FCA Now

On June 28, 2021, the United States Supreme Court denied review of a Seventh Circuit decision affirming the Department of Justice (“DOJ”)-requested dismissal of a False Claims Act (“FCA”) suit alleging a drug kickback scheme.  Cimznhca LLC v. United States, No. 20-1138, 2021 U.S. LEXIS 3404 (June 28, 2021).  As a result, the circuit split regarding the standard that applies to a Government’s motion to dismiss an FCA action remains unresolved. In the underlying case, relator Cimznhca, LLC filed an action against four defendants, UCB, Inc. RXC Acquisition Company, Omnicare Inc., and CVS Health Corporation, in July 2017.  United States ex rel. Cimznhca, LLC v. UCB, Inc., 970 F.3d 835, 839-40 (7th Cir. 2020).  Relator alleged that the defendants were engaged in a kickback scheme by providing physicians with incentives for prescribing a brand-name drug over other competitors.  Id.  The Government declined to intervene in December 2017, and Relator continued to prosecute the case.  Id.  However, the Government moved to dismiss under 31 U.S.C. § 3730(c)(2)(A) in December 2018.  Id. at 840; see also Granston Memo (Jan. 10, 2018) (encouraging the DOJ to use its power to dismiss relators' claims more often).  Relator objected to the dismissal. The district court held a hearing on the petition and applied the Sequoia Orange rational-basis test from the Ninth Circuit.  Id.  Under Sequoia Orange, when the government identifies a valid governmental purpose and a relationship between the purpose and dismissal, the court will dismiss unless the Relator can demonstrate that the dismissal is arbitrary and capricious.  United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998).  The district court determined the Government’s motion was arbitrary and capricious and denied it.  Cimznhca, 970 F.3d at 840.  The Government appealed the order.  Id. The competing dismissal standard is the unfettered-right standard from Swift v. United States, 318 F.3d 250 (D.C. Cir. 2003).  Under the Swift standard, the Government may dismiss an action without judicial review in virtually all cases.  Id. at 253.  The Tenth Circuit has followed the Ninth, adopting the Sequoia Orange standard.  See, e.g., Ridenour v. Kaiser-Hill Co., Ltd. Liab. Co., 397 F.3d 925 (10th Cir. 2005).  The Second and Third Circuits have noted the split but declined to adopt either standard.  See, e.g., Chang v. Children’s Advocacy Ctr., 938 F.3d 384 (3d Cir. 2019); United States ex rel. Borzilleri v. Abbvie, Inc., 837 F. App’x 813, 816 (2d. Cir. 2020). In this case, the Seventh Circuit reversed and directed the district court to dismiss.  970 F.3d at 854.  The Seventh Circuit declined to decide whether Sequoia Orange or Swift was the proper standard, but suggested that something closer to Swift would apply in almost all cases, excepting, for example, a fraud on the court.  Id. at 851-52.  Relator petitioned for a writ of certiorari, noting the circuit split on the dismissal standard. With the Supreme Court’s denial of Relator’s petition for a writ of certiorari, the circuit split remains.  Defendants embroiled in FCA cases should thus remain cognizant of the opportunity, under the right circumstances, for an early exit with the support of the DOJ, but note that the applicable standard will vary depending upon the circuit in which the case is filed.

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.

As has been emphasized with the disclosure of the “Granston Memo” in January 2018 and several cases since, the government may request dismissal of a qui tam action filed under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq., in certain circumstances, and even over the relator’s objection and when the government has declined to intervene. Recently, the Southern District of New York evaluated the underlying merits of such a request. At issue was the Government’s motion to dismiss whistleblower claims alleging that Standard Chartered Bank engaged in banking practices that violated U.S. sanctions against Iran. United States ex rel. Brutus Trading, LLC v. Std. Chartered PLC, No. 18 Civ. 11117 (PAE), 2020 U.S. Dist. LEXIS 116728 (S.D.N.Y. July 2, 2020). The court decided in favor of the government and dismissed the suit. Id. at *13. Review of the decision is helpful to better understand (1) some of the factors that support dismissal of qui tam claims filed under the FCA, and (2) the two approaches relating to the appropriate standard of review courts should apply when evaluating the government’s request to dismiss qui tam actions. The FCA allows a private party (also known as a relator or whistleblower) to bring a civil suit on behalf of the government in order to enforce the law against entities submitting fraudulent claims to the government. 31 U.S.C.at § 3730(b)(1). The FCA not only imparts significant control to the Government over such suits, but also permits the Government to intervene (or not) and move to dismiss (or not). Id. at § 3730(b)–(c). Historically, the government’s power to dismiss qui tam actions has been exercised sparingly, largely because the statute expressly provides that “relators can proceed with certain qui tam actions following the government’s declination.” See Granston Memo (Jan. 10, 2018). The initial DOJ guidance related to dismissal cautioned that: [A] decision not to intervene in a particular case may be based on factors other than merit, particularly in light of the government’s limited resources. Accordingly, [the government has been] circumspect with the use of this tool to avoid precluding relators from pursing potentially worthwhile matters, and to ensure that dismissal is utilized only where truly warranted. Id. at 1–2. The Granston Memo, however, encouraged DOJ trial attorneys to use its power to dismiss relator’s claims more often. We have previously reported on the Granston Memo, and readers can learn more about it here. Government motions to dismiss have been scrutinized under two different standards. The first approach articulated by the Ninth Circuit requires the government to identify “a valid government purpose” and “a rational relation between dismissal and accomplishment of the purpose.” United States ex rel., Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998). Next, the burden shifts to the whistleblower “to demonstrate that dismissal is fraudulent, arbitrary and capricious, or illegal.” Id. The D.C. Circuit, however, has articulated a more deferential test, recognizing that dismissal is the government’s “unfettered right” and is unreviewable by the court absent fraud. Swift v. United States, 318 F.3d 250, 252–53 (D.C. Cir. 2003). Here, the court declined to definitively adopt either standard, recognizing that the government had already met the more rigorous standard set forth in the Ninth Circuit. Brutus Trading, 2020 U.S. Dist. LEXIS 116728 at *8. The court reasoned that the whistleblower was not responsible for uncovering the fraud in the earlier investigation (dating back to 2013), and furthermore, had not aided the government in discovery of any new FCA violations since. Secondly, the court accepted the “well-established basis” set forth by the government: that were the case to proceed to discovery, the Government would be “required to expend resources on a matter that it has found meritless.” Id. at *10. The court also found particularly compelling that the government had already recovered hundreds of millions of dollars from the defendants over the previous decade without relator’s help. Id. The Government’s asserted reasoning not to spend additional resources was accepted as a “valid government purpose.” The whistleblower was then unable to meet its burden that dismissal would nonetheless be “fraudulent, arbitrary and capricious, or illegal.” Id. at *10–11 (internal quotations omitted). The court dismissed the relator’s “subjective disagreement with the Government’s investigative strategy and ultimate decision” as ineffectual reasoning and rejected relator’s characterization of the investigation as wasteful simply “because it did not reach the conclusion that relator deems correct.” Id. at *11–12. Because the government had met either standard, the claims against defendants were dismissed. The final takeaway here for parties to qui tams: the government continues to exercise its priorities under the Granston Memo to dismiss qui tams, and whether such a case is dismissed can depend on the approach taken by the particular circuit.

Earlier this month, the United States Department of Justice issued a press release to announce recoveries of over $3 billion from False Claims Act cases in FY2019. In making the announcement, Assistant Attorney General Jody Hunt of the Civil Division emphasized, “The significant number of settlements and judgments obtained over the past year demonstrate the high priority this administration places on deterring fraud against the government and ensuring that citizens' tax dollars are well spent.” But what do the numbers say about the administration’s reliance on qui tam actions to deter fraud? In short, qui tam actions appear to be less of a priority than they have been historically. The $3 billion in recoveries were announced in conjunction with FY2019 statistics revealing that $2.2 billion of those recoveries came from qui tam actions—lawsuits brought by whistleblowers or “relators” suing on behalf of the government under the FCA’s qui tam provisions. In addition, the FY2019 statistics showed the relators’ shares of the $2.2 billion topped $271 million. These qui tam numbers may appear robust on their own, but the following chart shows they are well below their five and ten year historical averages: Qui Tam Recoveries Total Recoveries (Qui Tam & Non-Qui Tam) % Qui Tam Recoveries to Total Recoveries Relators’ Share of Qui Tam Recoveries % of Relators’ Share to Total Recoveries FY2019 2,210,401,366 3,054,425,050 72% 271,941,791 9% 5 Yr Avg. 2,587,832,070 3,493,333,981 75% 437,397,496 13% 10 Yr Avg. 2,902,873,770 3,791,266,748 78% 489,500,130 13% The decline in qui tam recoveries to total recoveries, and the decline in the share of relators’ recoveries to total recoveries, perhaps are not that surprising. Blog readers may remember FCA Now’s earlier reports on Attorney General William Barr’s documented disdain for the FCA’s qui tam provisions in 1989 when he served in the Office of Legal Counsel to provide advice to the President and executive branch agencies. In that role, Attorney General Barr wrote a memorandum arguing that the qui tam provisions of the FCA were “patently unconstitutional” and that private qui tam actions were a “devastating threat to the Executive’s constitutional authority.” Those earlier views may have influenced the present based on the Department’s latest historical data, but there are other factors in play, too. For example, in January 2018, over a year before Barr became the Attorney General in February 2019, the Department of Justice instructed its prosecutors in what is known as the “Granston Memo” to more seriously consider dismissing meritless FCA qui tams when in the government’s best interest to do so. The Department’s announcement, in fact, emphasized that the FCA provides “authority for the government to dismiss cases that do not advance the goal of fraud prevention, and during the past year the government made increasing use of this tool to help prioritize and protect the expenditure of government resources.” In addition, the United States Supreme Court’s decision nearly four years ago in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), which required courts to apply a “rigorous” and “demanding” standard of materiality in FCA actions, may have resulted in more dismissals and smaller settlements. In other words, relators and their counsel—the ones responsible for filing qui tams—may be less willing to pursue such cases in today’s post-Granston and post-Escobar world. Time will tell of course whether the downward trend of qui tam recoveries continues, but because the Department’s announcement also revealed that new qui tam matters for FY2019 (636) are at their lowest number since 2011 (634), and are well below the five and ten year historical averages (662 and 665, respectively), lower overall qui tam and relator recoveries seem certain for FY2020.

The Department of Justice can move to dismiss a whistleblower’s claim under the False Claims Act without first holding an in-person hearing, the Third Circuit recently ruled in Chang v. Children’s Advocacy Center of Delaware, No. 18-2311 (3d Cir. Sept. 12, 2019). The FCA requires that a qui tam relator have “an opportunity for a hearing” if the DOJ moves to dismiss. 31 U.S.C. § 3730(c)(2)(A). But in a precedential opinion authored by Judge David J. Porter, the Third Circuit panel held that an “opportunity” does not equate to a guaranteed hearing. The court joined other jurisdictions in holding that the FCA does not require a hearing “unless the relator expressly requests a hearing or makes a colorable threshold showing of arbitrary government action.” Here, the relator never requested a hearing, and the court characterized the relator’s filing opposing dismissal as failing to demonstrate arbitrary government action. The court declined to weigh in on a putative circuit split as to whether a court must approve the DOJ’s dismissal of a qui tam action. The D.C. Circuit has held that the DOJ has “an unfettered right” to dismiss a qui tam action, and need not seek court approval. Swift v. United States, 318 F.3d 250, 252–53 (D.C. Cir. 2003); Hoyte v. Am. Nat’l Red Cross, 518 F.3d 61, 65 (D.C. Cir. 2008). On the other hand, the Ninth and Tenth Circuits require the government to prove to the court that there is (1) “a valid government purpose” for the dismissal, and (2) “a rational relation between dismissal and accomplishment of the purpose.” Id. at 1145. If the government meets these prongs, “the burden switches to the relator to demonstrate that dismissal is fraudulent, arbitrary and capricious, or illegal.” United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145–46 (9th Cir. 1998); United States ex rel. Ridenour v. Kaiser-Hill Co., LLC, 397 F.3d 925, 934–35 (10th Cir. 2005). The Third Circuit found that the relator’s showing fell short even under the stricter standard of the Ninth and Tenth Circuits. The Third Circuit’s ruling lends further support to the DOJ’s recent and increasing trend towards dismissing those qui tam actions that it declines to join. The trend finds its roots in the Granston Memo, authored in January 2018, which has since been adopted as formal DOJ policy. With the Granston Memo, the DOJ encouraged prosecutors to dismiss declined qui tam actions, due to the purported waste of DOJ resources and risk of engendering unfavorable precedent in weak cases. Per the Memo: “Even in non-intervened cases, the government expends significant resources in monitoring these cases and sometimes must produce discovery or otherwise participate. In cases that lack substantial merit, they can generate adverse decisions that affect the government’s ability to enforce the FCA.” Regardless of whether a court needs to approve a dismissal, Senator Chuck Grassley wrote a letter to Attorney General Barr on September 4, 2019, expressing concern that the DOJ was too eager to dismiss FCA claims. Senator Grassley alleged that the DOJ had moved to dismiss multiple cases “without first conducting cost-benefit analyses or other evaluations of the merits of a case.” He also asked Attorney General Barr to consider whether the Granston Memo creates “perverse incentives for alleged fraudsters to engage in abusive litigation tactics to prompt a case’s dismissal.” Grassley’s defense of FCA qui tam actions comes as no surprise; he was one of the primary authors behind the 1986 amendments that revived the FCA and authorized qui tam actions. Given Attorney General Barr’s previously documented hostility to FCA actions—in 1989 he argued the qui tam provisions of the FCA were “patently unconstitutional”—it is not clear how the Attorney General will respond to Senator Grassley’s letter. For the moment, at least, the table appears set for the DOJ to continue dismissing declined qui tam actions, as highlighted by the recent decision of the Third Circuit (and a recent decision of the Eighth Circuit, as previously reported here by this blog). Defendants that are embroiled in these claims should remain cognizant of the opportunity, under the right circumstances, for an early exit with the support of the DOJ.