False Claims Act & Civil Fraud

On December 26, 2017, defendant Gilead Sciences Inc. filed a petition for certiorari (case number 17-936), requesting the Supreme Court to review a major Ninth Circuit False Claims Act (FCA) ruling on liability in United States of America ex rel. Campie v. Gilead Sciences Inc. The petition argues that the Ninth Circuit adopted an approach to materiality that is inconsistent with the guidelines provided by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar, and conflicts with other appellate interpretations of Escobar’s materiality guidance. This is a case with significant implications for the Government contracts community, as the Ninth Circuit’s approach dilutes the protections offered by Escobar to FCA defendants.
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Should whistleblowers be permitted to recover hundreds of millions of dollars when the Government steadfastly insists that the factual underpinnings of a False Claims Act relator’s allegations are flatly incorrect? Although a federal district court in Texas awarded more than $660 million in damages to a relator based on purportedly inadequate disclosures to a federal agency, the post-Escobar materiality standard served as an important guardrail for the U.S. Fifth Circuit Court of Appeals. The appeals court reversed and put an end to the abusive FCA lawsuit. Among other things, the court recognized that the federal agency’s repeated, “authoritative” findings that the design and product at issue was compliant with federal safety standards and eligible for federal reimbursement were fundamentally at odds with the notion that the disclosures at issue were material to the government’s decision to pay the claim.
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On December 6, 2016, the Supreme Court ruled that the False Claims Act (“FCA”) does not require the dismissal of lawsuits brought by relators who violate the requirement that information regarding the FCA complaint (and alleged fraud) not be disclosed to anyone (other than the district court and Department of Justice) and remain “under seal.” In State Farm Fire & Casualty Co. v. United States ex rel. Rigsby , the Court held that district courts retain discretion to fashion an appropriate remedy based on the facts of the case.
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Today, in Universal Health Services v United States ex rel. Escobar, the Supreme Court resolved a circuit split on a question of great importance for government contractors: whether a claim presented to the United States for payment can be false or fraudulent for purposes of the False Claims Act (“FCA”) under the so-called “implied certification” theory. The Court answered in the affirmative, unanimously holding that “the implied false certification theory can, at least in some circumstances, provide a basis for liability.” The Court sought to allay any “concerns about fair notice and open-ended liability” by emphasizing the strict application of the FCA’s materiality and scienter requirements, clarifying the meaning of these requirements, and rejecting the Government and Second Circuit’s interpretation of implied certification as “extraordinarily expansive.” It remains to be seen whether the Court’s descriptions of the manner in which the FCA’s materiality and scienter requirements should be “rigorous[ly]” applied will provide meaningful protections to government contractors, including healthcare and other companies participating in various government programs, that face potential FCA liability based on implied certification theories of liability.
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The Second Circuit recently added to case law addressing the issue of whether a relator’s release of False Claims Act (FCA) claims prior to the relator’s qui tam action is enforceable. United States ex rel. Ladas v. Exelis, Inc. The circuit reversed the district court’s holding that the release was enforceable, disagreeing with the court’s conclusion that the Government had sufficient knowledge of the allegations of fraud prior to the release. The circuit, however, affirmed the Court’s dismissal of the amended complaint because the plaintiff did not plead fraud with sufficient particularity, and the district court did not abuse its discretion in denying leave to amend.
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On May 31, 2016, the Supreme Court granted certiorari in State Farm Fire & Casualty Co. v. United States ex rel. Rigsby, No. 15-513. At issue is an important question for the government contract community: “What standard governs the decision whether to dismiss a relator’s claim for violation of the FCA’s seal requirement, 31 U.S.C. § 3730(b)(2)?”
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The civil False Claims Act’s (FCA) public disclosure bar prohibits FCA suits based on allegations that have been disclosed publicly through certain enumerated sources, unless the relator meets the FCA’s definition of “original source.” Congress amended the bar in 2010, including replacing the phrase “no court shall have jurisdiction” with the phrase “[t]he court shall dismiss.”

Two recent Circuit Court decisions, issued within days of each other, have focused and elaborated on the public disclosure bar.
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In United States ex rel. Beuchamp v. Academi Training, the Fourth Circuit recently reversed the dismissal of a False Claims Act (FCA), explaining that the trial court had misapplied the public-disclosure bar when it dismissed the relators’ claims. The appellate court’s opinion explains recent (2010) statutory amendments, the manner in which an important pre-amendment Supreme Court precedent applies, and the proper application of the public-disclosure bar to the facts at issue. In short, when analyzing the timing of the public disclosure that purportedly bars FCA allegations, courts must focus on the pleading in which the relator(s) first alleged the relevant fraud—not on the most recent amendment to the complaint.

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The September 9, 2015 memorandum issued by Deputy Attorney General Yates makes clear that the Government intends to focus its investigative spotlight on possible False Claims Act violations by individuals, in addition to companies. “One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing.” As the leverage for this new focus, corporations are advised that to be eligible for “any” cooperation credit, they must provide “all relevant facts” about individuals involved in the misconduct. As Ms. Yates said in her public remarks the day after the memo was released: “It’s all or nothing.”

The Yates Memo raises important questions concerning how the new approach will affect Government contractors’ actions under the Mandatory Disclosure Rule. Does DOJ’s focus on individuals mean that the practices and procedures companies have developed for compliance with the Mandatory Disclosure Rule must change? To what extent should individuals be the focus of internal investigations and disclosures in order for a contractor’s disclosure to be acceptable?
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Government contractors face ever-increasing pressure to develop robust compliance programs that, among other things, detect potential violations of laws and regulations—which they are then obliged to report to the agency inspector general and the contracting officer. Like many large contractors, Kellogg Brown & Root’s (KBR) law department oversees (and conducts) investigations into potentially reportable violations