FCA Now

On Friday, May 13, 2022, the Department of Justice announced that it reached a settlement with Hensel Phelps Construction Company (“Hensel Phelps”) over allegations that the company had, in violation of the False Claims Act, circumvented subcontract set-asides for service-disabled veteran owned small businesses (“SDVOSB”). The case concerned a multi-million dollar prime contract awarded in 2011 to Hensel Phelps by the General Services Administration to construct the Armed Forces Retirement Home’s New Commons/Health Care Building in Washington, D.C.  As part of the contract, the government required Hensel Phelps to create and implement a small business subcontracting plan to provide contracting opportunities for SDVOSBs and other types of small businesses. Although the entity relator, Fox Unlimited Enterprises, LLP (“Relator”), filed the action relatively recently in April 2022, the parties were presumably able to expeditiously settle the matter because this case relates to DOJ’s settlement with TriMark USA, LLC earlier this year, involving the same relator.  In TriMark’s settlement agreement, TriMark agreed to pay $48.5 million to resolve allegations that it manipulated SDVOSB set aside regulations by using other small businesses to obtain set-aside subcontracts but nevertheless performing most of the set-aside work itself.  TriMark admitted that it, through one of its subsidiaries, identified small businesses with which it could partner, instructed them on preparing their bids and pricing, and even ghostwrote emails for the small businesses to make it appear that they, not TriMark, were doing the work. Here, the Relator alleged that Hensel Phelps had credited its compliance with set-asides to an entity that the company should have known was merely a “pass-through” for a large, non-qualifying company—i.e., TriMark.  Pursuant to Hensel Phelps’ settlement agreement, Hensel Phelps agreed to pay $2.8 million to resolve the allegations.  Notably, the large settlement amounts in both the TriMark and Hensel Phelps cases may reflect the government’s use of the presumption of loss rule in 15 U.S.C. § 632(w).  Under the rule, when a government contractor willfully seeks and receives an award by misrepresenting its size or status, there is a presumption of loss to the United States equal to the entire value of the contract, subcontract, cooperative agreement, or grant that is set aside for small business concerns.  This presumption, coupled with the FCA’s treble damages provision, makes enforcement actions for small business contracting fraud more enticing to both the government and relators.  The potential liability under the rule—and these settlements—highlights the risks to contractors in failing to comply with the subcontracting set-aside regulations.

The Department of Justice (“DOJ”) last month announced a new blockbuster settlement agreement under the False Claims Act, 31 U.S.C. § 3729 et seq (“FCA”), involving alleged violations of the Stark law and other efforts to defraud federal and state healthcare programs. The agreement also resolved the government’s allegations that the defendants—having allegedly engaged in healthcare fraud—further violated the FCA by obtaining a loan through the Paycheck Protection Program (“PPP” or “Program”) while certifying they were not engaged in illegal activities. Although this settlement appears principally to address allegations of healthcare fraud, the resolution of FCA claims involving alleged PPP fraud highlights the government’s efforts to root out those who attempt to defraud COVID-19 relief programs. In the settlement agreement, the U.S. government (“government”), the State of Florida (“Florida”), and several relators contend that Physician Partners of America, LLC (“PPOA, LLC”), an entity owned by Dr. Rodolfo Gari that manages or indirectly owns several other entities, Dr. Gari, and Dr. Abraham Rivera, the medical director of these entities (collectively, “PPOA”), committed various FCA violations. Regarding the PPP FCA claim, the government alleges in the settlement agreement that PPOA, LLC obtained a PPP loan[1] from Centennial Bank in April 2020. Under Program rules, a borrower had to certify that it was not engaged in any illegal activities under federal, state, or local law. The government contends that PPOA’s certification was false because PPOA, at the time it applied for PPP funds, pursued a scheme to overbill and defraud federal healthcare programs. Specifically, the government alleged (i) that PPOA violated the Stark Law, the physician self-referral law, by paying kickbacks to physicians working at PPOA-managed entities who referred patients to PPOA for reimbursable services; (ii) that PPOA submitted false claims to federal healthcare programs by billing for services and medical testing at the highest rate available despite these services or tests not being medically necessary or reasonable for each individual patient; and (iii) that PPOA improperly billed Medicare at a higher rate for “monitored anesthesia care” when PPOA in fact provided only local anesthesia. Furthermore, the government and Florida alleged that PPOA submitted false claims to federal and state healthcare programs for scheduling unnecessary biweekly telemedicine appointments for Florida patients after Florida paused non-emergency medical procedures in the wake of the pandemic. PPOA has not admitted liability regarding any of the settlement agreement’s allegations. However, under the terms of the agreement, PPOA will pay the government and Florida the sum of $24,500,000, with 1.625% interest accruing as of November 8, 2021. The terms of the settlement schedule payments so that PPOA shall pay the government $10,000,000 plus interest within seven (7) days after the agreement’s effective date and pay the remaining $14,500,000 plus interest to the government within ninety (90) days of the agreement’s effective date. Further, the terms allocate the funds so that the government will receive $24,491,213.80 plus interest, of which $11,550.692.58 is restitution, and Florida will receive $8,786.20 plus interest, of which $4,393.10 is restitution. Unlike previous settlement agreements, the terms of this agreement do not state what specific allocation of the settlement funds apply to settle the FCA allegation involving the false certification on the PPP loan application. Past agreements have required the borrower to reimburse the Small Business Administration for paying a processing fee to the lender as well as the full balance of the loan. See, e.g., Zen Solutions, Inc., discussed further here. This settlement agreement also states that the government and the numerous relators involved have not yet reached an agreement as to each relator’s share of the recovery. Moreover, while the settlement agreement’s terms contain typical release language, the terms state that two of the relator’s claims against a non-party entity are reserved. Thus, there could be further developments unfolding in the future. To stay updated on these developing topics, check out Dorsey’s FCA Now blog and FCA Case Tracker for the latest FCA and PPP fraud news. [1] Although not stated in the Settlement Agreement, publicly available data shows that PPOA, LLC obtained a first draw PPP loan of $5,978,709.00 on April 13, 2020.

The Department of Justice (“DOJ”) continues rolling out new settlement agreements related to COVID-19 fraud—highlighting the government’s and a common relator’s efforts to crack down on those alleged to have improperly received monies through the Paycheck Protection Program (“PPP” or “Program”). A new settlement agreement once again showcases these trends and illustrates the civil liability that businesses and individuals may face under the False Claims Act, 31 U.S.C. § 3729 et seq (“FCA”) for double-dipping into PPP loan funds made available in 2020 during the height of the pandemic. On April 21, 2022, the DOJ announced a settlement agreement between the U.S. government, Bryan Quesenberry (“Relator”), and Daniel Markus, Inc. (“DMI”) and Margarita Risis, DMI’s sole shareholder (collectively, “DMI” or “Defendants”). Prior to the execution of this settlement agreement, on September 12, 2020, Relator filed a qui tam suit against DMI under the FCA in the U.S. District Court for the District of New Jersey. Relator alleged that DMI “unlawfully applied for and received two loans under the [PPP]” and certified falsely that it would receive only one PPP loan. To settle these allegations, DMI, which operated several pawn shops in New Jersey, executed the settlement agreement, which explained these allegations further. Specifically, the government alleges in the settlement agreement that in April 2020 DMI obtained a first draw PPP loan of $242,849 from “Lender 1,” a bank based in Salt Lake City, Utah. The government contends that DMI certified to the following statement: “During the period beginning on February 15, 2020 and ending on December 31, 2020, the Applicant [DMI] has not and will not receive another loan under the [PPP].” Yet, the government further alleges in the settlement agreement that DMI, again in April 2020, obtained a second first draw PPP loan of $268,300 from “Lender 2,” a bank based in McLean, Virginia. Based on its receipt of this second loan, the government alleges, according to the settlement agreement, that DMI’s certifications on the first draw loan were false. In settling these allegations, in addition to those the government contends it has under the Financial Institutions Reform, Recovery and Enforcement Act, 12 U.S.C. § 1833(a) (“FIRREA”), the terms of the settlement agreement state that DMI shall pay the government $50,000 within two weeks of the date of the settlement agreement. The terms further state that DMI agrees not to seek forgiveness of the first loan from Lender 1 but shall instead repay Lender 1 within a year of the date of the settlement agreement. Finally, the terms state that Relator shall be entitled to recover $3,541.05 following DMI’s payment of $50,000. As reported previously, Relator Brian Quesenberry is no stranger to qui tam litigation, as he has brought numerous other FCA actions recently, including the Sextant Marine settlement and the Zen Solutions settlement.  To stay updated on these developing topics, check out Dorsey’s FCA Now blog and FCA Case Tracker for the latest FCA and PPP fraud news.

The Department of Justice (“DOJ”) continues racking up more settlement agreements under the False Claims Act, 31 U.S.C. § 3729 et seq (“FCA”) with companies and individuals alleged to have improperly used funds received through the Paycheck Protection Program (“PPP” or “Program”). The latest PPP fraud settlement illustrates that attempts to fraudulently obtain forgiveness of PPP loans used for ineligible expenses invites potential liability under the FCA in addition to liability under its criminal counterpart, 18 U.S.C. § 287. On March 25, 2022, the U.S. Attorney’s Office for the Eastern District of Washington announced a global criminal and civil settlement between the U.S. government and HPM Corporation (“HPMC’), Grover C. Mooers (“Mr. Mooers”), and Hollie P. Mooers (“Ms. Mooers”) (collectively, “Defendants”). This global criminal and civil settlement included a criminal Deferred Prosecution Agreement (“DPA”) and a civil FCA Settlement Agreement (“Settlement Agreement”) (collectively, “Agreements”). Under the Agreements, the government alleged that Defendants knowingly submitted false statements and certifications to the Small Business Administration (“SBA”) when seeking forgiveness of a PPP loan. Specifically, the Defendants admitted the following facts in the Agreements: On April 3, 2020, HPMC, through Mr. Mooers, applied for a PPP loan, which required him to certify that the funds would be used for Program-eligible purposes, like payroll or certain mortgage interest payments. The SBA approved the loan, and HPMC received $1,344,700 on April 17, 2020. Upon receipt of these funds, HPMC held the funds in a checking account for over a year, unused. On April 6, 2021, while the loan proceeds still sat idle in HPMC’s checking account, HPMC applied for forgiveness. Mr. Mooers certified on the loan forgiveness application that (i) the money HPMC received a year ago had been used for Program-eligible expenses, (ii) that Mr. Mooers had verified that the funds sought to be forgiven were used for Program-eligible expenses, (iii) that all statements made in the application were true and correct, and (iv) that Mr. Mooers understood the government could recover the loan amounts and civil or criminal penalties for knowingly using these funds for unauthorized purposes. The SBA then forgave the full loan amount—both principal and interest totaling $1,358,184.35—on April 13, 2021, thereby transferring this amount to HPMC’s lender (who also received a lender fee of $40,341.00 from the government). However, according to the admitted facts in the Agreements, HPMC did not use its PPP loan for Program-eligible purposes. In fact, after receiving forgiveness of the loan, on July 1, 2021, the sum of $1,344,700 was transferred from HPMC to Mr. and Ms. Mooers’ personal checking account at Community Bank, where they later distributed the funds to various charities. The Agreements also recognize that HPMC was a government contractor for the Department of Energy (“DOE”), and that DOE had continued making contract payments to HPMC from April 3, 2020 through April 6, 2021—the date HPMC applied for PPP funds and the date that HPMC applied for forgiveness of those funds. Based on these admitted facts, the Settlement Agreement’s terms require HPMC to pay a total of $2,939,400, which accounts for $1,344,700 as restitution for the original loan amount and another $1,344,700 as a penalty to the U.S. government. Further, the Settlement Agreement’s terms require Mr. and Ms. Mooers to pay $250,000 as a penalty to the United States, and that Mr. Mooers steps down from his current role at HPMC and that he shall not serve any other role in managing or advising HPMC for at least three years. Under the DPA, HPMC waived indictment and consented to the filing of a one-count information alleging a violation of 18 U.S.C. § 287 for submitting false and fraudulent claims to the United States.  The government agreed to defer prosecution of the charge for three years, contingent upon, inter alia, HPMC acknowledging responsibility for its conduct, making the payments required under the Settlement Agreement, undertaking an independent audit of HPMC’s financial practices, preventing Mr. Mooers from serving in any managerial capacity, and cooperating fully with the government.  If HPMC complies with its obligations, the government will dismiss the charge at the end of the three-year deferral period. The Agreements showcase the civil and criminal consequences that businesses and individuals may face if seeking forgiveness of PPP loans where those funds have been used improperly. To stay updated on these developing topics, check out Dorsey’s FCA Now blog and FCA Case Tracker for the latest FCA and PPP fraud news.

Following a record year for False Claims Act (“FCA”) settlements and judgments in 2021, the Department of Justice (”DOJ”) continues to aggressively pursue the prosecution of not only corporations, but also the individuals connected to corporate criminal cases. Within the first quarter of 2022, the DOJ has already announced numerous False Claims Act violations involving corporate defendants, including a $260 million settlement with pharmaceutical company Mallinckrod, a $48.5 million settlement with TriMark USA, LLC, and a $20 million settlement with BayCare Health System Inc. A notable theme emerging from the DOJ’s stream of FCA prosecution press releases, however, is its focus on holding individual defendants accountable for crimes committed in connection with their corporate activity. For instance, as part of TriMark USA’s $48.5 million settlement to resolve allegations that its subsidiaries manipulated federal contracts set-aside for small businesses, TriMark’s former executive in charge of the company’s government business, Kimberley Rimsza, agreed to pay an additional $100,000 as an individual civil penalty for her conduct in connection with the scheme. Likewise, the DOJ announced that a Philadelphia-based psychiatrist and his wife, Dr. Harry Doyle and Sonya Doyle, agreed to pay a total of $3 million to resolve alleged violations of the FCA, including the submission of false billing to the U.S. Department of Labor Office of Worker’s Compensation Programs (“OWCP”), as well as upcoding and double-billing patient claims. And, earlier this month, the DOJ announced it has filed a complaint against two laboratory CEOs, one hospital CEO, and other individuals, alleging FCA violations in connection with patient referrals in violation of the Anti-Kickback Statute and the Stark Law. This activity aligns with Attorney General Merrick Garland’s pronouncement at the ABA Institute on White Collar Crime in March that “prosecution of corporate crime is a Justice Department priority” and that the DOJ’s “first priority in corporate criminal cases is to prosecute the individuals who commit and profit from corporate malfeasance.”  President Biden’s FY22 budget supports these efforts with proposed increases in funding for both the DOJ’s criminal enforcement divisions, as well as the FBI’s White Collar-Crime Program.  With more resources and human capital on hand to support its prosecutorial goals, we can expect another busy and productive year from the DOJ in connection with its FCA enforcement initiatives.

The Department of Justice recently announced that a home-health services company has agreed to pay over $45,000 to resolve alleged False Claims Act (“FCA”) violations.  Professional Family Care Services, Inc. (“PFCS”), a North Carolina corporation, faced allegations of fraudulent billing for work by an employee that was convicted of wire fraud and sentenced to prison for her role in the alleged scheme. For two years starting in 2015, PFCS billed the Department of Veterans Affairs (the “VA”) for home-health services related to the medical care of an Army veteran identified by the initials W.R.  While PFCS was billing the VA for home-health services, W.R. was actually residing with a Certified Nursing Aide.  Relevant evidence indicated that PFCS was billing the VA based on falsified timesheets provided by the aide, for example, timesheets showing her providing services to W.R. and another patient simultaneously.  As a result, VA alleged that PFCS failed to provide W.R. with the time and quality of care required under the VA program. W.R. was eventually admitted to the hospital, where it was discovered that W.R. was extremely malnourished and died shortly after.  Following the death of W.R., PFCS submitted 15 separate claim forms seeking payment from the VA for the services provided by the aide totaling $11,273.92. Under 31 U.S.C. § 3729(a)(1), civil FCA claims may lead to treble damages in addition to other penalties for false or fraudulent claims.  As a result, PFCS agreed to pay $45,486.76 to settle the dispute and avoid litigation.  The aide was sentenced to twelve months and one day in federal prison for wire fraud related to the charging of home services for W.R. and ordered to pay over $90,000 in restitution. The primary takeaway here is that businesses that bill services to the government must closely review their invoices.  PFCS’s employee was double-charging the government for services, which could have been identified by internal review protocols.  Regardless of whether PFCS was aware of or condoned the actions, they were ultimately liable for monetary penalties.  Healthcare is one of the largest drivers of FCA liability, and this case serves to highlight the importance of internal controls when billing the government for healthcare services.

Fresh off the new year, the Department of Justice (“DOJ”) continues to announce new settlements under the False Claims Act, 31 U.S.C. § 3729 et seq (“FCA”)—further cementing the trend of private parties suing borrowers for violating requirements of the Paycheck Protection Program (“PPP” or the “Program”). Two new FCA settlements were announced earlier this month involving relators’ allegations that borrowers made false statements when applying for PPP loans in violation of Program rules. The first settlement, coming from the U.S. Attorney’s Office for the District of New Jersey, was announced on February 7, 2022. According to the settlement agreement, on June 19, 2020, relator Pat L. Christopher filed a qui tam action in the United States District Court for the District of New Jersey against Christopher Construction Company, Inc. (“CCC”) and Dennis Christopher. Relator alleged that CCC and Dennis Christopher violated Program rules by causing the submission of a false claim for payment. Specifically, according to the settlement agreement, the government then contends that around April 27, 2020, CCC and Dennis Christopher falsely stated on an application for PPP funds that no individual owner of CCC holding at least 20% of the company’s stock was then indicted or subject to criminal charges. The government further alleged that CCC and Dennis Christopher, at the time of submitting the application, knew that relator owned more than 20% of CCC’s stock and knew that relator had been indicted for theft, embezzlement, and tax fraud. Based on this false statement, the government asserts CCC—which received $255,507 in PPP funds—knowingly caused its lender to submit a false claim to the Small Business Administration (“SBA”) for $12,775 in loan processing fees. The settlement agreement states that CCC and Dennis Christopher have returned the value of the PPP loan to the lender as part of the settlement. Further, the terms of the settlement agreement require CCC and Christopher to pay the government a total of $53,325 in civil penalties and damages under the FCA—$12,755 of which represents restitution to the SBA for paying the processing fee to the lender. The settlement agreement also notes that CCC and Dennis Christopher will be responsible for the relator’s attorney fees. A few days later, on February, 11, 2022, the DOJ announced another FCA settlement involving PPP fraud. According to this settlement agreement, relator Bryan Quesenberry filed a qui tam action in the United States District Court for the Eastern District of Virginia against Zen Solutions, Inc. (“Zen”), a technology company based in Arlington, Virginia, alleging Zen violated Program rules by receiving two PPP loans before December 31, 2020. The PPP required loan applicants to certify they would apply for only one first draw PPP loan before December 31, 2020. According to the settlement agreement, Zen received a first draw loan of $181,055 on April 13, 2020, and then received a second, first draw loan of $192,727 on April 28, 2020. In connection with this second PPP loan, says the settlement agreement, the SBA paid the second lender $9,636.25 in processing fees. The government asserts in the settlement agreement that Zen falsely certified on the second loan that it would not receive a second, first draw loan before December 31, 2020. The terms of the settlement agreement require Zen to pay the United States $31,226.53 in civil damages and penalties under the FCA, of which $9,636.35 constitutes restitution to the SBA for its payment of processing fees to the second lender. Notably, this second settlement is one of several settlements based on PPP-related qui tams filed by relator Quesenberry, such as the Sextant settlement previously reported on Dorsey’s FCA Now blog. As reported elsewhere, the ability to mine public data allows relators to discern whether borrowers have violated Program rules by taking multiple, first-draw loans. To stay updated on these developing topics, check out Dorsey’s FCA Now blog and FCA Case Tracker for the latest FCA and PPP fraud news.

The trend of private parties suing businesses under the False Claims Act, 31 U.S.C. § 3729 et seq (“FCA”) for violating requirements of the Paycheck Protection Program (“PPP” or the “Program”) continues. Just recently, the Department of Justice (“DOJ”) issued a press release announcing its latest settlement in an FCA case involving Sextant Marine Consulting, LLC (“Sextant”) and a whistleblower named J. Bryan Quesenberry (“Relator”). According to the settlement agreement (“Agreement”), Sextant is a Miami, Florida-based limited liability company providing duct cleaning services that sought PPP funds during the height of the pandemic. The PPP required borrowers to certify they would receive only one first draw loan before December 31, 2020. However, according to the Agreement, Sextant received two PPP loans in 2020 despite certifying it would receive only one: it received its first loan of $150,000.00 on May 8, 2020 and its second loan of nearly $170,000.00 on May 22, 2020. Learning this, on September 18, 2020, the Relator filed suit under the qui tam provisions of the FCA, 31 U.S.C. § 3730(b). The government’s ensuing investigation led to the issuance of a civil investigative demand on May 12, 2021, which prompted Sextant to repay the second loan the same day. Ultimately, the parties signed the Agreement on September 29, 2021. Per the Agreement, Sextant will pay the government $30,000, which represents civil penalties and damages under the FCA and includes $8,490.55 in restitution for fees the Small Business Administration (“SBA”) paid to Wells Fargo bank for processing the second loan. The Agreement also stipulates that the Relator will receive 15%, or $4,500.00, of the settlement amount as his portion of the recovery for initiating the lawsuit. Notably, the DOJ’s press release explains that this “matter remains under seal as to allegations against entities other than Sextant.” Thus, more news may be coming soon. Dorsey’s FCA Now blog will continue monitoring for new developments on this and other FCA cases involving alleged PPP fraud, so be sure to check out the FCA Now blog and Dorsey’s FCA Case Tracker to stay current on the latest news involving these issues.

On August 30, 2021, the Department of Justice (“DOJ”) announced that Sutter Health and several of its affiliated entities (“Sutter”) agreed to pay a total of $90 million to settle allegations that Sutter violated the False Claims Act (“FCA”), 31 U.S.C. §§ 3729-3733, by “knowingly submitting inaccurate information about the health status of beneficiaries enrolled in Medicare Advantage Plans.”  Sutter Health and Affiliates to Pay $90 Million to Settle False Claims Act Allegations of Mischarging the Medicare Advantage Program, Department of Justice (Aug. 30, 2021), https://www.justice.gov/opa/pr/sutter-health-and-affiliates-pay-90-million-settle-false-claims-act-allegations-mischarging.  As a part of its settlement, Sutter also entered into a five-year Corporate Integrity Agreement with the U.S. Department of Health and Human Services to implement a centralized risk assessment program.  Id. The central allegation from qui tam Plaintiff Kathy Ormsby (“Ormsby”) was that Sutter had submitted inaccurate and unsupported medical information that artificially inflated Medicare reimbursement for Sutter’s Medicare Advantage patients.  United States ex rel. Kathy Ormsby v. Sutter Health, No. 3:15-cv-01062-LB, 444 F. Supp. 3d 1010 (N.D. Cal. 2020). In December of 2018, the United States formally intervened in the case and took primary responsibility for prosecuting the action.  Shortly thereafter, Sutter agreed to pay $30 million to settle some of the allegations in April of 2019, but explicitly denied any liability related to the allegations.  In so doing, Sutter argued that the United States had taken a mistaken approach to the case by applying an analysis involving traditional Medicare programs (using a fee-for-service model) as opposed to focusing on the unique nature of Medicare Advantage, which Sutter argued “is a fundamentally different program with its own unique standards for establishing overpayments” and thus the United States was relying on an inapplicable FCA theory of liability.  Sutter argued the United States had not, and indeed could not, prove that Sutter had knowingly submitted false claims or received overpayments for submitted claims that they failed to return. Ultimately, Sutter returned to the table to discuss settling the Medicare Advantage claims following recent FCA decisions holding that the overpayment rule did not improperly hold private insurers to higher standards on the basis that nothing in the FCA renders actuarial equivalence a defense against the obligation to refund any individual, known overpayment.  This is expected to buttress FCA enforcement by rejecting the idea that Medicare Advantage insurers receive apples-to-apples reimbursement with traditional Medicare. Sutter eventually settled the remaining claims for $60 million, bringing the total amount of the settlement to $90 million in addition to implementing further oversight and compliance mandates. The settlement between Sutter and the United States makes clear that defendants claiming protection against FCA enforcement should be careful when relying on rapidly changing FCA precedent.  Though defendants may be tempted to highlight and defend their actions under novel legal theories, the attention brought by said action may invite unwanted scrutiny, and ultimately, harsher penalties as opposed to settling and adjusting internal procedures early in the dispute.

On May 28, 2021, a District of Maine judge granted a joint motion for stipulated judgment in favor of the United States, ending the False Claims Act suit against a Coast Guard contractor hired to assist with the excavation of a World War II-era airplane crash site.  United States of America v. Luciano A. Sapienza, et al., No. 2:21-cv-00073-NT (Me.). As alleged in the amended complaint, the United States Coast Guard and North South Polar, Inc. (“NSP”) entered into a contract for NSP to provide support services for the validation, excavation, and extrication of a World War II-era airplane at a suspected crash site in July 2013.  Under the contract, NSP was required to furnish all materials, equipment, and services necessary to complete the excavation and extrication of the crash site in Greenland.  In turn, the government would reimburse NSP for all purchased equipment, with title of any reimbursed equipment passing to the government.  NSP’s president and chief executive officer, Luciano Sapienza, signed the contract on behalf of NSP. The government alleged that the Defendants purchased and obtained reimbursement from the government for four pieces of equipment for a total of $14,702: two hot water pressure washers ($8,030); an underwater metal detector ($3,299); and a heater ($3,373).  Although the amended complaint alleged that the defendants knew the contract required the return any equipment for which it was reimbursed, the government alleged that Sapienza refused to return the equipment. Instead, Sapienza allegedly sold the equipment on eBay. The government filed suit against NSP and Sapienza in March 2021, asserting an FCA claim for conversion of government property in violation 31 U.S.C. §§ 3729(a)(1)(D), 3730(a), as well as a common law unjust enrichment claim.  Shortly thereafter, the parties jointly motioned for entry of stipulated judgment against the defendants in May 2021.  Under the stipulated judgment, the parties agreed NSP and Sapienza would pay the government $40,585, representing $29,404 in double damages for the four FCA violations and one statutory penalty in the amount of $11,181.  The court granted the motion on May 28, 2021. This case serves as an important reminder to government contractors to pay close attention to all contractual obligations, including those that come into play after substantial completion of performance. The relatively low dollar amount at issue also stands out amongst the much-higher FCA resolutions that frequently make headlines, and should remind all contractors that no FCA violation is too small to escape government scrutiny.

On April 30, 2021, a Northern District of Texas judge denied a motion to dismiss an FCA qui tam action alleging “a fraudulent scheme to obtain Government subcontracting opportunities reserved for eligible small businesses under the Small Business Act.” United States ex rel. Haight v. RRSA (Commer. Div), LLC, 3:16-CV-1975-S, 2021 U.S. Dist. LEXIS 82894, at *1-4 (N.D. Tex. Apr. 30, 2021). In the complaint, the relator alleged that one or more of the defendants received several lucrative government construction subcontracts by falsely claiming small business eligibility. Id. at *4. According to the relator, Defendant RRSA Residential, a large, national roofing company, and its related entities “devised a scheme to obtain subcontracting opportunities that are reserved for small businesses under the Small Business Act.” United States ex rel Haight v. RRSA (Commer. Div.), 3:16-CV-1975-S, 2020 U.S. Dist. LEXIS 195267, at *4-5 (N.D. Tex. Oct. 20, 2020) (hereinafter “Haight I”). Certain government contracts are reserved, or set aside, for business that qualify as “small” under the SBA size standards set forth in 13 CFR 121. The relator alleged that RRSA Defendants falsely certified that an affiliated entity, RRSA Commercial, was an eligible small business, and calculated that it would have an advantage over legitimate small businesses due to the “combined resources, materials, industry connections, and ‘bondability’ that most legitimate small businesses do not have.” Id. at *6. After certifying that RRSA Commercial was an eligible small business on the System for Award Management (“SAM”) database, RRSA Commercial received “dozens” of small business subcontracts. Id. at *7. The relator also alleged that prime contractor defendants were aware that RRSA Commercial was in reality a large business and variously participated in and enabled the scheme. Id. at *7-8. Accordingly, the relator alleged that these false representations caused false claims for payment to be submitted to the government under an implied false certification theory. United States ex rel. Haight v. RRSA (Commer. Div), LLC, 3:16-CV-1975-S, 2021 U.S. Dist. LEXIS 82894, at *4 (hereinafter “Haight II”). Defendants moved to dismiss, arguing that the relator failed to satisfy the pleading standards of Federal Rule of Civil Procedure Rules 8(a), 12(b)(6), and 9(b). Haight I, 2020 U.S. Dist. LEXIS 195267, at *11. The court granted the motion in part and denied the motion in part, granting the relator an opportunity to replead dismissed claims. Id. at *24. Plaintiff filed an amended complaint in 2020. Dkt. 104. Defendants again moved to dismiss, this time arguing the relator lacked standing under Federal Rule of Civil Procedure 12(b)(1) because she had allegedly signed a settlement agreement that contained a broad release provision of “any and all claims” prior to the filing of the present qui tam action. Haight II, 2021 U.S. Dist. LEXIS 82894, at *5-6 (internal quotation omitted). The court rejected Defendants’ standing argument and denied the motion to dismiss. In discussing Defendants’ standing argument, the court first noted the plain language of the FCA provides that “a qui tam relator may not unilaterally enter into an enforceable settlement agreement or release after filing an FCA action.” Id. at *11. Although the Fifth Circuit has not directly considered enforceability of pre-filing releases, the court noted that several circuits apply the balancing test articulated by the Ninth Circuit in United States ex rel. Green v. Northrop Corp., 59 F.3d 953, 956 (9th Cir. 1995) when assessing enforceability. Id. at *11-17. Under the balancing test, courts must determine “whether the interest in enforcing the release was outweighed in the circumstances by a public policy harmed by enforcing the release.” Id. at *12 (citing Green, 59 F.3d at 958, 962). Applying the balancing test to the facts alleged, the court found dispositive the factor that the government did not know of the alleged fraud at the time of the alleged signing of the release. Because qui tam suits serve a valuable role in notifying the government of instances of fraud and a contrary holding would incentivize defendants to settle cases of fraud pre-filing without ever informing the government, the court refused to enforce the release as “contrary to well-established public policy.” See id. at *13, 17. The court noted the case’s similarity to Green, where the Ninth Circuit likewise “concluded that enforcement of the prefiling release would ‘impair a substantial public interest’ because the release ‘would threaten to nullify’ the ‘central purpose of the qui tam provisions of the FCA’—to incentivize insiders privy to fraud on the Government to ‘blow the whistle on crime.’” Id. at *12-13 (quoting Green, 59 F.3d at 963). The case serves as a reminder of the underlying policy justifications for the qui tam provision of the FCA, and, moreover, as a cautionary tale of the skepticism that courts will apply to pre-filing releases.

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.

Over three years after the filing of the initial sealed complaint, a New York-based construction company and several affiliates—including its bonding company—have agreed to pay a combined $4.47 million to settle a False Claims Act case alleging a decade-long scheme to fraudulently obtain federal contracts set aside for Service-Disabled Veteran-Owned Small Business Concerns (“SDVOSBCs”) and small businesses operating in Historically Underutilized Business Zones (“HUBZones”). United States of America, ex rel. James Hagan v. Northland Associates, Inc., et al., No. 5:17-cv-00036-GTS-TWD (N.D.N.Y.). The Small Business Administration (“SBA”) maintains several programs that provide small and disadvantaged businesses exclusive opportunities to procure certain set-aside contracts with the federal government, i.e., contracts that non-eligible companies cannot compete for. These programs are governed by an extensive set of statutes, regulations, and rules. Under the Small Business Act, certain size standards apply when determining if a business qualifies as a “small business” for government contracting purposes. See 13 C.F.R. § 121.201. When assessing size, small businesses must consider whether any relationship rises to the level of “affiliation,” which exists when another business controls or has the power to control the small business. See 13 C.F.R. § 121.103. Control by an affiliate may arise in several ways, including through ownership, management, financial support, employee sharing, or other relationships or interactions between the parties. Id. Small business must meet additional standards set forth by the SBA to obtain more specialized SBA certifications. For instance, the SDVOSBC program requires a small business to be 51% owned and controlled by a military veteran injured in the line of duty. 15 U.S.C. § 632(q); 38 U.S.C. § 101(2), (16); 13 C.F.R. § 125.10; 38 C.F.R. § 74.4. Under the SBA’s separate HUBZone program—designed to encourage investment and employment in historically underutilized communities—a small business may obtain a HUBZone certification if it is located in a designated underutilized business zone. 13 C.F.R. § 126. In Northland Associates, two former-employee relators filed a complaint alleging that Northland Associates, Inc. (“Northland”) created a sham company—Diverse Construction Group, Inc. (“Diverse”)—to bid for and fraudulently obtain over $50 million in construction set-aside contracts for the SBA’s SDVOSBC and HUBZone programs. The complaint alleged that Northland and its owner, James Tyler, worked with a service-disabled veteran, the late Hunter Grimes, to establish and certify Diverse as a SDVOSBC. According to the complaint, the parties further certified Diverse as a HUBZone business by setting up an office for the company in Plessis, New York. The complaint, however, alleged Grimes lacked the experience or capabilities to run a construction company, and that he did not take part in the management of Diverse or any day-to-day decision-making. Instead, the complaint alleged Northland controlled Diverse at all relevant times—including the bid process and the performance of contracts awarded to Diverse—from Northland’s office in Liverpool, New York. Going beyond certification-related misrepresentations, the relators’ complaint alleged that Northland, Tyler, and Diverse took several affirmative actions to prevent discovery of their scheme. For instance, the complaint alleged that after a competitor initiated a bid protest involving Diverse in September 2009, the SBA conducted a size determination and concluded that Diverse did not qualify as a small business due to its affiliation with Northland. According to the complaint, Diverse successfully appealed the determination based upon declarations in which Tyler and Grimes allegedly misrepresented that: (1) Northland did not control Diverse, (2) Northland did not assist Diverse in the bid process; (3) Northland did not share employees, equipment, or facilities with Diverse; and (4) Northland did not financially assist Diverse or help it obtain bonding. The companies also allegedly attempted to hide their financial affiliation by transferring money through a Northland subsidiary, Maple Ridge Plateau, Inc., and using different bonding companies. The Department of Justice (“DOJ”) opted to intervene and simultaneously filed its settlement agreement with Northland, Defense, and Tyler. In the settlement agreement, Northland, Diverse, and Tyler admitted to their involvement in “a scheme devised and engaged in . . . to circumvent service-disabled veteran-owned small business and HUBZone contract requirements.” They further admitted to the undisclosed affiliation between Northland and Diverse—including employee-sharing, funneling of funds through a Northland subsidiary, Northland’s involvement in the bid process, and Northland’s performance under the Diverse contracts—and that the declarations submitted in response to the bid protest contained material misrepresentations. In addition, the DOJ filed a separate settlement agreement with Rose & Kiernan, the bonding company used by Northland and Diverse. Notably, Rose & Kiernan had not been named as a defendant in the complaint. In the settlement agreement, Rose & Kiernan admitted that it “knew or should have known . . . that Diverse and Northland were affiliated in violation of SBA regulations and that [Northland and Diverse] took steps to hide their affiliation from the government to obtain and receive payment on government set-aside contracts.” Rose & Kiernan further admitted that “[w]ithout the surety bonds that [Rose & Kiernan] helped Diverse procure . . . Diverse’s fraud would not have been possible.” Combined, the defendants and bonding company agreed to pay $4,470,000 to settle the allegations, although the bonding company’s share was only $120,000. The relators—two former Northland employees—will receive $1,000,000. This resolution provides three important reminders for all those who contract with the United States government. First, companies applying for any small or disadvantaged business certification must carefully and accurately assess their eligibility. This includes, importantly, assessing whether they have any affiliates and whether those affiliates affect eligibility. Second, bonding companies should look closely at the DOJ’s settlement agreement with Rose & Kiernan. Although FCA liability is most frequently applied to contractors who submit claims to the government, this settlement evidences an expansive reading of the FCA in which a bonding company knowledgeable of underlying fraud can be held liable under the FCA. Finally, the government eagerly and aggressively investigates fraud in its contracting programs—particularly where funds earmarked for veterans and small businesses are involved. As the DOJ reiterated in its press release, “those who contract with the United States government must do so fairly and honestly,” and “[p]roviding false information to gain access to SBA’s preferential contracting programs is fraught with peril and is especially egregious when it involves programs intended to benefit our nation’s service-disabled veterans.” Given the large number of set-aside contracts that have been awarded under tight deadlines in response to the current COVID-19 crisis, we are likely to see an increase in small business-related FCA investigations and prosecutions in the coming months and years.

An importer recently agreed to pay $5.2 million to settle a False Claims Act (“FCA”) case alleging evasion of antidumping duties (“AD”) on wooden bedroom furniture from China. The importer, Blue Furniture Solutions, LLC (now doing business through its successor, XMillenium LLC), allegedly imported merchandise into the United States using false descriptions and invoices that claimed the merchandise was outside the scope of the China wooden bedroom furniture AD order, and therefore not subject to a 216.01% AD rate. Using the FCA’s qui tam provisions, the importer’s competitor brought the case in the Western District of Texas as a “relator” (i.e., whistleblower) in 2015, claiming that U.S. Customs and Border Protection (“CBP”) was deprived of $1.7 million in AD payments because of the importer’s intentional misrepresentations. After investigating the allegations, the U.S. Department of Justice (“DOJ”) decided to intervene under the FCA. On April 14, 2020, DOJ announced the $5.2 million settlement, which includes a $4.7 million payment by the importing company, and a $550,000 payment by the importer’s former corporate executives as their personal liability. In addition, the former corporate executives pleaded guilty last year in a related criminal prosecution for their roles. The FCA settlement appears in the civil case, United States ex rel. University Loft Company v. Blue Furniture Solutions, LLTC et al., No. 15-CV-588-LY (W.D. Tex.). The related criminal matter appeared under the case name United States v. Zeng, No. 19-CR-64-DCN (D.S.C.). The FCA permits actions against importers and other parties involved in importations for knowingly evading duties owed to CBP. Under the FCA, liability is three times the amount of import duties that should have been paid to CBP, and the relator in a qui tam action may be entitled to a portion of the U.S. Government’s recovery as an award. The U.S. Government has a variety of tools to investigate and prosecute alleged duty evasion. Under the FCA, importers’ competitors may become “whistleblowers,” file a complaint in federal district court alleging duty evasion, and seek an award from any recovery. Separately, CBP and DOJ can charge importers with civil and criminal penalties for duty evasion and recover unpaid duties under customs law. CBP and its sister agency, U.S. Immigration and Customs Enforcement, use investigative resources to help detect underpayment of duties to pursue those cases. The Department of Commerce also frequently investigates evasion of AD and countervailing duty (“CVD”) orders. The Trump administration has imposed tariffs on a variety of imports from China and the European Union under Section 301 of the Trade Act of 1974, subject to certain exclusions. In addition, new duties have been placed on imports of aluminum and steel products from all countries under Section 232 of the Trade Expansion Act of 1962, with certain exceptions. These tariffs can lead to significant liability for importers that incorrectly declare the tariff classification, origin, valuation, liability for additional duties such as AD/CVDs, or applicability of tariff exclusions to CBP. Dorsey & Whitney attorneys can help review a company’s imports to assess risks and potential mitigation measures for any inaccuracies in import declarations, as well as respond to any FCA or other U.S. Government claims of unpaid import duties.

Less than a year after United States Attorney Christina E. Nolan warned electronic health records (“EHR”) companies in a DOJ press release that they “should consider themselves on notice” following a $57.25 million FCA settlement with EHR software developer Greenway Health LLC, the DOJ announced in a recent press release a $145 million settlement with another EHR vendor, Practice Fusion, Inc.  The settlement includes $26 million in criminal fines and forfeitures, which Practice Fusion agreed to pay as part of a deferred prosecution agreement.  That settlement figure is notable as the largest criminal fine in the District of Vermont’s history.  Practice Fusion agreed to pay another $118.6 million in civil settlement, which includes approximately $113.4 million to the federal government and up to $5.2 million to states that opt to participate in separate state agreements. Practice Fusion, founded in 2005, provided electronic medical record software called Practice Fusion Solution free of charge. Instead of making money through software sales and support, the company supported itself through drug advertising revenues. The government brought both civil and criminal claims against Practice Fusion.  Like the Greenway case, the government alleged Practice Fusion submitted false claims by certifying its EHR software products had specific capabilities when the software apparently did not.  The settlement also resolves claims that Practice Fusion violated anti-kickback laws through programs it ran with opioid and other drug manufacturers.  According to the criminal Information filed in the District of Vermont by U.S. Attorney Nolan—the same district that filed charges leading to the Greenway settlement—Practice Fusion created pain clinical decision support (“CDS”) alerts that were inconsistent with CDC Guidelines and clinical quality measures.  As alleged, these CDS alerts were intended to prompt physicians to prescribe—and therefore increase sales of—extended release opioids in exchange for remuneration from the opioid manufacturer.  The extended release opioid CDS alerts began in 2016, even as the opioid crisis was coming to a head and the CDC released guidelines identifying addiction and overdosing as concerns with opioid use. The settlement is noteworthy for several reasons.  It resolves the first ever criminal prosecution of an EHR company, according to the press release.  It also demonstrates the government’s willingness to combat the opioid crisis by targeting entities other than opioid drug manufacturers.  In addition, the settlement was the result of charges brought solely by the government without any qui tam relators, just like the case in the Greenway settlement, demonstrating the government’s willingness to investigate EHR companies on its own initiative.  Finally, the settlement clearly emphasizes U.S. Attorney Nolan’s prior admonition, “EHR companies should consider themselves on notice.”

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 past 18 months have been a (relatively) wild time for the False Claims Act — on the books since 1863. In FY2018 the Department of Justice obtained more than $2.8 billion in settlements and judgments from cases involving fraud and false claims against the United States government. Add to this staggering statistic the fallout of the Supreme Court’s decision in Universal Health Services Inc. v. United States ex rel. Escobar, circuit splits on key timing provisions, and a change in DOJ leadership, and we are left with some very costly questions. Fortunately, government enforcement agencies and the Supreme Court are providing some much-needed guidance on open issues and interpretative revisions that make it an opportune time to take another look at “Lincoln’s Law.” DOJ and Barr to curb qui tam actions? The vast majority of recoveries from FCA cases come from lawsuits filed by whistleblowers, or “relators,” suing on behalf of the government under the FCA’s qui tam provisions. In 2018, the director of DOJ’s Civil Frauds section issued a memorandum encouraging DOJ trial attorneys to consider dismissing unmeritorious qui tam cases (even over the objection of the relator). The DOJ’s authority to dismiss FCA cases has long been built directly into the governing statute, 31 U.S.C. § 3730(c)(2)(A). But in practice DOJ trial attorneys rarely used this power, preferring to allow qui tam cases in which DOJ declined to intervene to continue being prosecuted by the relator. The new internal guidance suggests that DOJ attorneys should be more energetic in dismissing qui tam cases that lack substantial merit, are the product of parasitic relators, or that would unduly tax government resources. Meritless qui tam cases may also “generate adverse decisions that may affect the government’s ability to enforce the FCA.” The early returns show that DOJ seems to be more willing to dismiss declined qui tams than at any point in recent memory. This development is notable under a department headed by Attorney General William Barr. Before serving as AG under George H.W. Bush, Barr served in the department’s Office of Legal Counsel, where he provided legal advice to the president and executive branch agencies. In 1989, Barr authored a memorandum arguing that the qui tam provisions of the FCA were “patently unconstitutional,” in violation of the Appointments Clause, the Article III standing doctrine, and the doctrine of separation of powers. Barr wrote that private qui tam actions are a “devastating threat to the Executive’s constitutional authority.” When pressed, Barr walked back this position during his recent confirmation hearing before the Senate Judiciary Committee, noting he would enforce the FCA “diligently” and “in good faith.” While it remains to be seen whether dismissals increase under his leadership, DOJ has already moved to dismiss at least one high-profile case after SCOTUS denied review. See Gilead Sci. Inc. v. U.S. ex rel. Campie, U.S. No. 17-936, pet. denied Jan. 7, 2019 (9th Cir.). Consolidated guidelines regarding cooperation credit The DOJ also recently released a revised and consolidated set of guidelines for determining cooperation credit for organizations facing exposure under the FCA. The consolidated guidelines — revisions to the U.S. Attorney’s Manual — identify the main factors that the DOJ will consider when assessing the maximum “credit” parties will get for (1) voluntarily self-disclosing misconduct; (2) proactively cooperating with FCA investigations; and (3) taking effective remedial measures. The guidelines define “credit” as, typically, “reducing the penalties or damages multiple sought by the Department.” The guidance aims to consolidate and add uniformity to how these issues will be addressed — something that historically could vary considerably. Although the guidelines do not significantly alter existing DOJ policy, they provide a clearer and concise set of guidelines to the AUSAs and Civil Frauds trial attorneys who will evaluate an organization’s cooperation and self-disclosure. For organizations seeking to understand their own obligations and potential options, understanding the government’s playbook has never been more important. SCOTUS settles circuit split regarding tolling of statute of limitations While circuits remain divided on many key issues (see below), on May 13, 2019, the U.S. Supreme Court decided Cochise Consultancy, Inc. v. United States ex rel. Hunt, 587 U.S. ___ (2019), and resolved a circuit split regarding the statute of limitations for an FCA claim brought by a relator between six and 10 years after a violation, but fewer than three years after the government knew or should have known the relevant facts. The court held that relators can invoke a statute that tolls the usual six-year FCA statute of limitations to permit suit until up to three years “after the date when facts material to the right of action are known or reasonably known to the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed.” 31 U.S.C. § 3731(b). This means a relator can claim the benefit of this tolling provision even when the government declines to intervene and the relator knew of the alleged violation before the usual six-year statute of limitations expires. Bottom line: relators under certain circumstances now have more time to sue, and targets of FCA claims must now prepare themselves for the possibility of defending against qui tam FCA claims for up to ten years after an alleged violation. Falsity and materiality post-Escobar SCOTUS’ guidance ends there, as it has denied all six recent petitions asking the court to clarify both the falsity and materiality requirements of its decision in Universal Health Services Inc. v. United States ex rel. Escobar , 136 S. Ct. 1989 (2016). While Escobar clarified that contractors requesting payment could be liable under the FCA for concealing their failure to comply with contract requirements that are important to the government, it did not provide guidance on when a violated contractual requirement is material. One enduring circuit split concerns whether a complaint automatically fails for lack of materiality when a contractor shows that the government knew about noncompliance but still continued to pay the contractor. Compare Gilead, U.S. No. 17-936 (9th Cir.) with United States ex rel. Harman v. Trinity Indus. Inc., U.S. No. 17-1149, pet. denied Jan. 7, 2019 (5th Cir.). Another split involves whether a complaint must identify specific misrepresentations a contractor made about performance, as well as materiality, to adequately allege falsity. One hundred and fifty-six years have passed since the FCA’s passage, but the passage of time hasn’t necessarily clarified many of the FCA’s nuances and ambiguities. For regulated entities that are subject to the FCA (and for the lawyers who represent them), nuance and ambiguity can be a source of liability and grief — or a source for defenses and advocacy. In short, it has never been more important to understand the peril and promise of a very old law.

Amid increased public and government attention to cyber security, a qui tam plaintiff’s lawsuit has resulted a large settlement for a government contractors’ purported misrepresentations regarding compliance with government cyber security standards. In what is believed to be the first-of-its-kind settlement of an FCA claim premised upon cyber security misrepresentations, Cisco Systems recently agreed to pay $8.6 million to the federal and state governments. The case, United States of America v. Cisco Systems, involved allegations from a former-subcontractor whistleblower that Cisco Systems knowingly sold video monitoring technology containing security flaws to the United States, eighteen states, and the District of Columbia. See Complaint, Case No. 11-cv-400 (W.D.N.Y. May 5, 2011). According to the whistleblower, the security flaws to the video monitoring technology created a backdoor to the system, enabling a potential user to gain unauthorized access to the entire network of a federal agency, take control of or bypass an agency’s physical security systems, or even allow an unauthorized user to obtain administrative access to the system to make modifications. Id. Notwithstanding its awareness of the security flaws, and knowing that the disclosure of the security flaws would have prevented the federal government from purchasing the video monitoring technology, the Relator alleged that Cisco Systems withheld information regarding the security flaws from multiple federal and state agencies to which it sold the video monitoring technology. Id. On July 31, 2019, the federal government, fifteen states, and the District of Columbia settled the claims against Cisco Systems. Pursuant to that agreement, Cisco Systems will pay $2.6 million to the federal government to resolve the FCA claims and approximately $6 million to state governments to resolve similar state law fraud-in-contracting claims.  Cisco framed the settlement as a “partial refund” to the governments involved, and did not explicitly admit liability.  The company acknowledged that “times and expectations have changed.” The settlement may be a harbinger of more cyber security claims to come. Information security has become an increasingly prominent component of all government contracts, extending well beyond contracts in the information technology space. Government contractors will therefore be increasingly required to abide by the security standards imposed by the Federal Information Security Management Act and related regulations when selling products to the government. The recent seven-figure settlement emphasizes the government’s interest in pursuing FCA actions premised upon cyber security shortcomings, and serves as a reminder to government contractors to be mindful of their cyber security compliance obligations.

On June 20, 2019, more than six years after the case was first set into motion by the Relator, the U.S. Attorney's Office for the District of Maryland announced in a press release that Hart to Heart Ambulance Services, Inc. (“Hart to Heart”) settled a false claims act case—which alleged that it submitted false claims to Medicare for ambulance transports that were not medically necessary—for $1.25 million. The road to settlement was a long one. The Relator, a former Hart to Heart employee, filed the original complaint under seal on March 29, 2013. United States, et al. ex rel. Arvey v. Hart to Heart Transp. Servs., Inc. et al., No. 13-cv-01554-RDB (D. MD March 29, 2013) (ECF Nos. 1-3). After the complaint was filed, the United States secured multiple extensions of time to make an intervention decision. Id., ECF Nos. 5-11. Two-and-a-half years later, the United States still had not made a decision, and the court denied further requests for an extension of time, presumably because it decided the case needed to move forward. Id., ECF No. 14. Forced to make a decision, the United States declined to intervene on October 19, 2015, because it had not completed enough of its investigation to prosecute the case. Id. The United States continued to investigate after the case was unsealed and even engaged with Hart to Heart in settlement negotiations. Id., ECF Nos. 49-50, 53, 58. The parties began moving through the pleadings stage, id., ECF Nos. 14-51, but before the case could get off the ground, the parties negotiated and requested a stay, which the court granted on August 23, 2016, id., ECF No. 52. The stay ultimately continued until November 30, 2018, the same day the United States intervened against Hart to Heart, EMS Billing Solutions, Inc. (“EMS”) (Hart to Heart’s billing arm), and the companies’ owners and operators. Id., ECF Nos. 64-66. The complaint filed by the United States alleged that Hart to Heart fraudulently received millions of dollars of Medicare payments by submitting claims for ambulance transportation for patients who could sit, stand, walk, or otherwise did not need to be transported by ambulance. Id., ECF. No. 66 at ¶¶ 1-2. The United States further alleged that from 2010-2018, the owners and operators of Hart to Heart trained, threatened, and coerced its employees as well as EMS’s billing employees to transport patients by ambulance unnecessarily and to falsify records to make it appear as though it was medically necessary. Id. at ¶ 3. When that did not work, the United States alleged that Hart to Heart and EMS falsified the billings directly. Id. Despite the slow start, the case settled seven months after the United States filed its Intervention Complaint, and the parties never got passed the pleadings stage. Hart to Heart did not admit any of the allegations, but did resolve all claims from January 2, 2010 to December 31, 2017 to the tune of $1.25 million. See DOJ Press Release. The Relator will receive approximately $251,000 from the settlement. Id. Government investigations can take a long time and settlements even longer. Even when the government initially declines to intervene, it may later change course and intervene upon a showing of good cause under 31 USC § 3730(c)(3) because, as Yogi Bera famously said, “it ain’t over ‘till it’s over.”

On May 31, 2019, U.S. Attorney Stephen McAllister of the District of Kansas announced a $250,000 settlement with Coffey Health System to resolve a False Claims Act case.  The case arose from allegations that the hospital’s patient data security was insufficient to justify an incentive payment from the federal government.  The two whistleblowers each will receive $50,000 from the settlement. In 2016, two whistleblowers filed a qui tam complaint under the False Claims Act, alleging that Coffey Health System (“Coffey”) improperly certified information in its applications for federal incentives.  Coffey is a non-profit health provider that is affiliated with the local government in rural Coffey County, Kansas, and located in the town of Burlington with a population of approximately 3,000 city residents. As part of the American Recovery and Reinvestment Act of 2009 enacted in the wake of the last financial crisis, the U.S. Department of Health and Human Services administered an Electronic Health Records Incentive Program (“EHR”) as part of Medicare and Medicaid to encourage adoption of electronic record systems.  To apply for EHR, medical providers must attest their compliance with certain criteria, including patient data security measures and risk reviews.  The complaint in this case alleged that Coffey’s certification was knowingly inaccurate, because Coffey was aware of deficiencies in its data security measures, including the lack of security risk reviews.  The complaint alleged that Coffey received more than $2 million in EHR payments during the relevant years.  The whistleblowers are Coffey’s former chief information officer and former compliance officer. After a lengthy delay, the U.S. Government intervened in the case on May 23, 2019, leading to the unsealing of this case.  This settlement quickly followed a week later.  The settlement resolves this complaint without any determination of Coffey’s liability.  The case is a reminder that even small rural health providers are not immune from whistleblower actions and government intervention—and that data security obligations are the new frontier for FCA relators.