FCA Now

On January 14, 2021, the United States Department of Justice (“DOJ”) issued its annual press release highlighting its recoveries from False Claims Act (“FCA”) enforcement over the last fiscal year.  Total recoveries in FY2020 exceeded $2.2 billion, with the majority—$1.8 billion—of those recoveries coming from the healthcare industry.  These totals are down substantially from FY2019, in which total recoveries exceeded $3 billion with $2.6 billion relating to matters involving the health care industry. As was the case last year, recoveries from qui tam actions—lawsuits brought by whistleblowers or “relators” suing on behalf of the government—continued to fall, with only $1.6 billion in recoveries coming in qui tam actions following $2.2 billion in FY2019.  As we noted last year, this is unsurprising given former Attorney General Barr’s well-documented distaste for the qui tam provisions of the FCA, calling them “patently unconstitutional” in a memo he wrote as an Assistant Attorney General in 1989.  It also highlights the continuing effect of the “Granston Memo” on qui tam enforcement.  The Granston Memo, issued in 2018, instructed DOJ prosecutors to dismiss qui tam cases that lack substantial merit on the grounds that meritless qui tam cases drain limited government resources and may “generate adverse decisions that may affect the government’s ability to enforce the FCA.”  But the most likely factor for the lower recoveries in FY2020 is, of course, COVID-19, which has slowed judicial proceedings around the country and undoubtedly affected the progression of qui tam suits—an issue quickly identified by the DOJ in qualifying its reduced recoveries. The COVID-19 factor that led to a decrease in recoveries in FY2020, however, is likely to be responsible for what is expected to be a substantial increase in FCA recoveries and enforcement in 2021.  First, the government’s response to the pandemic by injecting trillions into the economy has created massive FCA exposure.  The risk of civil enforcement actions to combat fraud relative to the government’s expenditures are just starting to be seen now, with the recent announcement of the first civil FCA settlement based on a Paycheck Protection Program (“PPP”) loan.  Many more settlements and actions are likely to follow, given the congressional authorization of nearly $1 trillion of PPP funding since March 2020.  The rate of these enforcement actions is likely to increase, too, as the vaccine rollout continues and courts resume normal activities. Moreover, the government will be able to more effectively investigate and resolve FCA matters as the pandemic subsides, including addressing not only the new cases filed in 2021, but also, the still-pending 2020 matters.  Notably, although the total recoveries and total qui tam recoveries for FY2020 were down as compared to FY2019 ($2.2/1.6 billion compared to $3/2.2 billion), the total number of new FCA matters increased.  In FY2019, there were a total of 786 new FCA matters (148 non-qui tam and 638 qui tam).  This number increased by nearly 17% in FY2020, with 922 new FCA matters reported (250 non-qui tam and 672 qui tam).  Thus, as the government is able to better investigate these lingering 2020 matters in FY2021, the recoveries that may have otherwise been realized in FY2020 are now more likely to be realized in FY2021. Second, COVID-related expenditures—and the associated FCA exposure—are only expected to increase after President-Elect Biden proposed a $1.9 trillion relief plan on January 14, 2021.  Although a large percentage of that sum will go to individuals and the vaccine program, hundreds of billions are likely to go to businesses, opening the door for more fraud. Finally, the Biden administration may be more willing to pursue qui tam suits than the Trump administration, leading to an increased number of qui tam actions and a corresponding increase in overall recoveries.  President-Elect Biden stated plans to nominate Merrick Garland as Attorney General, who does not appear to have taken the same strong position against qui tam suits as seen with former Attorney General Barr. In short, while FY2020 was a down year for FCA recoveries, the number of total new FCA matters increased, and the conditions are ripe for a rise in FCA enforcement actions and recoveries throughout 2021.

On January 12, 2021, the Eastern District of California entered into a civil settlement with a Paycheck Protection Program (“PPP”) borrower and its CEO to resolve allegations of fraud.  The settlement stemmed from a $350,000 PPP loan that SlideBelts Inc., an internet retail company, received even though it was a prohibited borrower as a debtor in bankruptcy.  This is the first civil settlement for PPP-related fraud and is a harbinger of what the New Year will bring for some of the five million PPP loan recipients to date. The Settlement According to the settlement agreement, SlideBelts submitted three applications for PPP loans to three different lenders on April 3, 8, and 14 of 2020.  The application forms (SBA Form 2483) provide that loans will not be approved for any applicant that provides an affirmative answer to the very first question on the form, which asks: 1.  Is the Applicant . .  . presently involved in any bankruptcy? Even though it was a debtor in a Chapter 11 bankruptcy at the time, SlideBelts answered “no” to this question in each of its three applications. The settlement agreement provides the first lender rejected SlideBelts’ application on April 10, 2020.  At that time, the first lender sent an email advising SlideBelts’ CEO, Brigham Taylor, that Question 1 had been answered incorrectly because the lender knew SlideBelts was presently in bankruptcy.  Taylor responded that the answer was an “oversight,” but asserted that the question regarding bankruptcy was “an overreach” by the Small Business Administration (“SBA”).  On April 14, 2020, Taylor wrote the first lender again and reiterated that the term “bankruptcy” should not be included in Question 1, and that the lender should approve the loan.  The lender rejected Taylor’s request and repeated that SlideBelts was not eligible for a PPP loan because it was in bankruptcy.  Three hours later, SlideBelts submitted the third application, signed by Taylor, to a different lender. Shortly thereafter, the second lender approved SlideBelts’ second application.  Taylor signed the loan note with the second lender and, according to the settlement agreement, again “stated falsely that SlideBelts was not in bankruptcy to influence [the second lender] to execute the note and disburse the [$350,000] loan proceeds to SlideBelts.”  As a result of the note and the false statements by Taylor and SlideBelts, the second lender not only disbursed the loan proceeds to SlideBelts on April 21, 2020, but also submitted a false claim to the SBA for $17,500 in loan processing fees, which the SBA paid. One day after the loan was disbursed, Taylor wrote an email to the second lender stating that SlideBelts “just realized that we may not have answered [Question 1] correctly since we filled out the application quickly and wanted to bring it to your attention.”  Instead of returning the loan, however, SlideBelts sought retroactive approval of the PPP loan from the bankruptcy court.  In doing so, SlideBelts did not disclose to the bankruptcy court that it had obtained the loan by making a false statement to the second lender regarding its status as a debtor in bankruptcy.  The SBA and the second lender opposed SlideBelts’ motion and requested that the bankruptcy court order SlideBelts to return the loan.  SlideBelts did not return the money voluntarily but instead asked the bankruptcy court to dismiss the case so that it could refile for bankruptcy later and apply for a PPP loan while the case was dismissed. On June 30, 2020, the bankruptcy court granted SlideBelts’ motion to dismiss the bankruptcy case.  After repeated demands from the SBA to return the proceeds, SlideBelts finally returned the $350,000 to the second lender on July 8, 2020. Based on these actions, the United States contends in the settlement agreement that SlideBelts and Taylor are liable to the government for damages and penalties totaling $4,196,992 for violations of the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”) and the False Claims Act (“FCA”).  Pursuant to the terms of the settlement agreement, SlideBelts and Taylor agree to pay $100,000 to resolve these claims, with nearly half to be paid within fourteen days and the remaining amount due over the course of five years.  Notably, the settlement amount “represents the amount the United States is willing to accept in compromise of its civil claims arising from the [alleged violations] due solely to the [Taylor and SlideBelts’] financial condition.”  SlideBelts also agreed that if it failed to make its required payment under the settlement agreement, SlideBelts would consent to the entry of judgment against it for $2,098,496 (representing its half of the $4,196,992 in total alleged damages and penalties). The Takeaway When Congress enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act to quickly authorize up to $349 billion in forgivable loans to small businesses on March 29, 2020, it was inevitable that fraud would follow.  Enforcement followed, too, with federal prosecutors pursuing dozens of criminal prosecutions for various PPP-related fraud throughout 2020.  Those criminal charges often represented the most blatant of crimes and the easiest of targets.  All the while civil lawsuits were quiet, or at least not yet public. But not anymore.  This first-of-its-kind civil settlement demonstrates that civil enforcement actions are alive and well and that the government is aggressively pursuing recoveries against companies and individuals, and even against insolvent borrowers.  (Indeed, even under pandemic circumstances, the DOJ reported recovering more than $2.2 billion in settlements and judgments from civil cases involving fraud and false claims against the government in fiscal year 2020.) Moreover, the settlement paves the way for private relators looking to take advantage of the qui tam provisions of the FCA to target PPP fraud.  In fact, relator-driven qui tam cases—many of which are likely currently pending but under seal while under investigation by the government—may in fact dominate the enforcement scene related to PPP fraud in the New Year.  Only time will tell, but at the least the SlideBelts settlement marks the beginning of a new chapter related to combatting pandemic-related fraud with civil enforcement actions and the FCA. To stay up-to-date on False Claims Act news, subscribe to Dorsey’s FCA Now Blog today.

I. Introduction The CARES Act allocated $100 billion in relief funds to hospitals and other healthcare providers, to be distributed by the Department of Health and Human Services (“HHS”) through the Public Health and Social Services Emergency Relief Fund (or “Provider Relief Fund”). Many healthcare providers across the country have received payments from the Fund, beginning with an initial tranche of $30 billion distributed in mid-April, and many more will be receiving additional funding in coming weeks. These funds provide critical support to hospitals, physician-owned practices, and other providers who face significant financial challenges caused by the dual shocks of preparing to treat COVID-19 patients while simultaneously losing revenue because of suspension of elective procedures. But the relief funds are subject to extensive terms and conditions, and with those conditions comes exposure to potential liability under the False Claims Act (“FCA”). This exposure is particularly acute given the broad and ambiguous language of some of the terms and conditions, the expectation of intensive government enforcement efforts following distribution of relief funds, and the economic incentives for private relators to commence FCA lawsuits. Although many providers are understandably rushing to obtain relief funds immediately, it is critical to pay attention to the strings attached to those funds. Prudent providers can and should take steps now to mitigate the risk of potentially costly FCA claims that could arise later. II. FCA Basics The False Claims Act, enacted in 1863 to “stop[] the massive frauds perpetrated by large contractors during the Civil War,” Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 1996 (2016), imposes liability where a defendant “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” to the Government. 31 U.S.C. § 3729(a)(1). A person “knowingly” presents a false claim if he “(1) has actual knowledge of the information,” i.e., actually knows the claim is false; “(2) acts in deliberate ignorance of the truth or falsity of the information; or (3) acts in reckless disregard of the truth or falsity of the information.” 31 U.S.C. § 3729(b)(1); see United States v. Munoz-Escalante, 2015 U.S. Dist. LEXIS 142167, at * 6 (D.S.D. 2015) (citing United States ex rel. Quirk v. Madonna Towers, Inc., 278 F.3d 765, 767 (8th Cir. 2002)). Upon proving a violation, the Government can recover treble damages plus civil penalties. 31 U.S.C. § 3729(a)(1). The Government itself may commence an FCA action, or a private relator may do so on behalf of the Government, in which case the Government may or may not choose to intervene in the case. In either case, damages recovered belong to the Government, but the relator is entitled to a share of the proceeds. See generally United States ex rel. Hunt v. Cochise Consultancy, Inc., 887 F.3d 1081, 187 (11th Cir. 2018). Where, as here, the Government’s payment of funds is conditioned on compliance with certain requirements, FCA exposure can arise if the recipient of funds is alleged to have “falsely” certified compliance with the terms and conditions of payment. See, e.g., Escobar, 136 S. Ct. at 1995 (confirming the “implied false certification theory can be a basis for liability” under the FCA). III. Terms & Conditions of Provider Relief Fund Payments Providers who receive disbursements from the Provider Relief Fund are required to sign an attestation agreeing to the Government’s terms and conditions for receipt of the funds. In addition to a prohibition on using relief funds for expenses or losses reimbursed by other sources (i.e., no “double dipping”), and numerous other specific provisions, the terms and conditions prohibit “balance billing” out-of-network patients for “all care for a presumptive or actual case of COVID-19.”[1] The terms and conditions also impose a broad limitation on the purposes for which relief funds may be used: The Recipient certifies that the Payment will only be used to prevent, prepare for, and respond to coronavirus, and that the Payment shall reimburse the Recipient only for health care related expenses or lost revenues that are attributable to coronavirus. The latter two conditions in particular engender the potential for FCA litigation because they are both broadly applicable and ambiguous. For example, the prohibition on balance billing extends to “presumptive” cases of COVID-19, but fails to define a “presumptive” case. As experience with COVID-19 rapidly evolves, providers and public health agencies continually update clinical signs and symptoms of the disease, many of which are nonspecific. Virus test kits remain in short supply. Absent a test confirming a patient’s infection with the novel coronavirus, how is a provider to define “presumptive” cases of COVID-19 so as to comply with this condition? The Provider Relief Fund website states that “providers must agree not to seek collection of out-of-pocket payments from a COVID-19 patient that are greater than what the patient would have otherwise been required to pay if the care had been provided by an in-network provider” (emphasis added). This suggests that the out-of-pocket limitation applies only to COVID-19-related diagnosis and care, but ambiguity remains due to the lack of specific guidance. The broad limitation on use of relief funds is similarly problematic. Given the devastating breadth of the COVID-19 pandemic’s medical, economic, and social effects, how are providers to distinguish “expenses or lost revenues” that are “attributable to the coronavirus” as opposed to some other cause? For example, do “health care related expenses . . . attributable to the coronavirus” include only the direct costs of purchasing additional personal protective equipment, ventilators, and other supplies necessary to treat COVID-19 patients? Or does this category include associated administrative costs, costs of training, etc.? Do “lost revenues . . . attributable to the coronavirus” include only revenues from elective procedures cancelled pursuant to government order or by medical necessity? Or could this category also include, for example, procedures that could have gone forward but were cancelled by patients because of perceived infection risk? Could it include loss of business opportunities that are shelved or cancelled because of the broader effects of the pandemic? The Government’s decision to distribute a portion of the funds immediately and broadly to all providers that received Medicare fee-for-service reimbursement in 2019 suggests that “attributable to the coronavirus” should include lost revenue caused by the economic downturn attributable to the coronavirus. But again, a lack of guidance on how directly lost revenue must be attributable to the coronavirus pandemic creates ambiguity. So-called “subregulatory guidance,” that thicket of agency memoranda, website “FAQs,” and other directives not promulgated through notice-and-comment rulemaking or legislation, compounds the problems raised by ambiguous terms and conditions. Agencies are scrambling to issue new rules, directives, and direction as the COVID-19 pandemic evolves. This scramble is understandable, but it creates significant pressure for agencies to do something—fast—and that urgency does not lend itself to legislative action or the ordinary notice-and-comment rule-making process. From an administrative perspective, Department of Justice trial attorneys have been directed to not pursue FCA cases premised on violations of “sub-regulatory guidance”—this is the so-called “Brand Memo” of January 2018, which was later memorialized in section 1-20.000 of the Justice Manual. Likewise, the Courts have started to express some hostility to FCA cases premised on such violations, particularly in the wake of the June 2019 Supreme Court decision in Azar v. Allina Health Services, 139 S. Ct. 1804 (2019), which underscored the importance of notice-and-comment rulemaking to create substantive legal standards. Nevertheless, agencies will continue to promulgate subregulatory guidance, and it will continue to play a role in litigation, in one form or another. IV. The Risks of Ambiguous Payment Conditions As the foregoing examples suggest, there is room for interpretation and debate over the meaning of the broad language used in the terms and conditions attached to the Provider Relief Fund. And where there is room for debate, the potential for litigation increases considerably. This is particularly true where the Government is expected to ramp up enforcement efforts following disbursement of stimulus funds. Indeed, in announcing the allocation of additional funds, HHS Secretary Azar promised “significant anti-fraud and auditing work . . . by HHS, including the work of the Office of the Inspector General,” to enforce the conditions imposed on the disbursements. The Government’s efforts likely will focus on clear cases of willful fraud, rather than good-faith disputes over the meaning of ambiguous language in the terms and conditions. But recipients of relief funds cannot rely on good faith and prosecutorial discretion alone, because private relators still have significant financial incentives to pursue FCA claims. Ambiguous terms and conditions provide relators (and creative attorneys) a potential path to generate claims the Government probably would not pursue. Fortunately for recipients of Provider Relief Fund payments, the federal courts generally hold that a defendant will not face FCA liability for violating a vague or ambiguous law, regulation, or contractual condition if the defendant’s interpretation of the condition was objectively reasonable. See, e.g., United States ex rel. Donegan v. Anesthesia Assocs. of Kansas City, 833 F.3d 874, 879 (8th Cir. 2016); United States ex rel. Purcell v. MWI Corp., 807 F.3d 281, 288 (D.C. Cir. 2015); United States v. Southland Mgmt. Corp., 326 F.3d 669, 684 (5th Cir. 2003) (en banc) (Jones, J., concurring) (“Where there are legitimate grounds for disagreement over the scope of a contractual or regulatory provision, and the claimant’s actions are in good faith, the claimant cannot be said to have knowingly presented a false claim.”). This principle, which functions as a particularized application of the knowledge or scienter requirement of an FCA claim, “helps to ensure that innocent mistakes made in the absence of binding interpretive guidance are not converted into FCA liability, thereby avoiding the potential due process problems posed by ‘penalizing a private party for violating a rule without first providing adequate notice of the substance of the rule.’” Purcell, 807 F.3d at 287 (quoting Satellite Broad. Co. v. Fed. Commc’ns Comm’n, 824 F.2d 1, 3 (D.C. Cir. 1987)). There is an additional nuance, however: Even if a defendant received funds on the basis of an objectively reasonable interpretation of applicable conditions, the defendant still may be liable “if a Relator (or the United States) produces sufficient evidence of government guidance that ‘warned [the defendant] away from an otherwise reasonable interpretation’ of an ambiguous regulation.” Donegan, 833 F.3d at 879 (quoting Purcell, 807 F.3d at 290). V. Mitigating FCA Risk Associated with Provider Relief Fund Payments The foregoing case law should provide a viable defense for Provider Relief Fund recipients who use funds in accordance with good-faith, objectively reasonable interpretations of HHS’s terms and conditions. But providers should not simply hope to win the interpretive battle after an FCA claim is filed; there are steps providers can take now to bolster the likely strength of their defenses if litigation occurs. First, recipients of Provider Relief Fund Payments should carefully monitor and track the uses of these funds, so they can demonstrate compliance with the terms and conditions. (Relatedly, note that the terms and conditions expressly require compliance with federal financial management and record retention regulations, including 45 C.F.R. §§ 75.302 and 75.361-365). Second, recipients should carefully consider, articulate, and document how particular uses of relief funds meet the HHS conditions. Having supportable financial data to show that the recipient suffered an abnormal loss of revenue that can be attributable to coronavirus will likely be important to defend a recipient’s use of relief funds to support its operating expenses during the public health emergency. With respect to uses that may be debatable, providers should think critically and actively now about how those uses fit within the conditions, rather than waiting to generate a post hoc explanation after litigation arises. For example, in United States ex rel. Donegan v. Anesthesia Associates of Kansas City, the court ascribed some significance to the defendant’s reasonable definition of a vague regulatory term, adopted by the defendant’s Professional Practice Committee and documented in its Corporate Compliance Plan. 833 F.3d at 879. Thoughtful and deliberate development of internal definitions and processes not only helps generate more defensible interpretive positions; it also should help to demonstrate that the recipient is acting thoughtfully and in good faith. While there is some disharmony in the case law regarding the legal significance of a recipient’s subjective good faith, see, e.g., John T. Boese & Douglas W. Baruch, Civil False Claims & Qui Tam Actions § 2.06 (4th ed.), a defendant’s good faith will almost always be relevant to the Government’s exercise of prosecutorial discretion, and to the judges and juries who ultimately decide cases. Third, fund recipients should continue to monitor communications and guidance from HHS regarding the terms and conditions and use of funds. Even where agency guidance may not be legally binding, it often remains important as a practical matter and, even if not dispositive, it can play an evidentiary role in FCA litigation. Fourth, recipients must be vigilant about understanding the nature and purpose of any deposits of Government funds. It is a mistake to take the view that “if HHS deposited the funds in our account, my organization was entitled to them.” The FCA’s reach is very broad—it is not just limited to affirmative requests for funds, but extends also to the knowing retention of overpayments and so-called “reverse” false claims. See 31 U.S.C. § 3729(a)(1)(G). Finally, recipients should seek the advice of counsel regarding appropriate uses of Provider Relief Fund payments and other applicable conditions and regulatory requirements. Good, proactive legal advice can help mitigate the risk of facing FCA claims, and under certain circumstances can even provide a defense to an FCA claim if litigation occurs. See, e.g., United States ex rel. Bidani v. Lewis, 2001 U.S. Dist. LEXIS 260, at *24 (N.D. Ill. 2001) (citing United States v. Cheek, 3 F.3d 1057, 1061 (7th Cir. 1993)). It should be noted, however, that the advice-of-counsel defense may not be available to a defendant who “shops around” for a favorable legal opinion or otherwise does not act in good faith. See United States ex rel. Drakeford v. Tuomey Healthcare Sys., Inc., 792 F.3d 364, 380 (4th Cir. 2015). VI. Conclusion The Provider Relief Fund offers crucial support to hospitals, clinics, and other providers who face dire and immediate financial need. Providers in need of assistance certainly should avail themselves of this support as appropriate, but should be conscious of the attendant risks. Proactive, deliberate compliance actions are the best way to mitigate the risks of costly litigation likely to sweep through the healthcare industry on the heels of the COVID-19 pandemic.   [1] “[F]or all care for a presumptive or actual case of COVID-19, Recipient certifies that it will not seek to collect from the patient out-of-pocket expenses in an amount greater than what the patient would have otherwise been required to pay if the care had been provided by an in-network Recipient.”