The U.S. Department of Justice (“DOJ”) will nearly double the statutory penalties under the False Claims Act (“FCA”) under an interim final rule it published June 29, 2016. This significant increase gives the government and private whistleblowers even greater leverage when pursuing false claims and will alter the litigation calculus for most defendants facing FCA liability. It will also have a trickle-down effect on state false claims laws.
Under the FCA, each false claim presented to the government gives rise to a separate civil monetary penalty. As of August 1, the minimum penalty for each false claim will increase from $5,500 to $10,781, and the maximum penalty for each false claim will increase from $11,000 to $21,563. This dramatic spike in penalties will expose many defendants to much greater financial risk. The increase will likely have a distinct impact on those in the healthcare, life sciences and other industries that submit hundreds, or even thousands, of separate claims to the government. For instance, in United States ex rel. Drakeford v. Tuomey Healthcare Sys., Inc., 792 F.3d 364 (4th Cir. 2015), the defendant was found liable for 21,730 false claims to Medicare for reimbursement. Even though the district court calculated the penalty using the minimum of $5,500 per claim, the total civil penalty amounted to $119,515,000.1 Applying the new statutory minimum, the defendant in this case would have been subject to a civil penalty of $234,271,130. The FCA provides for these penalties to be imposed on top of the award of damages, which are calculated at three times the amount of the loss sustained by the government.
This is not the first time the DOJ has increased FCA penalties, but an increase of this size is unprecedented. The DOJ last adjusted the penalties in 1999, increasing the minimum penalty from $5,000 to $5,500, and raising the maximum from $10,000 to $11,000. This change was consistent with the 10% cap in such increases under the 1996 Debt Collection Improvement Act (“1996 Act”). However, the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (“2015 Amendments”) repealed the 1996 Act’s 10% cap and created a different statutory formula for calculating annual inflation adjustments.
The 2015 Amendments allow for an initial adjustment based on the cost of living increase between 2015 and the year in which the civil monetary penalty was established or adjusted by a provision of law other than the Federal Civil Monetary Penalties Inflation Adjustment Act of 1990 (“Inflation Adjustment Act”). The DOJ had not adjusted the FCA penalties other than through the Inflation Adjustment Act since 1986. That explains why this adjustment is so substantial. In the future, the adjustment will be determined by annual differences in the Consumer Price Index, and therefore further increases in penalties will be in smaller increments.
This increased penalty could create incentives for the government and private litigants who sue on its behalf – known as relators – to pursue FCA claims even where damages may be difficult to prove. For instance, in United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., 741 F.3d 390 (4th Cir. 2013), a relator sued on behalf of the United States for civil penalties only and did not pursue actual damages, while the government itself pursued both penalties and damages. The Fourth Circuit upheld the relator’s standing to sue for civil penalties to the exclusion of actual damages and enforced a total penalty of $24 million. The government and relators will now be able to recover even more in statutory penalties even where the evidence of any financial loss to the government may be lacking.
On the other hand, the new maximum penalties may not be enforceable in every case. For those cases involving large numbers of claims but small amounts of actual damages, defendants will have a stronger hand from which to argue that the imposition of statutory penalties in the amounts authorized by law would violate the prohibition on “excessive fines” found in the Eighth Amendment of the United States Constitution. DOJ has, in some cases, offered a voluntary reduction in the number of penalties sought to avoid Eighth Amendment scrutiny. The size of the penalties that will be available after August 1, 2016 will provide additional leverage to defendants who raise constitutional concerns.
The revised penalties will also have a trickle-down effect on state false claims laws. The federal government encourages states to pursue civil Medicaid fraud by allowing the state to retain 10% more than the share to which they would otherwise be entitled from the amount recovered under a state false claims action. To be eligible for this increased recovery, state false claims penalties must be no less than required under federal law. Many states have adopted Medicaid-specific false claims laws to meet this requirement.2 To continue earning the 10% bonus, states will have to amend their laws to mirror the federal increase.
The changes apply for penalties assessed after August 1, 2016 for violations that occurred after November 2, 2015. Comments to the interim final rule are due August 29, 2016.
[1] Id. at 384. The parties later settled the case for $72.4 million. See DOJ Press Release, United States Resolved $237 Million False Claims Act Judgment against South Carolina Hospital that Made Illegal Payments to Referring Physicians (Oct. 16, 2015), available at https://www.justice.gov/opa/pr/united-states-resolves-237-million-false-claims-act-judgment-against-south-carolina-hospital. [2] Currently, 19 states have statutes that are at least as strong as the federal statute and are eligible for the 10% bonus: California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Illinois, Indiana, Iowa, Massachusetts, Minnesota, Montana, Nevada, New York, Rhode Island, Tennessee, Texas, Virginia, Washington. See U.S. Department of Health & Human Services, Office of Inspector General, State False Claims Act Reviews, available at http://oig.hhs.gov/fraud/state-false-claims-act-reviews/.
