The New False Claims Act FERA: The Fraud Enforcement and Recovery Act of 2009

Impetus for FERA Several relatively recent court decisions narrowed, or threatened to narrow, the scope of the FCA Congress became concerned that the effectiveness of the FCA had become impaired, a concern that was heightened by the passage of TARP and stimulus legislation To underscore this point, Congress labeled the FCA Amendments of FERA “Clarifications to the False Claims Act to Reflect the Original Intent of the Law.”

Impetus for FERA cont. One of the most successful tools for combating waste and abuse in Government spending has been the False Claims Act (FCA) …. The effectiveness of the FCA has recently been undermined by court decisions limiting the scope of the law and allowing subcontractors and non-governmental entities to escape responsibility for proven frauds. In order to respond to these decisions, certain provisions of the FCA must be corrected and clarified in order to protect the Federal assistance and relief funds expended in response to the current economic crisis. S. Rep. No , 111 th Cong., 1 st Session 10 (March 23, 2009) (Senate Report)

FERA In May of 2009, Congress passed, and President Obama signed, the Fraud Enforcement and Recovery Act (“FERA”)

United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004) FACTS: defective rail cars provided to Amtrak Defendant argued that the present requirement of old § 3729(a)(1) was not satisfied because Amtrak is not the Government The relator argued that a claim to a grantee like Amtrak is “effectively presented to the United States” HELD: No FCA liability because “claims were presented only to Amtrak for payment, which is not the Government.” Holding seemingly approved by SC in Allison Engine.

Allison Engine Co. v. United States ex rel. Sanders, 128 S.Ct (2008) FACTS: subcontractor submitted certifications of compliance with Navy specifications to prime contractor Defendant subcontractor argued that it did not intend the government to pay a false claim HELD: A subcontractor violates old Sections 3729(a)(2) and (a)(3) only if it specifically intends to get the Government to pay a false claim Also held that, unlike Section (a)(1), Section (a)(2) lacked a presentment requirement (implicitly approving Totten’s treatment of Section (a)(1) as including a hard presentment requirement).

United States ex rel. DRC, Inc. v. Custer Battles, LLC, 444 F.Supp.2d 678 (E.D. Va.), rev’d, 562 F.3d 295 (4 th Cir. 2009) FACTS: false claims submitted to Coalition Provisional Authority (CPA) by Iraqi contractors. United States administered the funds on behalf of Iraqi people. Defendants argued that no U.S. funds were paid, because payments were from the CPA HELD: FCA liability does not apply to claims for funds over which the U.S. is merely a custodian. Also, could not prove presentment because CPA not U.S. entity. Although reversed by 4 th Cir. one month prior to FERA, case is specifically noted in Senate Report detailing purposes of FERA

United States ex rel. Cosens v. Baylor Univ. Med. Ctr., 469 F.3d 263 (2d. Cir. 2006) FACTS: False claims submitted no later than 1995, Government complaint in intervention filed in 2002, relator’s complaint was under partial seal since Defendant argued 6-year statute of limitations HELD: the Government could only go back to 1996 claims (six years from 2002) Even prior to FERA, Baylor was not being followed by most courts. See United States ex rel. Serrano v. The Oaks Diagnostics, Inc., 568 F.Supp.2d 1136 (C.D. Cal. 2008) (listing other cases). But still animated FERA.

Case Law Questions Addressed by FERA 1. Presentment: Does FCA liability attach only to claims presented to an officer or employee of the United States? (Totten/Allison Engine) 2. Intent: Is a defendant liable for making a false statement even where it is made without any specific intent to get a false claim paid? (Allison Engine) 3. Federal Funds: Does the FCA require that the Government hold title to the funds used to pay a claim? (Custer Battles) 4. Relation Back: Is the Government’s relation back of claims limited by the statute of limitations? (Baylor)

SPOILER ALERT the answer is NO to each

1. PRESENTMENT FERA functionally eliminates presentment requirement; focus now on purpose/source of funds Section 3729(b)(2) defines “claim” to include a request or demand presented to: An “officer, employee, or agent” of the United States; or A “contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest” and U.S. provided/will provide any portion of the money paid; or U.S. will reimburse the contractor, grantee, or recipient

2. INTENT FERA overrules Allison Engine’s holding that liability under old Sections 3729(a)(2) and (a)(3) exists only where a defendant intends TO GET the Government to pay a false claim. New Sections 3729(a)(1)(A) and (a)(1)(B) omit the terms “get” and “getting,” replacing them with the term “material” “Material” is defined as “having a natural tendency to influence, or to be capable of influencing, the payment or receipt of money or property”

INTENT cont. Thus, new Section (a)(1)(B) provides liability for any person who: “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim” (emphasis added) Significantly, the materiality requirement is a “soft” materiality … need only be capable of influencing payment decision. Arguably eviscerates conditions of payment v. conditions of participation dichotomy. See United States ex rel. Connor v. Salina Reg. Health Ctr., Inc., 543 F.3d 1211 (10 th Cir. 2008) (drawing distinction)

INTENT cont. (still more?! What the …) Important to emphasize that even before FERA, the terms “knowing” and “knowingly” are explicitly defined so as to make clear that “no proof of specific intent to defraud is required.” Deliberate ignorance is sufficient for liability to attach

3. FEDERAL FUNDS FERA endorses the 4 th Circuit’s opinion in Custer Battles Definition of “claim” makes it clear that FCA liability attaches even where the U.S. administers funds, “whether or not the United States takes title to the money or property.” (Section 3729(b)(2)) Thus, claims for funds administered by U.S. are actionable, subject to restrictions noted previously (gov. purpose and provision/reimbursement of funds)

FEDERAL FUNDS Cont. Interesting Questions For Future Litigation … What are and how do you measure the damages (as opposed to penalties) for false claims on funds merely administered by the Government? What about block grants or stimulus that merely supplement a recipient’s funds (e.g., funds provided to supplement budget shortfalls—revenue sharing)? Is the purpose anything other than revenue sharing? What is the proof?

4. RELATION BACK FERA rejects the Second Circuit’s Baylor Decision Provides for relation back of the Government’s complaint for statute of limitations purposes Adds to Section 3731(b): “For statute of limitations purposes, [the Government’s complaint in intervention] shall relate back to the filing date of the complaint of the person who originally brought the action, to the extent that the claim of the Government arises out of the conduct, transactions, or occurrences set forth, or attempted to be set forth, in the prior complaint of that person.”

FERA … is this stuff exciting or what?! Stay calm, more fun to come

OTHER CHANGES TO FCA FERA also Expands Conspiracy Provisions Expands Reverse False Claims Provision Permits Service of Relator’s Complaint on State or Local Entity Expanded CIDs

EXPANDED CONSPIRACY PROVISIONS FERA makes the conspiracy provision applicable to all theories of FCA liability Under old FCA, conspiracy provision did not apply to reverse false claims. Now, Section 3729(a)(1)(C) attaches liability to any person who “conspires to commit a violation of subparagraphs (A), (B), (D), (E), (F), or (G)”

EXPANDED REVERSE FALSE CLAIMS PROVISION FERA expands the reverse false claims provision to encompass the knowing avoidance of an obligation— without any false statement or record required for liability Section 3729(1)(a)(G) now attaches liability to any person that “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government” Significantly, Section 3729(b)(3) defines “obligation” to include “the retention of an overpayment”

EXPANDED REVERSE FALSE CLAIMS Cont. Collectively, these changes mean that a person who knowingly (which includes deliberate ignorance) and improperly retains an overpayment by the Government is in violation of the FCA. No act of concealment is necessary. INTERESTING ISSUES: When pursue administrative remedies rather than FCA litigation? Reverse exhaustion requirement? Of note, many programs (including Medicare) do not have any general requirement that overpayments be returned.

SERVICE OF QUI TAM COMPLAINT ON STATES OR LOCALITIES Section 3732(c) allows for service of a relator’s complaint on State or local governments if named as co-plaintiff’s in the suit Such service does not violate the seal and does not require court permission.

EXPANDED CIDs Authorizes the Attorney General to delegate authority to issue Civil Investigative Demands (CIDs) Permits CID information to be used for any official use. “Official Use” is defined to be any use that is consistent with law, DOJ regulations and policies, and use in connection with communications between DOJ and a Federal, State, or local government agency, as well as communications with Government investigators, auditors, consultants and experts, among others.

Effective Date and Retroactive Application Amendments apply prospectively (i.e. to conduct occurring after the date of enactment), except: Amendments relating to Relation Back, Service on Local and State Governments, and CID provisions Applies to all “cases” pending on the date of enactment Amendments correcting Allison Engine’s Intent Requirement (changing old Section 3729(a)(2) by inserting “material” instead of “to get”) Effective June 7, 2008 (two days before Allison Engine) and applies to all “claims” then pending

Effective Date and Retroactive Application (Cont) Two Issues: Difference between retroactive application to “cases” v. “claims” Courts have thus far indicated “claims” means those claims submitted to the Government, not claims pending in court. See, e.g., United States ex rel. Hopper v. Solvay Pharm., Inc., 588 F.3d 1318 (11 th Cir. 2009); United States v. Science Applications Int’l Corp., 653 F.Supp.2d 87 (D. D.C. 2009) Does retroactive application violate Ex Post Facto and Due Process Clauses of the Constitution (clarification v. making conduct illegal after the fact)?

QUESTIONS?