Eighth Circuit Widens FCA “Fraud-in-the-Inducement” Theory

 

Merle M. DeLancey and Justin A. Chiarodo

Merle DelanceyJustin A. ChiarodoIn 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”

Courts Are Increasingly Skeptical of FCA Suits Alleging Technical Violations of Medicare Regulations

Merle M. DeLancey

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”

Government Contractors Beware—DOJ Is Now Using the Byrd Amendment to Bring FCA Cases for Alleged Lobbying Violations

David M. Nadler

David M. NadlerOn November 8, 2012, the U.S. Department of Justice (DOJ) announced its intention to continue expanding the False Claims Act’s (FCA) reach by intervening in a lawsuit against Fluor Hanford Inc. and its parent company, Fluor Corporation (collectively Fluor), in the U. S. District Court for the Eastern District of Washington. In this case, DOJ is using the rarely invoked Byrd Amendment as the hook to pursue FCA claims. The complaint alleges that Fluor used federal contract funds to pay for lobbying services in violation of the Byrd Amendment and therefore, violated the FCA and subjected itself to treble damages. 31 U.S.C. § 3729 et seq. (FCA); 31 U.S.C. § 1352 (Byrd).

As discussed below, there have been few prosecutions under the Byrd Amendment, and FCA liability predicated on false certifications of compliance with the Byrd Amendment is a novel approach. The Fluor case highlights that government contractors must be aware of the lobbying restrictions under the Byrd Amendment as well as the type of conduct that could expose them to liability and treble damages under the FCA. DOJ’s decision to intervene in this case also underscores the government’s increased scrutiny and willingness to prosecute cases involving an alleged misappropriation of public funds. It also demonstrates DOJ’s continued efforts to expand the reach of the FCA by pursuing actions based on conduct that falls within the scope of independent statutes that carry their own civil penalties. Instead of seeking penalties via the underlying statute (here, the Byrd Amendment), DOJ has elected to proceed under the FCA where it can recover treble damages as well as civil penalties. Continue reading “Government Contractors Beware—DOJ Is Now Using the Byrd Amendment to Bring FCA Cases for Alleged Lobbying Violations”

DOJ and SEC Issue Foreign Corrupt Practices Act Guidance

David M. Nadler and Steven J. Roman

David M. Nadler Steven J. RomanThe Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) jointly issued a new guidance entitled “A Resource Guide to the U.S. Foreign Corrupt Practices Act.” Although the 130-page guidance does not break any significant new ground, and generally reiterates positions that the government has previously taken in Foreign Corrupt Practices Act (FCPA) litigation and settlements, the document does provide useful information to companies regarding compliance with, and government enforcement of, the FCPA.

For example, the guidance identifies nine factors that the government considers in conducting an investigation, determining whether to charge a corporation, and negotiating plea or other agreements: (1) the nature and seriousness of the offense, including the risk of harm to the public; (2) the pervasiveness of wrongdoing within the corporation, including the complicity in, or the condoning of, the wrongdoing by corporate management; (3) the corporation’s history of similar misconduct, including prior criminal, civil, and regulatory enforcement actions against it; (4) the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents; (5) the existence and effectiveness of the corporation’s preexisting compliance program; (6) the corporation’s remedial actions, including any efforts to implement an effective corporate compliance program or improve an existing one, replace responsible management, discipline or terminate wrongdoers, pay restitution, and cooperate with the relevant government agencies; (7) collateral consequences, including whether there is disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable, as well as impact on the public arising from the prosecution; (8) the adequacy of the prosecution of individuals responsible for the corporation’s malfeasance; and (9) the adequacy of remedies such as civil or regulatory enforcement actions. The guidance also includes a number of hypotheticals and case studies that are helpful in suggesting the types of conduct and compliance practices that are more or less likely to lead to government enforcement actions or declination of charges. Continue reading “DOJ and SEC Issue Foreign Corrupt Practices Act Guidance”

Trade Associations Request that Justice Department and SEC Clarify Criminal and Civil FCPA Enforcement

David M. Nadler and Steven J. Roman

David M. NadlerSteven J. RomanOn November 8, 2011, Assistant Attorney General Breuer promised in a speech to the 26th National Conference on the Foreign Corrupt Practices Act (FCPA) that in 2012 the U.S. Department of Justice (DOJ) would provide “detailed new guidance on the [FCPA’s] criminal and civil enforcement provisions.” More than 30 trade associations led by the U.S. Chamber of Commerce have requested that this promised guidance address several issues and questions summarized below in order to mitigate significant interpretative challenges faced by businesses seeking to comply in good faith with the FCPA. “[I]n order to avoid conflicting interpretations and ensure a uniform policy,” the letter suggests that the guidance be issued by both the DOJ and the U.S. Securities and Exchange Commission (SEC) and that it apply to both criminal and civil enforcement.

Definitions of “Foreign Official” and “Instrumentality”

The trade associations’ letter requests that the DOJ and the SEC provide “a clear, uniform definition” of “foreign official” and “instrumentality.” The letter stresses that the courts’ highly fact-dependent and discretionary approach to these terms, particularly in markets where many companies are at least partially state-owned, “engenders tremendous uncertainty and risks serious misallocation of resources by U.S. businesses seeking to sell their goods and services in foreign markets.” In response, the letter suggests that the forthcoming guidance address at least the following: (1) the percentage ownership or level of control by a foreign government that ordinarily will qualify a corporation as an “instrumentality;” (2) clarification that an “instrumentality” must perform government or quasi-governmental functions and a detailed list of what those functions may include; and (3) exceptions, if any, to the foregoing general principles. Continue reading “Trade Associations Request that Justice Department and SEC Clarify Criminal and Civil FCPA Enforcement”

DOD Issues Final Rule on Contractor Business Systems

David M. Nadler and Justin A. Chiarodo

David M. NadlerJustin A. ChiarodoOn February 24, 2012, the Department of Defense (DOD) published a final rule amending the Defense Federal Acquisition Regulation Supplement regarding contractor business systems [77 Fed. Reg. 11355]. With only minor changes from the interim rule (effective as of May 18, 2011), the final rule provides for oversight of a contractor’s business systems and empowers the government to withhold payments on contracts when a Contracting Officer determines that a contractor’s system contains “significant deficiencies.”

Consistent with the interim rule, the final rule applies to all contracts governed by the Cost Accounting Standards (CAS) and regulates six categories of “business systems”– Accounting Systems, Estimating Systems, Earned Value Management Systems, Purchasing Systems, Material Management and Accounting Systems, and Property Management Systems. The regulation is implemented by a contract clause that, where inserted, allows the government to withhold payments if one or more “significant deficiencies” are found in any of the above-mentioned business systems. Continue reading “DOD Issues Final Rule on Contractor Business Systems”

Update on the Government Response to the Potential Swine Flu Pandemic

What is the Swine Flu?

Richard J. Conway and Merle M. DeLancey

According to the U.S. Centers for Disease Control (CDC), the Swine Influenza (swine flu) is a respiratory disease caused by type A influenza virus that regularly causes outbreaks of influenza in pigs. The classical swine flu virus (an influenza type A H1N1 virus) was first isolated from a pig in 1930. Swine flu viruses do not normally infect humans. However, sporadic human infections with swine flu have occurred and are occurring now.

What is Known About this Current Outbreak?

According to the CDC, in late March and early April 2009, cases of human infection with swine influenza A (H1N1) viruses were first reported in Southern California and near San Antonio, Texas. Other states and foreign governments have reported cases of swine flu infection in humans, and cases have been reported internationally as well. As of April 30, 2009, there have been 109 cases reported in the United States, with most in New York City, California, and Texas. A toddler who crossed the border from Mexico into south Texas died from a new strain of swine flu on April 29, 2009 in a Houston hospital, the first confirmed death from the virus in the United States. Continue reading “Update on the Government Response to the Potential Swine Flu Pandemic”