Top False Claims Act Developments

March 17, 2022

Jeffrey S. Bucholtz, Tamra Moore, Jamie Allyson Lang, Matthew V.H. Noller

OVERVIEW

This week’s top False Claims Act (FCA) developments include: a proposed rule requiring Department of Agriculture contractors to certify their compliance with federal and state labor laws; the first settlement of an FCA case under DOJ’s Civil Cyber-Fraud Initiative; and a decision by a Massachusetts federal court denying attorney’s fees to relators under the FCA’s first-to-file rule.

1. USDA proposes rule requiring government contractors to certify under the FCA that they, their subcontractors, and their suppliers comply with labor laws  

Overview: On February 17, the U.S. Department of Agriculture published a proposed rule that would require any USDA contractor to certify that it complies with “all applicable labor laws” and that, “to the best of its knowledge,” its subcontractors and suppliers also comply with “all applicable labor laws.” USDA would treat this certification “to be a certification for purposes of the False Claims Act.” The comment period for the proposed rule closes on March 21, 2022.

The Proposed Rule: USDA proposes to impose additional requirements on the process for soliciting and awarding USDA contracts. One of the proposed requirements is that, “[i]n accepting [a] contract award, the contractor certifies that it is in compliance with all applicable labor laws and that, to the best of its knowledge, its subcontractors of any tier, and suppliers, are also in compliance with all applicable labor laws.” 87 Fed. Reg. 9005, 9017 (Feb. 17, 2022). The proposed rule defines “Applicable Labor Laws” to “include” fifteen specified federal statutes and executive orders, plus “[e]quivalent State laws.” Id.

Under the proposed rule, contractors must also certify “that they, and any subcontractor at any tier, are in compliance with all previously required corrective actions for adjudicated labor law violations.” Id. Contractors must report any “adjudicated evidence of noncompliance,” “provide a list of the specific violations,” and “be given an opportunity to disclose any steps taken to correct the violations . . . or improve compliance.” Id.

USDA will consider the certification required by the proposed rule “to be a certification for purposes of the False Claims Act.” Id. This seems to be intended to create a new basis for the government or private relators to assert FCA claims against USDA contractors.

Our Take: If adopted, the proposed rule will impose new certification requirements on USDA contractors and may expose them to potentially increased FCA liability. For example, contractors may have to consider whether to conduct additional investigations into their subcontractors’ and suppliers’ operations in order to certify their compliance with labor laws. And allegations, including by relators, that contractors’ certifications are false could subject contractors to FCA investigations and litigation, despite the practical limits on contractors’ ability to police and vouch for their subcontractors’ and suppliers’ labor-law compliance.

2. DOJ announces settlement of first cyber-fraud case under Department’s Civil Cyber-Fraud Initiative

Overview: On March 8, DOJ announced a $930,000 settlement with a medical services company accused of violating contractual requirements related to the company’s secure electronic medical record (“EMR”) system. This is the first settlement of an FCA case involving cyber-fraud allegations since DOJ created its Civil Cyber-Fraud Initiative, which we discussed in a previous blog post.

The Settlement: The government alleged as follows:  Comprehensive Health Services LLC (“CHS”) misrepresented its compliance with contractual requirements relating to its provision of medical services at government-run facilities in Iraq and Afghanistan. CHS agreed to use a secure EMR system to store all patients’ medical records, but did not do so consistently. CHS left records on an unsecure network drive accessible to non-clinical staff. In addition, CHS violated its contract by providing patients unapproved medical supplies.

DOJ pursued this action under its Civil Cyber-Fraud Initiative, created in October 2021. According to the government, the Initiative targets companies that “put U.S. information or systems at risk by knowingly providing deficient cybersecurity products or services, knowingly misrepresenting their cybersecurity practices or protocols, or knowingly violating obligations to monitor and report cybersecurity incidents and breaches.” The acting head of DOJ’s Civil Division declared that the CHS settlement “demonstrates the department’s commitment to use its civil enforcement tools to pursue government contractors that fail to follow required cybersecurity standards, particularly when they put confidential medical records at risk.”

Our Take: This settlement gives some indication of the investigative focus of DOJ’s Civil Cyber-Fraud Initiative, as well as DOJ’s use of the FCA to further its investigations, especially in the healthcare field.

3. Massachusetts federal court denies attorney’s fees to relators under first-to-file bar

Overview: On March 3, a federal court in Massachusetts held that relators who are not the first to file their claims cannot recover attorney’s fees after the government intervenes and settles the action. As we discussed in a previous blog post, the Sixth Circuit previously reached a contrary decision, holding that the FCA’s first-to-file rule does not apply to post-settlement attorney’s fees awards.

The Decision: The district court’s decision follows the government’s settlement of two qui tam actions in which the government intervened in some of the relators’ claims and then settled both actions. The first relator received a share of the government’s settlement, and he separately agreed to divide that share with the two relators in the second action. The relators then filed two separate motions for attorney’s fees.

The court awarded partial fees to the first relator but denied fees to the relators in the second action.  The court held that the first relator was entitled to fees only for the claims as to which the government intervened, reasoning that the FCA’s fees provision applies claim-by-claim. As to the relators in the second suit, the district court explained that it was denying their fee motion based on the FCA’s “first-to-file” rule, which provides that only the first relator to file a qui tam action based on a given set of allegations may proceed with such an action.  Relying on First Circuit precedent, the district court held that the first-to-file rule limits an attorney’s fees award to the first-to-file relator. The court also rejected the relators’ claim to entitlement to attorney’s fees based on their private agreement with the first relator, reasoning that “recovery of attorney’s fees pursuant to a private agreement would create, in essence, a back door into fees not contemplated by the statute” for relators whose claims are barred by the “first-to-file” rule. The district court’s decision on this score conflicts with the Sixth Circuit’s decision in United States ex rel. Bryant v. Community Health Systems.

Our Take: This decision reflects disagreement over whether the first-to-file rule can affect a relator’s entitlement to fees after the government settles a qui tam action. It may provide defendants outside of the Sixth Circuit with additional arguments for opposing fee awards.

In the News:

Pharmaceutical company pays $260 million to settle lawsuits alleging underpayment of Medicaid drug rebates and payment of kickbacks - On March 7, DOJ announced a $260 million settlement with Mallinckrodt ARD LLC. The government alleged that Mallinckrodt violated the FCA by (1) underpaying Medicaid rebates for its drug H.P. Acthar Gel and (2) paying illegal co-pay subsidies for the drug in violation of the Anti-Kickback Statute. These allegations were originally brought in three qui tam actions in which the government intervened.

Contractor pays $10 million to resolve allegations of knowingly presenting false invoices to Department of Energy - On March 7, DOJ announced a $10 million settlement with MOX Services LLC related to a contract for the construction of a fuel fabrication facility in South Carolina. The government alleged that MOX submitted fraudulent invoices from a subcontractor that sought payment for nonexistent construction materials. The government also alleged that MOX employees received kickbacks from the subcontractor related to the scheme.

Jeffrey S. Bucholtz is a partner in the Trial and Global Disputes Practice Group in the firm’s Washington, D.C. office, Tamra Moore is a partner in the Healthcare Practice Group in the firm’s Washington, D.C. office, Jamie Allyson Lang is a partner in the Special Matters and Government Investigations Group in the firm’s Los Angeles office, and Matthew V.H. Noller is a senior associate in the Trial and Global Disputes Practice Group in the firm’s San Francisco office.