Senate Judiciary Committee Votes to Approve Amendments to the False Claims Act
The Situation: The Senate is set to consider a bipartisan bill, S. 2428, that would make substantive and procedural amendments to the False Claims Act ("FCA"). The Senate Judiciary Committee voted the bill out of conference on October 28, 2021, referring it to the Senate for vote.
The Potential Result: If passed, the proposed amendments would make a number of potentially harmful changes to the FCA. For example, S. 2428 would constrain the Department of Justice's right to dismiss FCA complaints filed by relators—raising constitutional as well as practical problems. It also threatens to undermine existing Supreme Court precedent on materiality and potentially ease the plaintiff's burden of proof in False Claims Act cases.
Looking Ahead: The proposed changes in S. 2428 represent bad policy and would result in numerous negative consequences for FCA litigants and the health care industry, as well as anyone who submits claims for government payment in general. The amendments would tilt FCA litigation even further in favor of the government and qui tam relators and increase the likelihood of frivolous lawsuits, while threatening to make it harder to dismiss frivolous or meritless cases.
In July 2021, a bipartisan group of senators introduced a bill, S. 2428, entitled the False Claims Amendments Act of 2021 ("S. 2428"), which proposed substantive and procedural amendments to the False Claims Act ("FCA"). After multiple revisions to the bill, members of the Senate Judiciary Committee voted it out of committee on October 28, 2021. S. 2428 will now be referred to the full Senate for vote. The version of the bill passed by the Committee eliminates highly objectionable burden-shifting language and retroactivity provisions, but nonetheless threatens to diminish defenses and ratchet up costs in an area that is already heavily tilted in favor of plaintiffs. If passed, S. 2428 would:
- Threaten to undermine Supreme Court precedent by constraining the fact finder's ability to make commonsense findings regarding the materiality of certain conditions of payment;
- Constrain the government's right to dismiss qui tam suits;
- Expand the scope of the FCA's whistleblower retaliation provision; and
- Shift discovery costs in qui tam cases that have been declined by the Department of Justice ("DOJ").
Background on the False Claims Act
The FCA prohibits the submission of false claims to the government for payment. Enacted during the Civil War in response to contractors who sold the Union Army faulty munitions and spoiled provisions, the FCA is now most widely used to combat health care fraud.
Notably, private citizens—known as "relators"—can bring FCA suits on the government's behalf. Such actions (known as "qui tam" suits) must be initially filed under seal, with the government then given the opportunity to investigate the allegations—and either to intervene in the action, to seek the action's dismissal, or to allow the relator to proceed on the government's behalf. To encourage relators to come forward, the relator is entitled to a 15-30% share of any financial recovery, which can include treble damages and mandatory penalties ranging from $11,665–$23,331 per claim (penalties are increased each year to account for inflation).
The financial incentives for relators, as well as the potential hefty penalties for defendants, can encourage the filing of meritless FCA suits in the hopes of a settlement. In 2018, because of rising concerns over qui tam complaints that lack substantial merit or interfere with agency priorities and prerogatives, the Department of Justice issued a memo—commonly called the Granston Memo—reminding DOJ of the government's ability to dismiss qui tam suits in certain circumstances. This memo remains in effect today. But the government has used its dismissal power sparingly in FCA cases.
Senate Bill 2428 Proposes Unfair and Unnecessary Changes
The Materiality Framework
A successful FCA claim must meet, among other things, a "rigorous" and "demanding" materiality standard as described by the Supreme Court in Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). It is not enough simply to say that the government required compliance with a certain condition for payment. The facts must indicate that the government actually attaches weight to that requirement and relies on compliance with it. In Escobar, the Supreme Court set forth a non-exclusive list of factors for courts to consider in making materiality determinations, including, for example, evidence that the government continued paying certain claims even with knowledge of the facts.
Escobar opened up a reasonable and much-needed avenue for defendants seeking to combat FCA cases predicated on minor or technical alleged legal violations. And some defendants have obtained dismissals in cases by demonstrating, for example, that the government continued to pay the relevant claims even with knowledge of the alleged fraud.
S. 2428 attempts to curtail Escobar's logical interpretation of the FCA's materiality requirement by including the following language:
In determining materiality, the decision of the Government to forego a refund or to pay a claim despite actual knowledge of fraud or falsity shall not be considered dispositive if other reasons exist for the decision of the Government with respect to such refund or payment.
In short, the bill directly targets the defense bar's successful and commonsense argument that continued payment by the government, with full knowledge of the alleged fraud, strongly undermines any contention that the alleged fraud is material to the government's decision to pay.
Dismissal of FCA Lawsuits
S. 2428 also includes language seeking to constrain the government's right to dismiss qui tam suits, requiring that the government affirmatively demonstrate its reasons for dismissal and providing relators with the opportunity to show that such reasons are "fraudulent, arbitrary and capricious, or contrary to law." Such limitations on the Executive Branch and judicial second-guessing of enforcement decisions implicate potential constitutional concerns. They are also bad policy. Even with the Granston Memo in effect, DOJ has exercised its power to dismiss FCA suits in a limited and restrained manner. The proposed change needlessly makes it harder for DOJ to dismiss cases that interfere with government policies or programs. It will also encourage even more frivolous litigation than the FCA already generates and potentially increase health care costs when providers respond to these changes, either through operational changes or simply by increasing prices to account for heightened liability risk.
The proposed changes would extend the FCA's anti-retaliation provision to apply to post-employment retaliation (i.e., former employees), siding with the minority in a circuit split on that particular issue.
Shifting Discovery Costs
S. 2428 would require the parties in declined qui tam cases to pay the government's costs in responding to discovery requests unless the requesting party can affirmatively demonstrate that the information is "relevant" and "proportionate to the needs of the case," and the request is not "unduly burdensome." This provision seems to attempt to unfairly shift burdens and costs to qui tam defendants. Given the practicalities of FCA litigation and the realities of coordination between relators and the government, the increased burden will largely fall on defendants who need evidence from the government to show that it "pa[id] a particular claim despite its actual knowledge that certain requirements were violated," which the Supreme Court has recognized as "very strong evidence that those requirements are not material." This one-sided rule also fails to account for the fact that the government is the "real party in interest" even in declined qui tam lawsuits and should not be treated simply as a typical "third party" entitled to the range of protections under F.R.C.P. 45 (governing the scope of third party subpoenas). The proposed amendment threatens to burden defendants seeking discovery from the government—even though such discovery can be valuable to defend against meritless complaints, and even though cost-shifting is already available under the existing rules.
Three Key Takeaways
- If passed, S. 2428 will raise the stakes—both with harsher legal standards and heavier financial burdens—for FCA defendants. Such proposed changes tilt FCA litigation even further in favor of the government and qui tam relators, increasing the likelihood of frivolous lawsuits.
- S. 2428 may needlessly interfere with the executive branch's discretion to dismiss cases.
- The proposed changes in S. 2428 are bad policy with a number of foreseeable negative consequences not just for FCA litigants but also for anyone who submits claims for government payment.
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