The False Claims Act After Escobar

Assessing Risks and Avoiding Liabilities

February 17, 2017
Introductions

– Brian A. Hill, Member, Miller & Chevalier Chartered

– Honorable Anthony J. Trenga, U.S. District Court Judge, Eastern District of
Virginia
– Florence A. Crisp, VP & Senior Legal Counsel, CVS Health Corporation
– David S. Williams, Managing Principal, Deloitte LP

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Overview

1) False Claims Act Basics

2) Escobar
3) Higher Penalties
4) Damages after Escobar

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False Claims Act (“FCA”) Basics

• Civil War era statute passed in 1863

• Codified at 31 U.S.C. §§ 3729 et seq.
• Any person who violates the FCA is liable to the United States
Government for a civil penalty . . . plus 3 times the amount of
damages which the Government sustains because of the act of that
person.

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FCA Basics
31 U.S.C. § 3729(a)(1) -- Any person who . . .

(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval;
(B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a
false or fraudulent claim;
(C) conspires to commit a violation of subparagraph (A), (B), (D), (E), (F), or (G);
(D) has possession, custody, or control of property or money used, or to be used, by the Government
and knowingly delivers, or causes to be delivered, less than all of that money or property;
(E) is authorized to make or deliver a document certifying receipt of property used, or to be used, by the
Government and, intending to defraud the Government, makes or delivers the receipt without completely
knowing that the information on the receipt is true;
(F) knowingly buys, or receives as a pledge of an obligation or debt, public property from an officer or
employee of the Government, or a member of the Armed Forces, who lawfully may not sell or pledge
property; or
(G) knowingly makes, uses, or causes to be made or used, a false record or statement material to an
obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and
improperly avoids or decreases an obligation to pay or transmit money or property to the Government.

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FCA Basics

• DOJ can bring FCA civil action without a whistleblower (31 U.S.C. § 3730(a))
• Or “qui tam” action, brought by private party, “relator,” alleging that defendant
defrauded the government (31 U.S.C. § 3730(b)(1))
• Relator may be awarded up to 30% of funds recovered (31 U.S.C. § 3730(d))
• First, relator files suit, under seal, in federal court (31 U.S.C. § 3730(b)(2))
• DOJ has 60 days to investigate the relator’s claims (31 U.S.C. § 3730(b)(2))
• After its investigation (which can be extended), DOJ must inform relator whether
it intends to intervene in the case
– If the government elects to intervene, it takes over the case (31 U.S.C. § 3730(b)(4)(A))
– If the government declines to intervene, the relator (through counsel) has the right to pursue
the case (31 U.S.C. § 3730(b)(4)(B))

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FCA Basics

• Historic Recoveries

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Universal Health Services, Inc. v. United States ex rel.
Escobar, 136 S. Ct. 1989 (2016) (“Escobar”)

ESCOBAR

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Universal Health Services, Inc. v. United States ex rel.
Escobar, 136 S. Ct. 1989 (2016) (“Escobar”)
• Factual background
– Parents of daughter who died of a seizure while being treated at a mental health facility
brought qui tam action against facility
– Alleged that facility violated the FCA by failing to comply with Medicaid regulations re staff
qualifications
– Government declined to intervene
– Relators proceeded under “implied certification” theory:
• By submitting claims to Medicaid, facility impliedly certified compliance with federal regulations
• Facility knowingly violated important regulations re: staff qualifications
• Had Medicaid known of the violations, it would not have paid facility’s claims
• Lower court holdings
– District Court dismissed on theory that none of the violated regulations was a condition of
payment
– First Circuit reversed, holding that the regulations themselves “constitute[d] dispositive
evidence of materiality.”

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Escobar Holding: Implied Certification

• SCOTUS took the case to resolve a circuit split

– Some circuits had adopted the implied cert. theory, others had rejected it, and
still others had accepted modified versions of the theory
• Escobar held that implied cert. can be a basis for FCA liability if two
conditions are satisfied:
1. The claim makes specific representations about the goods or services provided
2. Defs.’ “failure to disclose noncompliance with material statutory, regulatory, or
contractual requirements makes those representations misleading half-truths”
• Court left open possibility of other ways to state implied cert. claim

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Escobar Holding: Materiality
• In implied cert. cases, misrepresentation must be material to gov’t
payment decision
• FCA always contained a materiality requirement
– Not all requirements are automatically material
– Material means “having a natural tendency to influence”
• Court clarifies:
– Materiality does not turn on “condition of payment” label (though it remains relevant)
– Not material simply because government “has the option to decline to pay”
– Not material where “noncompliance is minor or insubstantial”
– Materiality does “look to the effect on the likely or actual behavior of the recipient of
the alleged misrepresentation”
– Attaches great probative value to how government has responded when it had actual
knowledge about similar violations

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Circuit Update

• First Circuit: Escobar on remand from SCOTUS (2016 WL 6872650)

– Applies the Supreme Court’s “holistic” approach to materiality
– Finds mental health facility’s misrepresentations material for three reasons:
1. Compliance with licensing req’ts was labeled as a “condition of payment”
2. Licensing req’ts went to “the very essence of the bargain”
3. No evidence that MassHealth paid claims despite being aware of violations
– Court reserved right to change ruling if discovery reveals that MassHealth
continued to pay claims to facility despite becoming aware they were not in
compliance

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Circuit Update
• Seventh Circuit: U.S. ex rel. Nelson v. Sanford-Brown, 840 F.3d 445 (7th Cir. 2016)
– Former employee of for-profit college alleged that college’s recruitment and retention policies violated Title IV Higher Ed. Act requirements
– Seventh Circuit had previously rejected implied cert. theory
– On remand from Escobar, court found that relator had “offered no evidence that the government's decision to pay SBC would likely or actually
have been different had it known of SBC's alleged noncompliance with Title IV regulations”

• Eighth Circuit: U.S. ex rel. Miller v. Weston Educational, 840 F.3d 494 (8th Cir. 2016)
– Former employees of for-profit college alleged that college fraudulently induced government to provide financial aid funds by falsely promising to
keep accurate student records
– Materiality:
• Court found that the college’s promise to maintain accurate grade and attendance records influenced the government’s decision to enter
into a contractual relationship with the college
• Court noted that there was evidence that the government sometimes terminated otherwise eligible institutions for falsifying student
attendance and grade records

• Ninth Circuit: U.S. ex rel. Rose v. Stephens Inst., 2016 WL 5076214 (N.D. Cal. Sept. 20, 2016)
– Another higher ed, for-profit college Title IV funding case
– District Court found that “Escobar did not establish a rigid two-part test for falsity that must be met [in] every single implied certification case”
– District Court then certified three questions for interlocutory appeal, one of which was:
• “Must the ‘two conditions’ identified by the Supreme Court in Escobar always be satisfied for implied false certification liability under the FCA . . .”

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Circuit Update
• Fourth Circuit: U.S. ex rel. Badr v. Triple Canopy, Inc.
– On remand from Supreme Court in light of Escobar
• Involved a security contract in Iraq for which contractor hired Ugandan guards who had allegedly failed
marksmanship tests
• Contractor allegedly had employees falsify records to indicate passage
• Prior to Escobar, Fourth Circuit had deemed the failure to satisfy marksmanship tests material under a common
sense standard;
– Query whether Fourth Circuit will adopt First Circuit’s approach on remand and allow for possibility that
materiality could be undermined if discovery shows government knew about poor marksmanship and paid
claims anyway.

• Eleventh Circuit: U.S. ex rel. Marsteller v. Tilton, 2016 WL 1270586 (N.D. Ala. Mar. 31, 2016)
– Involves FCA claims surrounding contract for manufacture of helicopters and alleged gratuities provided to
project manager who submitted inflated pricing info in bidding process
– District Court found that relator had not alleged facts demonstrating that compliance with a certain regulation
was material to the government’s decision to pay
– Briefing complete; oral argument contemplated but not yet scheduled

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Open Questions

• Other means of proving implied certification beyond specific way

endorsed in Escobar?
• Quantum of evidence necessary to prove materiality?
• What can contractors do to establish material terms at the outset?
• Can contractors defeat materiality test simply by submitting
evidence that government knew about the unsatisfactory
performance but paid anyway?

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FCA Penalties

Higher Penalties

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FCA Penalties

• As of August 1, 2016
– Minimum penalty rose from $5,500 to $10,781
– Maximum penalty rose from $11,000 to $21,563
• 81 Fed. Reg. 42491
• But when is a penalty imposed?

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FCA Penalties

• Different interpretations caused by two provisions under § 3729

– § 3729(a)(1)(A): a person is liable under the FCA who “knowingly presents, or
causes to be presented, a false or fraudulent claim for payment or approval”
– § 3729(a)(1)(B): a person is liable under the FCA who “knowingly makes, uses,
or causes to be made or used, a false record or statement material to a false
or fraudulent claim”
• So, which is it? Does a penalty apply for each false record or
statement, or each false claim?

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FCA Penalties
• U.S. v. Bornstein, 423 U.S. 303 (1976)
– “the number of imposable forfeitures has generally been set at the number of
individual false payment demands that the contractor has made upon the
government.”
• It’s the number of false payment demands, not supporting statements or records
• Relators and the gov’t have continued to push the false statements
theory post-Bornstein, but courts have followed Bornstein
– U.S. v. Krizek, 111 F.3d 934 (D.C. Cir. 1997)
• Gov’t sought penalties for each of 8,002 false codes submitted, not the number of false claims
submitted.
– U.S. ex rel. Maxwell v. Kerr-McGee Oil & Gas Corp., No. 04-cv-01224, 2010 WL
3730894, at *3-6 (D. Colo. 2010)
• Gov’t sought penalties for each of 1,403 miscalculated royalty amounts, not the 48 monthly
reports containing the miscalculations.

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FCA Penalties
• What is a “claim” for FCA penalty purposes?
– 31 U.S.C. § 3729(b)(2)(A)
• “[A]ny request or demand, whether under a contract or otherwise, for money or property . . .
that . . . is presented to an officer, employee, or agent of the United States,” or, if federal funds
or property are at issue, “to a contractor, grantee, or other recipient”
– U.S. v. Speqtrum, Inc., 113 F. Supp. 3d 238, 246 (D.D.C. 2015)
• “Each request for payment that [a contractor] submit[s] . . . qualifie[s] as an FCA ‘claim’”
• Understanding what constitutes a claim can be critical
– U.S. ex rel. Drakeford v. Tuomey, 792 F.3d 364, 386 (4th Cir. 2015)
• 21,730 separate false claims vs. four cost reports – penalties assessed on the claims
– But cf.
• U.S. ex rel. Hockett v. Columbia/HCA Healthcare Corp., 498 F. Supp. 2d 25, 70-71 (D.D.C.
2007)
• Visiting Nurse Ass’n of Brooklyn v. Thompson, 378 F. Supp. 2d 75, 99 (E.D.N.Y. 2004)
• In both, penalties assessed on cost reports rather than false claims

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FCA Penalties
• Eighth Amendment: Excessive Fines Clause (EFC)
– “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments
inflicted”
– “The [EFC] . . . prohibits the government from imposing excessive fines as punishment. Civil fines serving
remedial purposes do not fall within the reach of the Eighth Amendment. But where a civil sanction can only
be explained as serving in part to punish, then the fine is subject to the Eighth Amendment.” U.S. ex rel.
Drakeford v. Tuomey, 792 F.3d 364, 387 (4th Cir. 2015) (internal quotation marks and citations omitted)
• SCOTUS has not weighed in on whether the EFC applies to FCA cases
– But see U.S. v. Bajakajian, 524 U.S. 321 (1998) (held that fines are payments that are “punitive” in nature,
and they are excessive where “grossly disproportional to the gravity of the defendant’s offense”)
• Fifth Amendment: Due Process Clause (DPC)
– “No person shall . . . be deprived of life, liberty, or property, without due process of law”
– “The [DPC] imposes substantive limits beyond which penalties may not go. Like the Eighth Amendment, the
[DPC] does not apply to compensatory damage awards. This is because compensatory damages redress
the concrete loss the plaintiff has suffered[, whereas] punitive damages are essentially private fines intended
to punish the defendant and to deter future wrongdoing.” Tuomey, 792 F.3d at 387

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FCA Penalties
• Lower Courts mostly have held that the EFC applies to FCA
– U.S. ex rel. Bunk v. Gosselin World Wide Moving, N.V., 741 F.3d 390, 408 (4th Cir. 2013) (“A
cumulative monetary penalty such as that imposed under the FCA will violate the Eighth
Amendment proscription against excessive fines in the infrequent instance that it is ‘grossly
disproportional to the gravity of a defendant's offense.’”) (quoting Bajakajian)
– U.S. v. Mackby, 261 F.3d 821, 829-32 (9th Cir. 2001) (holding that EFC analysis applies to
FCA civil penalties)
– U.S. v. Cabrera-Diaz, 106 F. Supp. 2d 234, 242 (D.P.R. 2000) (finding civil penalty to be
excessive because penalty was significantly greater than government’s actual damages)
– U.S. v. Advance Tool Co., 902 F. Supp. 1011, 1018-19 (W.D. Mo. 1995) (finding civil penalty
of $3.4 million to be unconstitutionally excessive when the government failed to prove actual
damages, penalty reduced to $365,000)
• But see U.S. v. Rogan, 517 F.3d 449, 453-54 (7th Cir. 2011) (noting that “[i]t is
far from clear that the Excessive Fines Clause applies to civil actions under the
False Claims Act,” and declining to rule on the issue)

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FCA Penalties
• EFC and DPC analysis can be complex:
– SCOTUS has found both compensatory and punitive aspects in the FCA’s treble
damages provision
• Compensation above actual damages helps pay for:
– “[C]osts, delays, and inconveniences occasioned by fraudulent claims.’” Cook Cnty., Ill. v. U.S. ex rel.
Chandler, 538 U.S. 119, 130 (2003)
– Recovery of amounts paid to relators. Tuomey, 792 F.3d at 388
• Punitive damages are analyzed under SCOTUS’s 3-part State Farm test:
– “(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or
potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between
the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable
cases.” State Farm Mut. Auto Ins. Co v. Campbell, 538 U.S. 408, 418 (2003)
– “[A]n award of more than four times the amount of compensatory damages might be close to the line of
constitutional impropriety.” Id. at 425
• Fourth Circuit’s decision in Tuomey takes us through this analysis in detail.
– Ultimately concluded that the ratio of punitive-compensatory was 3.6-1 ($186M - $51M), safely within the
4-1 ratio
– Had the new statutory minimum been applied, the ratio would have been 6-1

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FCA Damages

After Escobar

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FCA Damages

• FCA damages are compensation to the government for the harm it

has suffered.
• Said differently, damages are designed to make the Government
whole.
– Under the FCA, government may recover "actual damages," the difference
between what it paid and what it should have paid for the goods;
– Courts will consider any reasonable method of calculating damages which
will fairly reimburse the government for its losses and expenses, without
creating a windfall for the government.

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FCA Damages – Escobar Takeaways

1) “Implied certification” cases are sanctioned and will continue

2) the “materiality” language will (hopefully) limit “tainting” damages
claims - further support for damages as compensation and “no
windfall” notion
• U.S. ex rel. Wall v. Circle C Construction, LLC, 813 F.3d 616 (6th Cir. 2016)
• Awarded damages of 763K reduced to approximately 15K - the dollar difference
between value of performance promised vs obtained.
• U.S. v. United Technologies, 2016 WL 3141569 (S.D. Ohio 2016)
• rejected a $657 million damage award, because despite contractor cost misstatements,
the Government received the value it was promised, and therefore suffered no harm.

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FCA Damages – Statistical Sampling

• What is sampling?
• Sampling is the act, process, or technique of selecting a suitable sample, or a
representative part of a population for the purpose of determining parameters or
characteristics of the whole (Webster, 1985).
• Purpose - To draw inferences about a population
• Why sample?
– Efficiency - taking a sample requires fewer resources than a census
– Timeliness - results are faster
– Large Populations - the size of the population makes a census impossible
– Inaccessibility - access to the population makes a census impossible
– Destructiveness - some observations destroy the items observed, so only sampling makes
sense
– Accuracy - samples can be more accurate than a census

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FCA Damages – Statistical Sampling

• There seems to be a growing acceptance that statistical sampling is an

appropriate tool to establish damages in FCA cases.
• Cases reflect a continued concern regarding liability, all are distinguishable
based on facts – and therefore are all over the place!
• U.S. ex rel. Martin v. Life Care Centers of Am. Inc., No. 08- cv-251 (E.D. Tenn. Feb. 18, 2015)
- (“[A]s long as the statistical sample is a valid sample that is representative of the universe of
claims, the natural disparity between the claims does not preclude using sampling and
extrapolation as evidence of the total number of claims for noncovered services.”)
• U.S. ex rel. Ruckh v. Genoa Healthcare LLC et al., No. 8:11-cv-1303 (M.D. Fla. 2015) - expert
testimony based on statistical sampling was appropriate in FCA cases and could not be
excluded solely due to the concern that sampling, by its nature, subverts individualized proof.
• Admissibility - arguments regarding admissibility of such expert testimony go to
the weight or reliability of sampling results (driven by methodological choices by
the expert) and are appropriate in Daubert proceedings.
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FCA Damages – Statistical Sampling

• SCOTUS case that may impact FCA statistical sampling going

forward
– Tyson Foods, Inc. v. Bouaphakeo, 136 S.Ct. 1036 (2016)
• The district court did not err in certifying and maintaining a class of employees who allege that the
employer’s failure to pay them for donning and doffing protective gear violate the Fair Labor Standards
Act, notwithstanding the employees’ reliance on “representative evidence” to determine the number of
additional hours that each employee worked, when the employer had failed to keep adequate records.
• Kennedy wrote that “a representative or statistical sample, like all evidence, is a means to establish or
defend against liability.” It is allowed into a trial, of a class action or other type of case, depending “on the
degree to which the evidence is reliable in proving or disproving the elements” of the legal claim at stake,
the opinion added.

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 Contact Information

Brian A. Hill Honorable Florence Crisp David S. Williams

Member Anthony J. Trenga VP & Senior Legal Counsel Managing Principal
Miller & Chevalier Chartered U.S. District Court Judge, CVS Health Corp. Deloitte LP
202.626.6014 Eastern District of Virginia 401-765-1500 (212) 492-2879
bhill@milchev.com (703) 299-2113 Florence.crisp@cvshealth.com davidswilliams@deloitte.com

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