Top False Claims Act Developments

October 28, 2021

Seth H. Lundy, Amy Boring, and Katie Harris, King & Spalding LLP

Overview

This issue highlights the following top False Claims Act (FCA) developments: (1) a district court’s hesitation to award treble damages and significant penalties for a minor licensing violation; (2) the Department of Justice’s (DOJ’s) announcement of a new Civil Cyber-Fraud Initiative; (3) an FCA settlement relating to valves supplied to the U.S. Navy; and (4) our take on how enforcement practices from the opioid crisis could expand FCA exposure in other areas.

1. District Court orders whistleblower to show cause as to why he is entitled to treble damages and significant penalties

Overview: On its own motion, the U.S. District Court for the Northern District of Mississippi recently ordered a relator to show cause as to why treble damages and significant civil penalties were justified in a case involving claims that were allegedly based on false information that a nursing director had a valid nursing license. 

The Show Cause Order: In its order, the court questioned the applicability of the FCA’s mandatory penalties, in particular whether the magnitude of an award of a civil penalty for each false claim (the penalty range is currently $11,803 to $23,607) and treble damages would be appropriate, even in the absence of actual damages.  The court was troubled that a multi-million-dollar verdict could be the remedy for the regulatory violation alleged in the case  -- that a nursing director’s multi-state privileges granted by Virginia had terminated because she had established Tennessee as her primary residence.  The court’s opinion suggests that mechanically applying the FCA’s methods of calculating damages and penalties to such a set of alleged facts could “present a potential unfairness, or even absurdity, in the law” and that a rough estimate of potential damages for what the court characterized as “rather minor licensing issues” was “difficult to reconcile with any consideration of proportionality and fairness.”  

The court also highlighted its concern about the leverage that FCA plaintiffs could exert against defendants and questioned whether the FCA, which demands such large penalties, was the appropriate vehicle for handling this type of alleged regulatory or licensing violation.  The parties have submitted briefing in response to the order.

Our Take: The court’s order illustrates a concern among some parts of the judiciary that the FCA remedies scheme could be applied in a manner that is untethered from the facts and actual damages of a given violation, resulting in unfair and even “absurd” (and perhaps constitutionally problematic) damages and penalty awards.  In addition, the order raises a broader question of whether minor regulatory and licensing violations are properly handled through the FCA or better left to state and federal regulators.

2. DOJ announces the Civil Cyber-Fraud Initiative, which will use the FCA to pursue cybersecurity-related fraud by government contractors and grant recipients

Overview: On October 6, 2021, Deputy Attorney General Lisa O. Monaco announced a new Civil Cyber-Fraud Initiative.  The initiative aims to hold government contractors and grant recipients accountable if they “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 initiative will be led by the DOJ Civil Division’s Commercial Litigation Branch, Fraud Section. 

Our Take: This initiative is part of broader federal efforts to address cyber threats.  Given significant and high-profile cybersecurity breaches, cybersecurity is likely to remain a focus for DOJ, law enforcement, and other federal agencies.  We expect DOJ’s increased resources and focus on cybersecurity could lead to an increase in cybersecurity-related qui tam cases (e.g., involving whistleblower allegations that certain contractors’ or grant recipients’ security protocols do not measure up to the levels set forth in bids for federal awards).

3. Manufacturer of industrial products used in U.S. Navy ships agrees to pay $4.5 million to resolve FCA allegations

Overview: On October 6, 2021, DOJ announced a $4.5 million settlement with the Crane Company to resolve allegations that the Crane Company violated the FCA by supplying high performance butterfly valves used on U.S. Navy ships that did not comply with Military Specification (Mil Spec) requirements and requirements for inclusion on the Qualified Products List (QPL). 

Details of the Settlement and Allegations: The Crane Company had allegedly supplied high performance butterfly valves that included Reinforced Teflon seats and Monel bolting.  According to the allegations, the Navy had not approved the Reinforced Teflon seats or the Monel bolting for use by the Navy, and the modifications were not disclosed as required by the QPL Program.  Without admitting liability, the Crane Company agreed to pay $4.5 million to resolve the claims, which were originally brought under the qui tam provisions of the FCA. 

Our Take: The FCA continues to play a prominent role in matters involving the Department of Defense’s acquisition process.  More cases like this are anticipated, where the government uses the FCA to address situations involving products supplied for use in military projects that allegedly do not meet specifications.  While the government presumably could have addressed its concerns as a matter of contract, the FCA opens these contractual allegations to complaints by whistleblowers and potentially much greater exposure than for a contract claim.

4. Potential for expanded downstream FCA liability

Overview:  The expansion of liability under the FCA during the opioid crisis raises questions about how these enforcement practices could expand to downstream obligations and services in other industries.

Precedent from the Opioid Crisis: Facing pressure from the public and the government to combat the opioid epidemic, DOJ lawyers have expanded their use of the FCA.  Pharmacies and pharmaceutical product distributors have been targeted under the FCA for allegedly facilitating the provision of opioid medications to end users.  For example, in one case, DOJ brought an enforcement action against two Tennessee pharmacies, their owners, and three pharmacists in connection with the dispensing of opioid products reimbursed by the Medicare program.  DOJ’s theory of liability, in part, was that the pharmacies’ claims to Medicare were false because the opioids were not dispensed for a legitimate medical purpose and the pharmacists had failed to meet their professional responsibility to ensure that the prescriptions presented to the pharmacy were in fact medically appropriate for the patients.

Our Take:  This aggressive use of the FCA is closely tied to the national public health emergency resulting from the opioid crisis.  DOJ’s press release announcing the action against the Tennessee pharmacies specifically stated that it intended to “use every resource at [its] disposal … to stop pharmacies and pharmacists from continuing to abuse their dispensing authority to fuel this epidemic.”  The action appears to raise the question of how to delineate the circumstances in which pharmacists should be deemed to be on notice that opioid prescriptions written by licensed physicians are not being prescribed for a legitimate medical purpose.   

This expansive use of the FCA could manifest in other areas as well.  For example, in a government-funded context, a product or piece of equipment that allegedly violates a health and safety or environmental requirement could be the basis for a FCA action, but how far down the chain of distribution should liability extend?  If courts, prosecutors, and qui tam relators use the precedent from the opioid crisis as a guide, it could be that someone at least one step removed from the actual violation—some who, for example, merely installs or delivers a non-conforming product to an end user, even if the non-conformance relates to raw materials used in a single part of the product—could face FCA allegations.

Seth H. Lundy is a partner in the FDA and Life Sciences Practice Group in the firm’s Washington, D.C. office.  Amy Boring is a Senior Associate in the Special Matters and Government Investigations Practice Group in the firm’s Atlanta office, and Katie Harris is an Associate in the Special Matters and Government Investigations Practice Group in the firm’s Atlanta office.