By Ambi Biggs
The Department of Justice (“DOJ”) has issued an interim final rule that dramatically increases the dollar amount for civil penalties that can be assessed against an entity or individual who violates the False Claims Act (“FCA”). Under the FCA, 31 U.S.C. § 3729, et seq., anyone who knowingly presents a “false or fraudulent” claim to the government for payment or approval or knowingly makes or uses a false record or statement material to a false or fraudulent claim is civilly liable to the federal government. On June 30, 2016, the DOJ issued an interim final rule that increased the minimum amount of penalties for a FCA violation from $5,500 to $10,781 and the maximum from $11,000 to $21,563. The interim rule went into effect on August 1, 2016 and comments are due by August 29.
The DOJ adjusted the civil penalties for inflation in accordance with the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, which is part of the Bipartisan Budget Act of 2015. The adjustments to civil penalties are based on the Bureau of Labor Statistics’ Consumer Price Index for 2015. The increased penalties apply to penalties that are assessed after August 1, 2016 whose associated violations occurred after November 2, 2015. The lower range of penalties – $5,500 minimum and $11,000 maximum – will continue to apply to violations that occurred on or before November 2, 2015 and to assessments that were made before August 1, 2016 whose associated violations occurred after November 2, 2015.
The increased penalties are in addition to damages that the DOJ can assess under the FCA. Under 31 U.S.C. § 3729, the government can assess three times the amount of damages it sustains based on an FCA violation. In instances in which the government has sustained minimal damages, FCA violators can still be liable for enormous amounts because each false claim can result in a penalty. Thus, in cases in which a contractor submits hundreds or thousands of invoices or billings to the government for payment while performing on a contract, the contractor can amass steep civil penalties.
The increase in penalties could provide more incentive for relators to bring qui tam actions. Under the FCA, whistleblowers can receive between 15 to 25 percent of the amount recovered in an action if the government chooses to intervene in the lawsuit, and between 25 to 30 percent of the proceeds if the government does not intervene.
While the increase in the amount of penalties was expected, it comes on the heels of the U.S. Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar, which held that the implied false certification theory can be the basis for FCA liability in certain circumstances. The theory holds that when a defendant submits a claim for payment to the government, it impliedly certifies compliance with all conditions of payment, even if the invoice does not expressly state the contractor has complied.
In Universal Health Services, a couple claimed that their daughter died of a seizure while being treated by unlicensed and unsupervised staff at a mental healthcare facility. They filed a qui tam action, alleging that by submitting reimbursement claims to the state Medicaid agency, the facility fraudulently misrepresented that its staff members were properly licensed and/or supervised, in violation of both the federal and Massachusetts False Claims Acts.
The Supreme Court resolved the disagreement between the U.S. Courts of Appeal regarding the scope and validity of the implied false certification theory. It held that the theory can be the basis for liability “when the defendant submits a claim for payment that makes specific representations about the goods and services provided, but knowingly fails to disclose the defendant’s noncompliance with a statutory, regulatory, or contractual requirement,” if the omission makes the representations “misleading half-truths.”
The Court also held that the misrepresentation about compliance must be material to the government’s decision to pay in order for there to be FCA liability, and that the “materiality standard is demanding.” Importantly, in vacating the lower court’s judgment and remanding the case for reconsideration of whether the plaintiffs had sufficiently pled an FCA case, the Court stated: “We emphasize … that the False Claims Act is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations.”
Although the Supreme Court accepted the implied false certification theory, it imposed rigorous standards, which could dissuade some potential relators and the government from pursuing FCA claims. Nonetheless, if they do file valid FCA claims, government contractors now face heftier penalties.
Comments on the interim rule on the increased penalties can be submitted in electronic format or on paper. They can be submitted online or by mail: Robert Hinchman, Senior Counsel, Office of Legal Policy, U.S. Department of Justice, Room 4252 RFK Building, 950 Pennsylvania Avenue NW, Washington, D.C. 20530. All comments should reference Docket No. OAG 148 and must be submitted by August 29.
About the Author: Ambi Biggs is an associate with PilieroMazza who practices in the areas of litigation and government contracts. She may be reached at abiggs@pilieromazza.com.