The False Claims Act After Escobar Elizabeth Latif, Esq. March 8, 2017

1. The False Claims Act After EscobarElizabeth Latif, Esq.March 8, 2017

2. The False Claims Act • The False Claims Act provides for treble damages against government contractors who knowingly present false or fraudulent claims for payment.

3. FCA Basics • Over 150 years old • Originally known as the Lincoln Law, after President Abraham Lincoln • Implemented during the Civil War • Enacted in response to the government being defrauded by suppliers of goods to the Union Army during the Civil War

4. Basics, cont’d • Has a “qui tam” provision (Latin for “in the name of the king”) • Allows private persons to file suit if they learn of a false claim that has not come to the attention of the government • If their suit is victorious, private person can receive part of the award or settlement

5. Basics, cont’d • The Act is designed to encourage individuals to report previously unknown fraud on the government • Cases cannot be based on previously publicly-disclosed information.

6. Basics, cont’d • Cases are filed under seal and can remain so for a long time. • The purpose of filing the case under seal is to afford the government an opportunity to investigate the allegations without the defendant’s knowledge.

7. Basics, cont’d • From 1986 to 2016, the government has recovered over $50 billion from False Claims Act cases. • $4.6 billion in 2016 • Most of these recoveries were a result of FCA lawsuits brought by private persons (known as “relators”).

8. Basics, cont’d • Many of the recoveries are from healthcare fraud cases, including those involving drug companies, medical device companies, hospitals, nursing homes, laboratories, and physicians. • Others cases involve fraud relating to housing (mortgage fraud), defense, energy, construction, and natural disaster recovery

9. Text of the Statute • The False Claims Act defines a “claim” as a demand for money or property. • Knowledge requirement (includes recklessness) • Penalties: $10,781 to $21,563 per false claim, plus treble damages

10. Issue Presented in Escobar • What does it mean for a contractor to “knowingly” present a claim that is “false” or “fraudulent”? • Is a claim submitted to the government for payment for goods or services actionable under the FCA when the claimant knows (and fails to disclose) that the goods or services fail to comply with material statutory, regulatory, or contractual requirements? • This theory is known as “implied false certification” liability.

11. Facts of Escobar • Universal Health submitted claims to Massachusetts Medicaid for mental health services provided to a teenage beneficiary. • Beneficiary had an adverse reaction to prescribed medication and ultimately passed away. • In FCA suit, family claimed that Universal Health made a false certification to the government that the services provided to the beneficiary were done by individuals who had earned National Provider Identification numbers, which are provided by the federal government upon proof of certain qualifications and licenses.

12. District Court and First Circuit • The district court dismissed the complaint, holding that it failed to state a claim under the False Claims Act because the regulations that required the licenses were not conditions of payment of the Medicaid program. • The First Circuit reversed the decision of the district court, holding that the regulations at issue were conditions of payment.

13. Supreme Court • Supreme Court sent the case back to the First Circuit, with a new test for false certification liability. • Held that when a defendant makes representations in submitting a claim, but omits its violations of statutory, regulatory, or contractual requirements, those omissions can be a basis for liability if they render the defendant’s representations misleading with respect to the goods or services provided.

14. Escobar’s Three-Part Test The holding thus sets up a three-part test for implied false certification claims under the FCA: • Does the request for payment contain a “specific” representation about the goods or services provided? • If yes, • Was it false? or • Did the representation omit that the requestor had not complied with a statutory, regulatory, or contractual requirement, such that it made the representation a half-truth? • Was the misrepresentation material to the government’s payment decision?

15. First Element • First, the claim must “not merely request payment, but also make[] specific representations about the goods or services provided.” • For example, in Escobar – use of NPI numbers that corresponded to certain job titles was a representation that individuals providing the services qualified for those job titles.

16. Second Element • Second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements must make those representations misleading half-truths. • In Escobar – use of NPI numbers falsely implied that the individuals were qualified for those certain job titles

17. Third (and toughest) Element • Third, the misrepresentation must have been material to the government’s payment decision. • Misrepresentation cannot be deemed material merely because the government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment.

18. What kind of proof will suffice to establish materiality? • Materiality can be alleged or proven by evidence that government would not have paid the claim if they knew of the noncompliance. • How is that shown? • Evidence that the government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement • E-mails or other documentary evidence where noncompliance was disclosed, and the government declined to approve the claims for payment

19. Materiality • Materiality can be disproven where: • noncompliance was clear from the face of a request for payment and the government paid anyway; or • Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated; or • noncompliance with the requirement is minor or insubstantial.

20. Quiz #1 • Suit alleged that the contractor’s noncompliance and misrepresentations would have entitled the government to decline payment.

21. #2 • Suit alleged that college had altered grade and attendance records in violation of an agreement that expressly conditioned college’s Title IV funding on compliance with the recordkeeping requirement.

22. #3 • Suit alleged that the defendants (1) certified in their Medicare enrollment forms that they would abide by Medicare laws, regulations, and program instructions, (2) understood that payment of a claim was conditioned on the claim being compliant with Medicare laws, regulations, and program instructions, and (3) submitted claims for payment and knowingly failed to disclose their noncompliance with Medicare regulations. • Suit also alleged “that the government would not have paid Defendants’ claims had they known of Defendants' fraudulent conduct.”

23. #4 • Suit alleged that the operator of substance abuse and rehabilitation centers violated Office of Alcoholism and Substance Abuse Services and Medicaid provisions, where counselors failed to keep adequate notes about patients, billed time incorrectly, and maintained records that contained discrepancies between patient signatures.

24. #5 • Suit alleged that government contractor defrauded a government program because contractor (who provided mental health services) knowingly misrepresented its compliance with requirements that are so central to the provision of mental health counseling that Medicaid would have refused to pay these claims had it known of these violations.

25. Other District Court decisions post-Escobar • United States v. Luce, No. 11-C-05158, 2016 WL 6892857 (N.D. Ill. Nov. 23, 2016) • U.S. ex rel. George v. Fresenius Med. Care Holdings, Inc., No. 2:12-CV-00877-AKK, 2016 WL 5361666 (N.D. Ala. Sept. 26, 2016) • U.S. ex rel. Lee v. N. Adult Daily Health Care Ctr., No. 13-CV-4933 (MKB), 2016 WL 4703653 (E.D.N.Y. Sept. 7, 2016) • U.S. ex rel. Se. Carpenters Reg. Council v. Fulton County, Ga., No. 1:14-CV-4071-WSD, 2016 WL 4158392 (N.D. Ga. Aug. 5, 2016) • U.S. ex rel. Voss v. Monaco Enterprises, Inc., No. 2:12-CV-0046-LRS, 2016 WL 3647872 (E.D. Wash. July 1, 2016)

26. Takeaways • Relators must conduct deeper investigations prior to bringing suit and be sure to allege each of the elements set forth in Escobar with particularity. • Contractors should focus on whether relator has adequately pled materiality.