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The Next Wave: The Expansion
of State False Claims Acts and
Enforcement
July 23, 2013
Dave Nadler
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#3183346
Agenda
• Federal and State FCA Profiles
• Keys to Federal FCA Success
• Recent State FCA Activity
• What to Expect
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Most State FCAs Are Based on the Federal
Model
• The False Claims Act (“FCA”) was originally enacted in 1863 to
combat fraud perpetrated by Civil War contractors against the
Federal Government.
• In 1986 Congress significantly expanded the FCA to “reach all
fraudulent attempts to cause the Government to pay out sums of
money or to deliver property or services.” The FCA was again
substantially amended in 2009 (i.e., FERA Amendments).
• Today, the FCA penalizes any person who “knowingly presents or
causes to be presented, a false or fraudulent claim for payment or
approval…,” including making a false record or statement in order to
facilitate the payment of a false claim by the Federal Government.
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Most State FCAs Are Based on the Federal
Model
• The FCA permits private citizens to bring a “qui tam” (whistleblower)
suit in the name of the United States.
– The relator shares in the proceeds of any recovery.
• DOJ may choose to intervene as of right in any qui tam suit.
– If the Government intervenes the relator’s share is at least 15% but no
more than 25%.
– If the Government does not intervene the relator’s share increases to
between 25% and 30%.
• Violators of the FCA are liable for treble damages plus a civil
penalty of $5,500 to $11,000 per claim.
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State FCA Profile – Overview of State
Statutes
• 36 states and the District of Columbia have enacted false claims
legislation.
– 13 of these states have statutes specifically directed at fraud involving
Medicaid and other state healthcare programs.
– 20 states and the District of Columbia have statutes that encompass
fraud against the government generally.
– 3 states have both a Medicaid-specific statute and a general false
claims statute.
• 29 states and the District of Columbia permit whistleblower suits.
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State FCA Profile – Federal Incentives
• The Federal Government encourages states to adopt the Federal
model in joint state-federal programs, such as Medicaid, including
provisions for rewarding and encouraging qui tam suits.
– Financial incentives – an additional 10% share of Medicaid recoveries
• Recent expansion of Federal FCA case law in several key areas
(e.g., expansion of liability and damages theories) could push states
to follow suit or risk losing the financial incentives.
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Federal FCA Success
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•
Between 1987 and 2011, the Federal Government has collected over $30
billion from FCA cases.
•
FY 2012 continued the trend, with the Federal Government collecting a
single year record of $4.9 billion in civil FCA settlements and judgments
(with several recoveries over $1 billion).
•
FY 2012 collective statistics include:
–
647 qui tam suits filed (compared to 30 in 1987);
–
135 non-qui tam suits filed;
–
$3.3 billion recovered in whistleblower suits (compared to $0 in 1987 and $2.4 billion in
2010);
–
$439 million recovered by relators;
–
Over $3 billion recovered from health care fraud;
–
$1.4 billion recovered from housing and mortgage fraud; and
–
$427 million recovered for procurement fraud (i.e., goods and services purchased by the
Federal Government).
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Federal FCA Success
• Significant individual FCA recoveries in FY 2011 and 2012 include:
– $1.5 billion to resolve civil claims against GlaxoSmithKline LLC (part of
an overall $3 billion settlement) – the largest fraud settlement in U.S.
history
– $1.5 billion to resolve claims against Abbot Laboratories
– $950 million to resolve claims against Merck Sharp & Dohme
– $202.3 million settlement with Deutsche Bank AG
– $200 million from Oracle Corp. and Oracle USA (largest settlement ever
obtained under a GSA contract)
– $158.3 million settlement with CitiMortgage Inc.
– $132.8 million settlement with Flagstar Bank
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Keys to Federal FCA Success – Procedural
• DOJ substantially leverages the qui tam bar to augment its
capabilities and resources.
• DOJ often defers intervention decision (“not intervening at this time”)
– Best of all worlds.
– Maintains the constant threat of intervention without having to actually
intervene; continuous pressure on defendants.
– DOJ maintains ultimate control over the litigation.
• DOJ can intervene at any time and take over the case.
• Even if it does not intervene, DOJ must approve all settlements;
can force continued litigation between relators and defendants if
settlement is too low.
– DOJ still recoups most of any recovery but expends minimal effort and
avoids litigation risk in doing so.
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Keys to Federal FCA Success -Substantive
• Recent developments have made it more difficult for defendants to
dismiss complaints on the pleadings.
– Expanded liability theories
– Expanded damages theories
– Expanded relator pool
– Narrowed defenses
• Generally, if the case moves into discovery and beyond, the
prospect of settlement increases due to the expense of litigation and
the prospect of treble damages, administrative sanctions, and
reputational harm.
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Keys to Federal FCA Success – Expanded
Liability Theories
• Implied certification theory
– Traditionally, FCA liability has required the plaintiff to plead with
specificity that the defendant made a false statement or certification –
i.e., some overt act – which can be difficult to do at the complaint stage
without the benefit of discovery.
– The implied certification theory does not require an overt act or
statement.
• Instead, defendants impliedly certify that they are in compliance
with all statutory, regulatory, and contractual provisions that are
preconditions to payment or participation.
– Effectively lowers a plaintiff’s pleading burden because there is no need
to allege an overt act or requirement to certify compliance with the
underlying law or regulation.
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Keys to Federal FCA Success – Expanded
Liability Theories
• Implied certification theory potentially transforms every breach of
contract dispute into actionable fraud.
• Virtually any term or condition in a contract can now serve as the
basis for a false claim, regardless of whether they are material or a
condition of payment.
– Most state contracts have hundreds of contract provisions and
incorporate by reference scores of statutes and regulations.
– Noncompliance with any one of these could potentially be the basis for
a false claim.
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Keys to Federal FCA Success – Expanded
Liability Theories
• Expanded definition of materiality – “having a natural tendency to
influence, or be capable of influencing,” a payment decision.
− This very broad definition, when paired with the implied certification
theory, transforms virtually any statutory, regulatory, and contractual
violation into actionable fraud, even if it had no impact on the
government’s payment decision.
− “Reverse false claims” – Companies can now be liable when they
knowingly retain an overpayment by the government, even if the
overpayment was not caused by any action of the contractor.
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Keys to Federal FCA Success – Expanded
Liability Theories
• Recent amendments have expanded the reach of the FCA:
– Previously, the FCA required “presentment” of a false claim directly to
the government.
– Now, FCA applies whenever Federal funding is involved, regardless of
who pays the claim.
– Expands the pool of defendants subject to the FCA.
– For example, subcontractors, grantees, or other entities who do not
directly submit claims to the government, but receive federal funding
from their prime contractors or grantors, are now covered.
• Applies to non-traditional government contractors like Lance
Armstrong – government alleges that false statements made to
USPS to induce its assent to an advertising contract constitutes a
false claim.
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Keys to Federal FCA Success – Expanded
Damages Theories
• DOJ is pursuing “fraudulent inducement” theories to maximize FCA
damages.
– Used where defendant is alleged to be ineligible to receive the contract
or perform the work, but represents otherwise.
– But for the defendant’s misrepresentation, the government would not
have contracted with the defendant.
• Examples include loan programs, small-business set asides, Trade
Agreements Act or other preference requirements, socio-economic
requirements, and Medicaid eligibility.
– Damages are disgorgement – the full contract value X 3, plus penalties.
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Keys to Federal FCA Success – Expanded
Relator Pool
• Expanded relator pool
– Government employees can be relators – even when they learn of the
facts underlying their claim while performing their job.
– Courts have rejected the government’s argument that government
employees lack standing and present conflict of interest concerns.
– For example, courts have held that government auditors who audited
the defendant, and learned the basis of their complaint from that review,
have standing to be FCA relators.
– Government employees often possess more and better information of
the alleged fraud and, thus, file complaints that are more likely to
survive a motion to dismiss.
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Keys to Federal FCA Success – Narrowed
Defenses
• Recent trends have made it more difficult for defendants to dismiss
complaints on the pleadings, which increases the chances for
settlement.
– Expanded liability and damages theories have effectively relaxed
plaintiffs’ pleading requirements.
– Defenses have been scaled back.
• For example, regarding the public disclosure bar: (i) fewer types of
disclosures are now considered public, (ii) relators do not need
direct knowledge of the complaint allegations, and (iii) DOJ can
veto any court dismissal.
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Recent State FCA Activity
• Many states are expanding their FCA laws beyond Medicaid
– GA and NC recently enacted new laws extending qui tam provisions
and treble damages to non-Medicaid fraud.
– CA, HI, MA and TN recently updated their FCA statutes to square them
with Federal amendments.
– Proposed legislation in AL, AZ and MI would create new qui tam
provisions and treble damages for fraud under any state contract.
• States are pursuing new and novel uses of FCA laws. For example,
NY’s FCA law was amended in 2010 to allow whistleblowers to
pursue false claims related to state and local taxes.
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Recent State FCA Activity
• 2012 Significant Settlements
– Johnson & Johnson subsidiary reached a $158 million settlement to
resolve Medicaid fraud claims in Texas, as well as $181 million to
resolve claims in 36 other states and the District of Columbia.
– McKesson Corporation agreed to pay 30 states over $151 million to
settle a Medicaid fraud suit.
– Senior Care Action Network reached a settlement of $323 million with
California and the Federal Government to resolve state and Federal
FCA claims.
– Compass Group USA, Inc. reached an $18 million settlement with New
York to resolve FCA claims related to improper overcharging for food
services.
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Recent State FCA Activity
• James D. “Buddy” Caldwell v. Janssen Pharmaceutical Inc. et al.,
(La.) (2012)
– $258 million in civil penalties, $70 million in attorneys’ fees, and $3
million in costs for Medicaid violations.
• Mohan’s Custom Tailors, Inc., (NY) (2012)
– $5.5 million settlement of tax evasion claims under the NY FCA; first
successful use of the 2010 amendments to the NY FCA, which
expanded FCA coverage to substantial violations of tax law.
• People of the State of New York v. Sprint Nextel Corp., (NY) (2013)
– Ongoing $300 million tax fraud case under the NY FCA.
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What to Expect
• Expect state FCA activity to continue to rise both as a potential
means of addressing budget shortfalls and to root out fraud in
various industries.
• Expect states to continue to apply their FCA statutes beyond the
Medicaid context to all manners of procurement, and to extend the
reach of their statutes in new and creative ways to other types of
misconduct such as tax fraud.
• Expect states to continue to tailor their statutes to the Federal model
to benefit from Federal incentives, and to leverage expansive
Federal theories to increase recoveries.
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What to Expect
• Expect the plaintiffs’ bar to continue to move aggressively into this
space
– Plaintiffs’ lawyers are already active in Federal qui tam actions, and
have cultivated contingency fee work from AGs in consumer protection,
Medicaid, and other suits.
– Qui tam litigation gives them the opportunity to encourage state action
and bring the authority of AGs to bear on targets without being formally
retained by states.
– Private counsel receive a share of the state’s settlement or litigation
recovery (15-30%) whether the AG intervenes or not.
• Expect cases to be increasingly complex and costly to defendants
because qui tam cases can include claims under multiple states’
FCAs, but do not necessarily benefit from the coordinated discovery
and settlement that occurs in traditional multi-state litigation.
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Contact Information
Dave Nadler
202-420-2281
NadlerD@dicksteinshapiro.com
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