Top False Claims Act Developments
Jeffrey S. Bucholtz, Tamra Moore, Matthew V.H. Noller, King & Spalding LLP
This week’s top False Claims Act (FCA) developments include: a settlement in a qui tam action based on alleged violations of cybersecurity regulations; a federal district court decision taking sides in a circuit split over the FCA’s first-to-file bar; and two federal district court decisions dismissing qui tam actions under Fed. R. Civ. P. 9(b).
1. Qui tam suit alleging violations of cybersecurity regulations settles
Overview: On April 27, Aerojet Rocketdyne Holdings Inc. announced that it had settled a relator’s FCA action against it. To our knowledge, this was the first qui tam case to make it to trial based on allegations that the defendant violated U.S. cybersecurity regulations.
The Settlement: The relator alleged that Aerojet misled the Department of Defense and NASA about the company’s violations of regulations intended to protect sensitive information from cybersecurity threats. The Department of Defense promulgated the relevant cybersecurity regulations in 2013, and this case was the first one in which a court found (in a decision denying a motion to dismiss the complaint) that alleged violations of the cybersecurity regulations could support an FCA suit. The case settled for $9 million on the second day of trial.
This settlement comes as DOJ ramps up its enforcement activities related to cybersecurity violations. Last October, DOJ created a Civil Cyber-Fraud Initiative to pursue 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.” DOJ announced its first settlement under the Civil Cyber-Fraud Initiative in March, declaring a “commitment to use its civil enforcement tools to pursue government contractors that fail to follow required cybersecurity standards.”
Our Take: Cybersecurity is likely to remain a priority for FCA relators and DOJ.
2. Mississippi federal court dismisses qui tam action under first-to-file bar
Overview: On April 26, a Mississippi federal district court dismissed a qui tam action alleging FCA violations by an operator of hospice care centers. The court held that an earlier lawsuit, which was pending when the relator filed her initial complaint, triggered the FCA’s first-to-file bar. Taking sides in an ongoing circuit split, the court held that the relator could not avoid the first-to-file bar by amending her complaint after the earlier-filed action settled.
The Decision: The relator alleged that defendant SouthernCare violated the FCA by billing Medicare for hospice services that either were not provided at all or were provided to patients who were ineligible for hospice care. At the time that the relator filed her complaint, another qui tam action based on identical facts and claims was pending against SouthernCare. After that case settled, the relator amended her complaint.
The court dismissed the relator’s amended complaint under the first-to-file bar, which provides that “when a person brings an action under [the FCA], no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5). The relator argued that the first-to-file bar did not apply to her suit because she amended her complaint after the earlier-filed case settled, but the district court disagreed.
The court acknowledged that this issue is subject to a circuit split. The First Circuit has held that the first-to-file bar does not apply when a relator amends her complaint after an earlier-filed action is dismissed. In contrast, the Second and D.C. Circuits have held that a relator cannot avoid the first-to-file bar by amending her complaint. Last month, the Eleventh Circuit joined the Second and D.C. Circuits in a decision we discussed in a blog post. The Mississippi district court adopted the majority approach, holding that whether the first-to-file bar applies depends on whether a related action is pending when a relator files her initial complaint, not when the relator files an amended complaint.
Our Take: As the court recognized, its decision implicates a circuit split over the FCA’s first-to-file bar. If the relator appeals, the Fifth Circuit will have to decide which side of the split to join, which could trigger a petition for certiorari to the Supreme Court.
3. Federal courts in Missouri and New Jersey dismiss qui tam actions under Rule 9(b)
Overview: On April 25 and April 29, respectively, federal district courts in Missouri and New Jersey dismissed two relators’ FCA actions against healthcare providers. Both courts held that the relators failed to plead fraud with particularity under Fed. R. Civ. P. 9(b).
The Decisions: In the Missouri action, the relator alleged that the defendants violated the FCA by illegally compensating doctors under the Stark Law, which generally prohibits physicians from referring patients to entities with which they have a financial relationship. In the New Jersey action, the relator alleged that the defendants violated the FCA by double-billing for the relator’s treatment, receiving reimbursement from both the government and the relator’s private insurer. The defendants in both cases moved to dismiss under Rule 9(b).
As we have discussed in previous posts, the circuits are split over how Rule 9(b) applies to FCA actions. Specifically, the circuits disagree about whether Rule 9(b) requires FCA plaintiffs to plead specific details of allegedly false claims. The Eighth Circuit, which includes Missouri, requires plaintiffs to plead either “(1) representative examples of the false claims, or (2) the details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” The Third Circuit, which includes New Jersey, does not require plaintiffs to plead specific details of false claims.
Although the Missouri and New Jersey district courts applied different Rule 9(b) standards, they agreed that the relators did not plead fraud with particularity. The Missouri court held that the relator did not identify representative examples of false claims, instead alleging generally that “every claim” the defendants submitted was false, which is not sufficient to satisfy Rule 9(b) in the Eighth Circuit. The court also held that the relator did not provide “indicia of reliability that claims were actually submitted” because he did not “allege firsthand knowledge of Defendants’ billing system” or provide “particulars” for any actual claim. The New Jersey court held that the relator did not plead with particularity that any of the defendants’ claims were false because he did not allege the necessary information to show that the defendants ever simultaneously billed the government and private insurance for the same services. The court also held that the relator had not adequately alleged that any false claim was material to the government’s decision to pay the defendants.
Our Take: These two decisions implicate the circuit split over Rule 9(b)’s application to FCA claims. Currently, there are three petitions for certiorari pending before the Supreme Court asking the Court to resolve the split, including one petition on which the Court has requested the views of the Solicitor General.
In the News:
DOJ announces settlement with pawn shops to resolve allegations of COVID-19 relief fraud - On April 21, DOJ announced a $50,000 settlement with a collection of pawn shops and their owner related to allegations that the defendants violated the FCA when seeking Paycheck Protection Program loans. The government alleged that the defendants sought and received two PPP loans, while falsely certifying that they would not receive more than one loan.
United States sues government contractor for allegedly submitting false invoices to Department of Homeland Security - On May 2, the United States filed a lawsuit against Intelligent Fiscal Optimal Solutions LLC (iFOS) and its owner for alleged FCA violations in connection with a contract to provide staff augmentation services to the Department of Homeland Security. The government alleges that iFOS violated federal conflict-of-interest rules and material contractual requirements when performing the contract, then submitted false invoices to hide its violations. According to the complaint, the government “mistakenly paid over $628,322 to iFOS for tainted services.”
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, and Matthew V.H. Noller is a senior associate in the Trial and Global Disputes Practice Group in the firm’s San Francisco office.