rule 9(b). Id. at *6. The Nunnally court stated that while the relator does not need to identify details regarding every false claim, the relator must make up for that shortcoming by "demonstrat[ing] a strong inference of fraud." Id. at *5-6.

As these cases indicate, Rule 9(b) is important for determining if an FCA case is allowed to go forward at all. But perhaps equally important, courts have continued to find that Rule 9(b) also assists in determining the scope of discovery. For instance, in United States ex rel. Duxbury v. Ortho Biotech Prods., L.P., No. 12-2141, 2013 U.S. App. LEXIS 11842, at *23 (1st Cir. June 12, 2013), the First Circuit held that the scope of discovery should be limited to "only those claims supported by . . . well-pled allegations." Id. at *20. Given that the relator failed to discover any evidence supporting his fraud allegations, the Court found no reason to expand the scope of discovery into a "fishing expedition." Id. at *22 (citations omitted). This case is useful, as courts often use Rule 9(b) motions to at least limit what parts of a relator's case go forward into discovery. With decisions like Duxbury, defendants have a strong argument that only those portions of a relator's case that survive Rule 9(b) challenge are subject to any discovery.

  1. What "Wartime" Tolls the Statute of Limitations?

The Wartime Suspension of Limitations Act (WSLA) tolls the ordinary six-year statute of limitations for prosecuting charges relating to fraud against the United States while at war. In United States ex rel. Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013), the Fourth Circuit addressed the question of whether a formal declaration of war is required to trigger this Act. It found that the answer is "no." In Carter, the defendant allegedly used fraudulent billing practices for services provided to the United States military in Iraq, but the defendant argued that the case was barred by the statute of limitations. Id. at 178. The court disagreed, finding that the WSLA applied to toll the limitations period. The court explained that the definition of "at war" for purposes of the tolling provisions of the WSLA includes more than just declared wars because the WSLA does not specifically require a "declared war," the United States had not formally declared war since World War II, and the Supreme Court has previously applied laws of war to "non-declared war." Id. at 178-79. Furthermore, because the purpose of the WSLA is to protect the United States from fraud during times of war, during which the country is more vulnerable, the court found the WSLA's purpose would be frustrated by limiting its application to declared wars. Id. As a result, the court found that the WSLA applied subsequent to the adoption of the Authorization for the Use of Military Force against Iraq in 2002, which "signaled Congress's recognition of the president's power to enter into armed hostilities." Id. The Fourth Circuit also held that the WSLA applies to both criminal and civil claims, including those brought by a relator if the government has declined to pursue the action. Id. at 179-80.

Some have speculated that this may open the question as to when, if ever, the limitations period is not tolled, given the United States' ongoing foreign military engagements. Likewise, questions have arisen as to whether the tolling under the WSLA suggested by Carter only applies to cases against government contractors involved in war-related activities, or all FCA cases.

  1. Developments in Anti-Retaliation Provision

The FCA also includes an anti-relation provision, prohibiting certain adverse employment actions in response to forms of protected activity, 31 U.S.C. § 3730(h). In the first half of 2013, there have been at least two developments relating to this provision.

First, two circuits have addressed the meaning of a protected activity under 31 U.S.C. §3730(h). In Glynn v. EDO Corp., 710 F.3d 209, 211 (4th Cir. 2013), the Fourth Circuit held that an employee was not engaged in a protected activity when he raised concerns regarding a product that EDO designed and manufactured for the United States military. The court used the "distinct possibility" standard to determine whether the employee's actions constituted protected activity. Under the "distinct possibility" standard, an activity is protected under the FCA's anti-retaliation statute if the activity was "investigating 'matters that reasonably could lead to a viable FCA action.'" Id. at 214 (quoting Eberhardt v. Integrated Design & Constr., Inc., 167 F.3d 861, 869 (4th Cir. 1999)). Even though the employee allegedly determined that the product was inferior to what EDO had represented, the problem was "not severe enough in degree to trigger any contractual obligations" by EDO. Id. at 215. Additionally, the employee did not engage in protected activity in furtherance of a qui tam suit by alleging false certification, because the government was satisfied with the allegedly inferior product. Id. at 217. As a result, the false certification did not have "a 'natural tendency' to influence the government's decision to pay for the contracted service." Id. Furthermore, the court's conclusion under the "distinct possibility" standard that the employee did not engage in protected activity is not altered by the fact that the employee actually initiated a government investigation. Id. at 216.

In Thomas v. ITT Educ. Servs. Inc.., No. 12-30620, 2013 U.S. App. LEXIS 5783, at *1-2 (5th Cir. March 22, 2013) the Fifth Circuit held that Thomas, an instructor at ITT, was unable to state a claim for retaliation under 31 U.S.C. § 3730(h) because she was not engaged in protected activity. Unlike the Fourth Circuit in Glynn, the Thomas court did not use the "distinct possibility" standard. Rather, the Thomas court defined a protected activity as "one motivated by a concern regarding fraud against the government." Id. at *6. Although Thomas alleged that she refused to falsify grade records when allegedly persuaded to do so by ITT, she did not "submit evidence establishing that she sought to pursue a qui tam action, that she informed anyone at ITT that its actions were illegal, or that she informed anyone at ITT that its actions were fraudulent." Id. at *8. Rather, Thomas's claim related to "internal policy matters . . . beyond the reach of the FCA," and did not state sufficient evidence to establish she engaged in protected activity. Id. at *9.

Second, the Fourth Circuit has addressed the issue of causation--specifically, whether an employee can demonstrate that his protected activity caused his termination if the employer did not know about the protected activity and the termination occurred long after the protected activity. In Shenoy v. Charlotte-Mecklenburg Hosp. Auth., No. 12-1786, 2013 U.S. App. LEXIS 9614, at *17 (4th Cir. May 13, 2013), a doctor filed a claim against Carolinas Pathology Group (CPG) alleging retaliation under the FCA. Id. at *2. The Fourth Circuit held that there was insufficient evidence to show that the relator's acts in furtherance of a qui tam suit caused his termination. Id. at *17. The court not only considered the lack of evidence proving CPG's knowledge of the doctor's acts, but also considered the lengthy amount of time between CPG's alleged knowledge and termination. Id. The court concluded that the "temporal proximity [was] several years, which is simply not 'very close' in time," and thus, there was insufficient evidence of causation. Id.

  1. Retroactivity of FERA Amendments

In 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) in part to relax the requirements for false statement liability under the FCA, responding to the Supreme Court's 2008 holding in Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662 (2008), that such liability can only attach where the defendant made a false statement with the intention of getting a false claim paid by the government. Section 4(f)(1) of FERA provides that the amendments "apply to all claims under the False Claims Act . . . that are pending on or after" June 7, 2008 – two days before Allison Engine was decided. Following the passage of FERA, a circuit split developed on whether the amended language is retroactive to all claims for payment pending on June 7, 2008, or rather to all cases (causes of action) pending on that date. The Ninth and Eleventh Circuits have adopted the former interpretation, and in November 2012 the Sixth Circuit joined the Second and Seventh Circuits finding the latter, in the continued proceedings on remand in Allison Engine. Sanders v. Allison Engine Co., 703 F.3d 930 (6th Cir. 2012).

On June 24, 2013, the Supreme Court denied Allison Engine's petition for certiorari on this issue, effectively leaving in place the circuit split. Allison Engine Co., Inc. v. United States ex rel. Sanders, 81 U.S.L.W. (U.S. June 24, 2013) (No. 12-1057). Accordingly, whether the revised false statement liability will apply to a particular case will likely depend on the circuit in which the case was brought, and more circuits will be asked to weigh in on this question as more affected qui tam suits are unsealed and pursued in litigation.

IV. Conclusion

The first half of 2013 was extremely active; and we anticipate that the second half of 2013 will be even more so when it comes to legislative, enforcement, and case law developments relating to the FCA. We will of course continue to monitor these developments, and you can look forward to their complete summary in our 2013 Year-End FCA Alert, due in January 2014.