Justin A. Chiarodo and Daniel A. Broderick
Last November, the U.S. Department of Defense (DoD) issued a final rule imposing enhanced cybersecurity and reporting obligations on contractors and subcontractors with information systems containing unclassified controlled technical information (UCTI). 78 Fed. Reg. 69273 (Nov. 18, 2013). UCTI is defined to mean technical information with a military or space application that is subject to controls on its access, use, reproduction, modification, performance, display, release, disclosure, or dissemination.
The final rule adds a new subpart (224.73) and corresponding contract clause (252.204-7012) to the Defense Federal Acquisition Regulation Supplement (DFARS), and together they direct contractors that handle UCTI to (1) implement enhanced safeguards and (2) report and investigate certain incidents affecting such information.
This final rule implements one part of the broader and more controversial proposed rule, published in June 2011. 76 Fed. Reg. 38089 (June 29, 2011). That rule, which proposed substantial compliance obligations for protection of unclassified information, applied to a larger class of nonpublic information, including nonpublic information either provided by or on behalf of the DoD or collected, developed, received, or transmitted in conjunction with the contractor’s support of an official DoD activity. Unlike the proposed rule, however, this final rule is narrower in scope because it concerns only a single category of data: UCTI. Continue reading “Final DFARS Rule Imposes New Cybersecurity and Reporting Obligations”
Scott Arnold, Justin A. Chiarodo and Christian N. Curran
The American Arbitration Association (AAA) recently adopted optional Appellate Rules which significantly change the resolution of post-award issues. The new Appellate Rules, effective November 1, 2013, permit appeals of arbitration rulings directly to an AAA appellate panel. Given the difficulty in overturning traditional arbitration awards, these new rules could help protect against factually and legally flawed outcomes. However, they also could add both time and expense to an arbitration, limiting the efficiencies and cost savings that often lead contractors to use arbitration provisions in the first place. This alert discusses the new Appellate Rules, and some things to keep in mind when evaluating whether to use them.
New Appeal Grounds
One of the traditional features of arbitration compared to litigation is that arbitrations are designed to reach a final decision sooner. Vacating an arbitration award is extremely difficult and can generally only be done under limited circumstances (e.g., plain and obvious bias of an arbitrator, fraud or corruption, misconduct of an arbitrator, or if arbitrators exceed their powers). See Federal Arbitration Act, 9 U.S.C. § 10. An arbitration panel’s legal or factual errors alone are not traditional grounds to overturn an award.
Addressing some of these limitations, the new Appellate Rules provide an optional appellate proceeding for parties who agree to use the rules-either by stipulation or contract provision-to appeal an award based on two grounds: “(1) an error of law that is material or prejudicial; or (2) determinations of fact that are clearly erroneous.” Appellate Rule A-10. Continue reading “AAA Expands Review of Arbitration Awards With New Appellate Rules”
Justin A. Chiarodo
The First Circuit recently affirmed the dismissal of a closely watched False Claims Act (FCA) suit in United States ex rel. Ge v. Takeda Pharmaceutical Co. because the relator’s complaint failed to identify any examples of actual false claims presented to the federal government. The relator Helen Ge, alleged that Takeda, a pharmaceutical company, failed to inform the U.S. Food and Drug Administration (FDA) of adverse events associated with its drugs Uloric, Kapidex/Dexlant, Prevacid, and Actos. Federal law requires Takeda to inform the FDA of such adverse events. According to Ge, claims for the reimbursement of Takeda drugs under federal Medicare and state Medicaid programs must have been false because Takeda failed to inform the FDA of adverse events associated with those drugs. The First Circuit held that such allegations do not rise to the level of particularity required by the federal rules.
The Takeda case has been closely watched since the district court dismissed the case in November 2012. The district court’s dismissal order stated that compliance with the FDA’s reporting requirements was not a material condition of payment. Although the FDA has the discretion to remove drugs that are marketed in violation of the adverse-event reporting requirement, it is not required to do so. Thus, in the district court’s view, claims such as Ge’s would always be subject to dismissal. Continue reading “First Circuit Ends Closely Watched Takeda Suit With Limited Ruling”
Richard J. Conway and Justin A. Chiarodo
In a significant decision regarding the application of the False Claims Act (FCA) to firm-fixed price procurement contracts, the U.S. District Court for the Middle District of Florida recently held that a government contractor working under a fixed-price contract is not liable under the FCA for higher than expected profits and “failing to notify the Government that the work could be performed less expensively and charged a lower price” than the contract price. U.S. ex rel. Prime v. Post, Buckley, Schuh & Jernigan, Inc., 2013 WL 4506357, No. 6:10-cv-1950 (M.D. Fla. Aug. 23, 2013).
The defendant was a joint venture that had entered into a fixed price indefinite delivery/indefinite quantity (ID/IQ) contract with the government to provide architect and engineering services for an Everglades restoration project overseen by the Army Corps of Engineers. As the project was a first-of-its-kind effort, the Corps planned to reduce its cost risk by using a fixed-price contract performed through task orders. The ID/IQ contract provided negotiated fixed-price labor rates and a negotiated profit component, derived primarily from past Corps contract experience. Subsequent fixed-price task orders were lump-sum, determined in accordance with the agreed-upon labor rates multiplied by the number of days required to complete the work, and included the agreed-upon profit component. The joint venture saw its profit margin increase through the use of efficient staffing of task orders with lower-cost resources than those contemplated in the original ID/IQ formulas. Continue reading “Increased Profit Under a Firm-Fixed Price Contract a False Claim? Not So Says One Federal District Court”
Justin A. Chiarodo and Stephanie M. Harden
Two recent regulatory actions by the Department of Labor will impose significant new affirmative action and data collection requirements on federal contractors and subcontractors. The final rules will impact many federal prime and subcontracts performed in the United States and warrant close attention by contractors of all sizes. This alert highlights key provisions in those rules, which are presently set to go into effect on March 24, 2014.
Overview and Application
On September 24, 2013, the Department of Labor published two final rules on new affirmative action obligations for federal contractors and subcontractors. These new rules make changes to the regulations implementing Section 503 of the Rehabilitation Act of 1973, as amended, 29 U.S.C. § 793 (2006), and the Vietnam Era Veterans’ Readjustment Assistance Act (VEVRAA), 38 U.S.C. § 4212 (2006). Section 503 prohibits federal contractors and subcontractors from employment discrimination against individuals with disabilities, and the VEVRAA prohibits such discrimination against protected veterans. Both laws require federal contractors and subcontractors to take affirmative action to recruit, hire, promote, and retain covered individuals, and the new final rules strengthen these affirmative action requirements. The final rule for Section 503 also makes changes to the nondiscrimination provisions of the regulations to bring them into compliance with the Americans with Disabilities Act Amendments Act of 2008, Pub. L. No. 110-325, 122 Stat. 3553 (2008). The requirements of these rules are in addition to those of the Americans with Disabilities Act of 1990, 42 U.S.C. §12101 (2006), and state laws. Continue reading “New Department of Labor Regulations to Increase Contractors’ Affirmative Action Obligations”
Merle M. DeLancey Jr. and Justin A. Chiarodo
In a significant decision regarding the “fraud-in-the-inducement” theory under the False Claims Act (FCA), the Eighth Circuit recently reversed a District Court’s dismissal of an FCA claim brought by a former employee against a major pharmaceutical company. United States ex rel. Simpson v. Bayer Healthcare, No. 12-2979, 2013 WL 5614268 (8th Cir. Oct. 15, 2013), aff’g in part, rev’g in part, Order, No. 08-5758, 2012 WL 5358333 (D. Minn. July 19, 2012). The Simpson decision demonstrates courts’ willingness to accept a “fraud-in-the-inducement” theory of liability even when the relationship between the alleged fraud and the claim for payment is attenuated, at best. The proliferation of the “fraud-in-the-inducement” theory-and the significant damages exposure it presents-raises a number of challenges for companies in the defense, healthcare, and other sectors that are paid with federal funds.
In Simpson, the relator alleged that the company, Bayer, knew that its cholesterol lowering drug Baycol increased the risk of developing rhabdomyolysis, a rare but serious muscle disorder. Despite knowing that rhabdomyolysis and Baycol were linked, Bayer allegedly instructed its sales representatives to push the product to customers, including the Department of Defense (DoD), which purchased the drug under several contracts. According to the relator, Bayer representatives told the DoD that no such causal link had been proven. Continue reading “Eighth Circuit Widens FCA “Fraud-in-the-Inducement” Theory”
Merle M. DeLancey Jr.
False Claims Act (FCA) suits against health care providers have dramatically risen during the last three years. However, recent decisions indicate that courts are becoming increasingly skeptical of suits which allege that technical violations of Medicare regulations are actionable FCA violations. The most recent decision indicating such increasing skepticism was issued by the Eighth Circuit Court of Appeals last week in U.S. ex rel. Ketroser v. Mayo Foundation, 2013 WL 4733986, No. 12-3206 (8th Cir. Sept. 4, 2013). In that case, relators brought a qui tam action under the FCA against the Mayo Clinic and several related entities (Mayo). Relators asserted that Mayo falsely billed Medicare for surgical pathology services when it did not submit written reports for each surgical pathology service billed, which was allegedly required by Medicare regulations. The Eighth Circuit found that the regulations at issue did not require such written reports. However, the Eighth Circuit also signaled that even if Mayo was noncompliant with Medicare’s rules and requirements, the relators had not established the “scienter” necessary to show that Mayo “knowingly” submitted false or fraudulent claims for Medicare payment in violation of the FCA. The court concluded that because Mayo’s interpretation of the applicable requirements was at least reasonable, it did not violate the FCA even if it did make a technical mistake under the rules, because it did not act “with the knowledge that the FCA requires before liability can attach…” Continue reading “Courts Are Increasingly Skeptical of FCA Suits Alleging Technical Violations of Medicare Regulations”