Top False Claims Act Developments
Ethan P. Davis, Tamra Moore, Matthew V.H. Noller, King & Spalding LLP
This week’s top False Claims Act (FCA) developments include: Sixth and D.C. Circuit decisions reversing dismissals of two qui tam actions; a grant of rehearing en banc in the Fourth Circuit’s decision applying the Safeco scienter test to FCA claims; and the Solicitor General’s filing of an amicus brief recommending that certiorari be denied in a case presenting a question about FCA pleading requirements.
1. Sixth Circuit reverses dismissal of qui tam fraudulent inducement action against NASA contractor
Overview: On May 16, the Sixth Circuit in United States ex rel. USN4U, LLC v. Wolf Creek Federal Services, Inc. reversed the district court’s decision dismissing a qui tam action alleging that the defendant submitted to NASA falsely inflated estimates for facilities maintenance projects. The Sixth Circuit held that the relator sufficiently alleged that the defendant used fraudulent cost estimates to induce NASA to enter into contracts.
The Opinion: The relator alleged that defendant Wolf Creek Federal Services overstated its estimates of labor costs when submitting quotes for NASA facilities maintenance contracts, leading NASA to pay inflated amounts for work that was not performed. The relator identified specific contracts for which Wolf Creek allegedly inflated its quotes. The district court dismissed the relator’s complaint, holding that Wolf Creek’s quotes were not “claims” under the FCA and that the relator did not adequately allege that Wolf Creek’s quotes were false or that any false quote was material to NASA’s decision to pay.
The Sixth Circuit reversed in a published opinion, holding that the relator adequately pleaded a claim for fraudulent inducement. It first held that the relator alleged fraud with particularity under Rule 9(b) because it identified “several specific examples of how Wolf Creek allegedly overbilled NASA” and “set forth a factual basis” for its allegation that Wolf Creek’s quotes were fraudulently inflated.
The court then held that the alleged fraud was material even though NASA continued to pay Wolf Creek’s invoices after learning of the alleged fraud, because “there are a variety of factors unrelated to the materiality of the allegations that could cause the Government to continue contracting with a party.” A “false cost estimate,” the court held, “goes inherently ‘to the very essence of the bargain,’” supporting a finding of materiality.
Our Take: This decision addresses several important questions for FCA cases, including the standard for pleading fraudulent inducement with particularity and the requirements for alleging materiality.
2. D.C. Circuit reverses dismissal of qui tam action under government-action bar
Overview: On May 17, the D.C. Circuit in United States ex rel. Vermont National Telephone Co. v. Northstar Wireless, LLC reversed the district court’s decision dismissing a qui tam action under the FCA’s government-action bar. The D.C. Circuit held that the Federal Communications Commission’s licensing proceedings are not “administrative civil money penalty” proceedings under the government-action bar because the FCC cannot impose monetary penalties in licensing proceedings.
The Opinion: This case arose out of an FCC bidding process for licenses to provide wireless services. As part of the bidding process, FCC announced that small businesses would be eligible for a discount on their winning bids. Defendants Northstar Wireless and SNR Wireless LicenseCo submitted bids. They claimed that they were eligible for the small-business discounts and disclosed that they had acquired their capital from defendant DISH Network, which was not itself eligible for the small-business discount. The FCC awarded Northstar and SNR multiple licenses, but later determined that they were not eligible for small-business discounts because they were controlled by DISH. In response to that determination, Northstar and SNR defaulted on some of the licenses they won, leading the FCC to require them to pay a default payment.
Separately, the relator sued Northstar, SNR, and DISH under the FCA, alleging that they committed fraud in seeking small-business credits. The district court dismissed the relator’s complaint, primarily on the ground that the FCA’s government-action bar applied. The government-action bar forecloses qui tam actions “based upon allegations or transactions which are the subject of a civil suit or an administrative civil money penalty proceeding in which the Government is already a party.” 31 U.S.C. § 3730(e)(3). The district court held that the FCC’s licensing proceeding was an “administrative civil money penalty proceeding,” triggering the bar.
The D.C. Circuit reversed in a published opinion. It held that the FCC’s licensing proceeding could not be an “administrative civil money penalty proceeding” because the FCC lacks authority to impose civil money penalties in licensing proceedings. The court held that the default payment the FCC required the defendants to make was not imposed during the licensing proceeding as a penalty for Northstar and SNR’s ineligibility for small-business discounts, but only in a separate proceeding after Northstar and SNR defaulted on their obligations to pay for some of their winning bids. The D.C. Circuit also held that the relator plausibly pleaded materiality.
Our Take: This appears to be one of the only circuit court opinions interpreting the government-action bar. It will likely inform other courts’ interpretation of the bar in future cases.
3. Fourth Circuit grants rehearing en banc of decision applying Safeco scienter standard to FCA actions
Overview: On May 10, the Fourth Circuit granted rehearing en banc in United States ex rel. Sheldon v. Allergan Sales, LLC. The panel decision in Sheldon applied the Supreme Court’s scienter analysis in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), to hold that a defendant cannot “knowingly” violate the FCA when the defendant’s conduct is consistent with an objectively reasonable reading of federal law and no authoritative guidance from the government warned the defendant away from that reading.
The Case: As we discussed in a previous post, the panel decision in Sheldon joined multiple other circuits in applying Safeco’s scienter test to FCA claims. It established a two-part test to assess scienter: (1) did the defendant act consistent with an “objectively reasonable” interpretation of the underlying statute; and (2) did “authoritative guidance” warn the defendant away from that interpretation? Judge Wynn dissented from the panel decision, arguing that the Safeco test should not apply in FCA actions.
The Fourth Circuit’s grant of rehearing en banc vacates the panel decision and creates the possibility that the Fourth Circuit will hold that Safeco does not apply to FCA actions. The Supreme Court is also currently considering a petition for certiorari asking the Court to decide whether Safeco applies.
Our Take: If the en banc Fourth Circuit holds that Safeco does not apply to FCA actions, that will create a circuit split over the standard for alleging scienter under the FCA, which the Supreme Court may need to resolve.
4. Solicitor General recommends denial of certiorari petition in FCA case raising Rule 9(b) issues
Overview: On May 24, the Solicitor General filed a Supreme Court amicus curiae brief in Johnson v. Bethany Hospice & Palliative Care LLC. The Supreme Court had requested the Solicitor General’s views on the petition for certiorari in Bethany Hospice, which asks the Court to decide how Rule 9(b) applies to FCA actions. The Solicitor General recommended that the Court deny certiorari, arguing that there is no circuit split over the question presented and that Bethany Hospice is not a good vehicle for deciding that question.
The Case: As we have discussed in previous posts, the petition in Bethany Hospice is one of three current petitions that ask the Supreme Court to resolve a circuit split over whether Rule 9(b) requires relators to plead details of specific false claims. The petitions in those cases argue that some circuits require relators to plead such details, while other circuits hold that the submission of a false claim can be inferred from particularized allegations of a fraudulent scheme. In Bethany Hospice, the Eleventh Circuit dismissed the relator’s complaint for failure to plead specific details of false claims.
The Solicitor General argued that no actual circuit split exists because “the courts have largely converged on an approach that allows relators either to identify specific false claims or to plead other sufficiently reliable indicia supporting a strong inference that false claims were submitted to the government.” The Solicitor General also argued that even if there were a circuit split, Bethany Hospice is an “unsuitable vehicle” because the district court held that, in addition to not pleading details of false claims, the relator also had not adequately alleged the existence of a fraudulent scheme. “Although the court of appeals did not reach the issue,” the Solicitor General argued it “would complicate the Court’s consideration” of the Rule 9(b) question.
The Solicitor General did not address the other two petitions raising the Rule 9(b) question, which were filed in United States ex rel. Owsley v. Fazzi Associates, Inc. and Molina Healthcare of Illinois, Inc. v. Prose. On May 16, the Supreme Court invited the Solicitor General to file a brief in Owsley. Although the Solicitor General has not yet filed that brief, the government will presumably maintain its position that certiorari should be denied because the circuits are not really split on how to interpret Rule 9(b). The Supreme Court will consider the Molina petition at its conference on June 2.
Our Take: The Court’s requests for the views of the Solicitor General in Bethany Hospice and Owsley suggest that it may be seriously considering granting one or more of the petitions raising the Rule 9(b) issue. It will be interesting to see if the Solicitor General’s opposition to a grant influences the Court’s decision.
In the News:
New York federal district court dismisses qui tam action for failure to plead scienter - On May 5, a federal district court in New York dismissed a qui tam action alleging that McKesson Corp. violated the FCA and Anti-Kickback Statute by providing its customers business management tools. The court held that the relator plausibly alleged that McKesson had violated the Anti-Kickback Statute, but had not adequately alleged scienter because it did not plead facts showing that McKesson was actually aware that providing those tools would constitute kickbacks.
South Korean contractors settle FCA allegations - On May 18, the government announced a $3.1 settlement with seven South Korean companies accused of engaging in a bid-rigging conspiracy with respect to contracts for construction and engineering work on U.S. military bases in South Korea. The government alleged that the defendants conspired to suppress competition during the bidding process.
United States sues medical device manufacturer for allegedly inducing medical providers to unsafely use medical devices - On May 17, the United States filed a lawsuit against The Prometheus Group, a manufacturer of pelvic muscle therapeutic systems and related rectal probes, and its owner. The government alleges that the defendants violated the FCA by causing health care providers to bill Medicare for services in which the providers improperly and unsafely re-used the defendants’ single-user rectal sensors and single-use catheters on multiple patients.
Ethan P. Davis is a partner in the Special Matters and Government Investigations Practice Group in the firm’s San Francisco 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.