Pleading a Claim under the False Claims Act
By Alan Levins and Alison Cubre – May 23, 2014
The False Claims Act (FCA), codified at 31 U.S.C. §§ 3729–3733, receives a lot of attention for the multimillion and multibillion settlements reached for fraudulent billing practices. The FCA has also garnered attention for its strict pleading requirements. Many litigants cannot plead a claim under the FCA because they are unable to meet the heightened pleading standard under Federal Rule of Civil Procedure 9(b). This heightened standard has been the subject of much litigation: Currently, circuit courts are split on how “specific” the allegations must be in order for a claim to withstand a motion to dismiss under Federal Rule of Civil Procedure 12(b). Many recent decisions have been less lenient with litigants, thus prohibiting claims from prosecution and making it difficult for litigants to meet the standards required to plead fraud with particularity. Courts have also narrowly interpreted the standards for employees claiming retaliation for engaging in activities “in furtherance” of the FCA, thus restricting the ability of those claims from going forward at the pleading stage.
The Protections of the FCA
The FCA was originally enacted to stop “massive frauds” perpetrated by large, private contractors during the Civil War by imposing liability on persons who defraud the government. 31 U.S.C. §§ 3729–3733; United States v. Bornstein, 423 U.S. 303, 309 (1976). Amendments in 1986, 2009, and 2010 expanded the scope of the FCA and its available remedies. The current incarnation of the FCA provides for liability premised on whether a person:
(1) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval;
(2) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim;
(3) conspires to commit a violation of the FCA;
(4) knowingly delivers, or causes to be delivered to the Government less than all of the money or property due to the Government;
(5) certifies the amount or property to be used by the Government without completely knowing that the information on the receipt is accurate;
(6) knowingly buys or receives public property from the Government from someone not authorized to sell the property; or
(7) knowingly makes, uses, or causes to be made or used, a false record or statement regarding an obligation to pay or transmit money or property to the Government, or knowingly conceals or decreases an obligation to pay or transmit money or property to the Government.
31 U.S.C. § 3729(1)(A)–(G).
The FCA also prohibits an employee, contractor, or agent from being “discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done by the employee, contractor, agent or associated others in furtherance of an action” under the statute.
FCA Enforcement and Remedies
Either the U.S. Department of Justice or a private party, known as a “relator,” can initiate an action under the FCA. If a relator initiates an action, the action is called a qui tam action, meaning the relator is prosecuting the action on behalf of the government. The United States has 60 days to decide whether to intervene in the qui tam action and prosecute the case. 31 U.S.C. § 3730(b)(2). Relators filed 752 qui tam suits in fiscal year 2013. If the United States intervenes, a relator may receive between 15 to 25 percent of the government’s recovery, plus reasonable expenses, depending on the relator’s level of involvement. 31 U.S.C. § 3730(c)(1), (d)(1). However, if the United States declines to intervene, the relator may receive even more of the government’s recovery—between 25 to 30 percent—plus reasonable expenses, and the United States may only exercise limited rights during the proceeding. 31 U.S.C. § 3730(c)(3)–(5), (d)(2).
Persons who violate the FCA are subject to penalties of a minimum of $5,500 and maximum of $11,000 per violation, plus treble damages, attorney fees and costs. 31 U.S.C. §§ 3729(a)(1)–(3), 3730(d); 28 CFR § 85.3. For claims of retaliation, remedies include reinstatement, double back pay, interest on back pay, special damages, and attorney fees and costs. 31 U.S.C. § 3730(h)(2). Because of the draconian remedies available, recovery can be in the millions or, in some cases, billions of dollars, and individual relators can receive significant sums of money. Courts have recognized that because relators have such strong financial incentives to bring FCA suits, the FCA must be construed to balance the “promot[ion of] private citizen involvement in exposing fraud against the government” against the “prevent[ion of] parasitic suits by opportunistic late-comers who add nothing to the exposure of fraud.” United States ex rel. Reagan v. East Tex. Med. Cent. Re’ll Healthcare Sys., 384 F.3d 168, 174 (5th Cir. 2004). To balance out these potential conflicting interests, courts require relators to plead these types of fraudulent claims with particularity.
The Strict and Stricter Requirements of Pleading a Claim Under the FCA
Because the FCA is a claim for fraud, the heightened pleading standard of Federal Rule of Civil Procedure 9(b) applies, which requires “a party must state with particularity the circumstances constituting fraud or mistake.” Relators are required to set forth with particularity the “‘who, what, when, where, and how’ of the alleged fraud.” United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 903 (5th Cir. 1997); see also Arruda v. Sears, Roebuck & Co., 310 F.3d 13, 18–19 (1st Cir. 2002).
In United States ex rel. Clausen v. Laboratory Corporation of America, Inc., 290 F.3d 1301, 1311 (11th Cir. 2002), cert. denied, 537 U.S. 1105, 123 S. Ct. 870, 154 L. Ed. 2d 774 (2003), the court noted that “Rule 9(b)’s directive that ‘the circumstances constituting fraud or mistake shall be stated with particularity’ does not permit a False Claims Act plaintiff merely to describe a private scheme in detail but then to allege simply and without any stated reason for his belief that claims requesting illegal payments must have been submitted, were likely submitted or should have been submitted to the Government.” Rule 9(b) requires that “some indicia of reliability” must be provided to support the allegation that an actual false claim was presented to the government. The critical question is whether the defendant caused a false claim to be presented to the government, because liability under the act attaches only to a claim actually presented to the government for payment, not to the underlying fraudulent scheme. Id. (citing United States v. Rivera, 55 F.3d 703, 709 (1st Cir. 1995)). Without plausible allegations presenting the claim to the government, a relator fails to meet the particularity requirement of Rule 9(b) and also fails to satisfy the general plausibility standard of Ashcroft v. Iqbal, 556 U.S. 662 (2009). See Clausen, supra, 290 F.3d at 1313 (“If Rule 9(b) is to carry any water, it must mean that an essential allegation and circumstance of fraudulent conduct cannot be alleged in such conclusory fashion.”) Nonetheless, the court cautioned that whether the “factual allegations in a given case meet the required standard must be evaluated on a case-specific basis.” Id.
More recently, in United States ex rel. Nathan v. Takeda Pharms. N. Am., Inc., 707 F.3d 451 (4th Cir. Va. 2013), (4th Cir. 2013) (cert denied on Mar. 31, 2013), the Fourth Circuit agreed that, “the critical question is whether the defendant caused a false claim to be presented to the [G]overnment, because liability under the [False Claims] Act attaches only to a claim actually presented to the [G]overnment for payment, not to the underlying fraudulent scheme.” Id. at 456. The relator provided at most, aggregate expenditure data for one of the four subject drugs, with no effort to identify specific entities who submitted claims or government program payers, much less times, amounts, and circumstances. This was insufficient to meet the pleading requirements under Rule 9(b). The Sixth and Eighth Circuits have a similar standard.
Several other federal appellate decisions that have expressed a more lenient pleading standard than that required in the Fourth, Sixth, and Eighth, and Eleventh Circuits. For example, in United States ex rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13, 29 (1st Cir. 2009), the First Circuit held that “a relator could satisfy Rule 9(b) by providing ‘factual or statistical evidence to strengthen the inference of fraud beyond possibility’ without necessarily providing details as to each false claim”) (citation omitted). The Circuit Court noted a distinction between a qui tam action alleging that the defendant made false claims to the government, and a qui tam action in which the defendant induced third parties to file false claims with the government. Id. (citations omitted). In United States ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849, 854 (7th Cir. 2009), the court held that, “[s]ince a relator is unlikely to have [billing] documents unless he works in the defendant's accounting department, [a requirement to allege specific false claims] takes a big bite out of qui tam litigation. . . . [M]uch knowledge is inferential . . . and the inference that [the relator] proposes is a plausible one.”). Similarly, in United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009), the court held that a complaint that does not allege “details of an actually submitted false claim, may nevertheless survive by alleging particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” The court concluded that, because the complaint included the dates of specific services that were recorded by the physicians but never were provided, such allegations constituted “more than probable, nigh likely, circumstantial evidence that the doctors' fraudulent records caused the hospital's billing system in due course to present fraudulent claims to the Government.” Id. at 192.
There Is Also a Circuit Split as To How a Claim of Retaliation Must Be Pled
To assert a claim of retaliation under the FCA, a plaintiff must offer facts sufficient to demonstrate that: (1) the plaintiff engaged in protected activity; (2) the defendant knew of the protected activity; and (3) the defendant retaliated against the plaintiff as a result of those acts. Mann v. Heckler & Koch Def., Inc., 630 F.3d 338, 343 (4th Cir. 2010); Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1103 (9th Cir. 2008). Unlike a claim under the FCA, a retaliation claim does not need to meet the heightened pleading standards under Federal Rule of Civil Procedure 9(b) because it does not require a showing of fraud. United States ex rel. Karvelas v. Melrose-Wakefield Hosp., 360 F.3d 220, 238 n.23 (1st Cir. 2004).
Various standards have been adopted to determine whether conduct is “in furtherance” of an action under the FCA. Some Circuit Courts have held that a “plaintiff must be investigating matters which are calculated, or reasonably could lead, to a viable FCA action.” United States ex rel. Karvelas v. Melrose-Wakefield Hospital, 360 F.3d 220, 236 (1st Cir. 2004), citing United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1269 (9th Cir. 1996); United States ex rel. Yesudian v. Howard Univ., 153 F.3d 731, 740 (D.C. Cir. 1998). Other Circuit Courts have held there must be a distinct possibility of litigation at the time that the plaintiff made his or her disclosures. United States ex rel. Sanchez v. Lymphatx, Inc., 596 F.3d 1300, 1303–04 (11th Cir. 2010) (per curiam); Mann v. Heckler & Koch Def., Inc., 630 F.3d 338, 343 (4th Cir. 2010). While other circuit courts require the plaintiff to have a good faith and objectively reasonable belief that the defendant was committing fraud against the government. Fanslow v. Chicago Mfg. Center, Inc., 384 F.3d 469, 480 (7th Cir. 2004); Wilkins v. St. Louis Hous. Auth., 314 F.3d 927, 933 (8th Cir. 2002); Moore v. Cal. Inst. of Tech. Jet Propulsion Lab., 275 F.3d 838, 845 (9th Cir. 2002). The Supreme Court has declined to endorse any of these formulations. Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, 545 U.S. 409, 416, fn. 1 (2005).
Some courts interpret what constitutes a "protected activity" fairly narrowly. In these courts, a plaintiff must be able to plead that he or she engaged in conduct that could lead to a viable FCA claim. Glynn v. EDO Corp., 710 F.3d 209, 215 (4th Cir. 2013) (internal citations and quotations omitted); Hutchins v. Wilentz, Goldman & Spitzer, 253 F.3d 176, 184 (3d Cir. 2001) (affirming dismissal of FCA retaliation claim because there was no demand for money from the government, and thus there was no liability under the FCA). For example, in the Fourth Circuit, merely reporting a concern about mischarging of funds to a supervisor fails to establish the “probability” of litigation. See, e.g., U.S. ex rel. Owens v. First Kuwaiti Gen. Trading & Contracting Co., 612 F.3d 724, 735 (4th Cir. 2010) (affirming dismissal of FCA retaliation claim because plaintiff merely reported a concern of mischarging to the Government and did not act in furtherance of a qui tam action). Similarly, reporting fraudulent conduct that cannot not lead to the payment of federal funds to the company is not protected activity because it could not lead to a legitimate FCA suit. Dookeran v. Mercy Hosp. of Pittsburgh, 281 F.3d 105, 109 (3d Cir. 2002) (affirming dismissal of FCA retaliation claim because the application in dispute contained no demand for payment of federal funds). Accordingly, if the retaliation claim is not properly pled to satisfy these requirements, it is unlikely to withstand a motion to dismiss.
While FCA claims and the related retaliation component of the FCA can mean a large payout for whistleblowers, some circuit courts have constricted the ability of these claims to proceed past the pleadings stage. Other circuit courts have adopted more lenient standards. As this area of the law continues to develop, the Supreme Court will, at some point, be forced to reconcile the division among the courts. But, until that happens, litigants are advised to plead their claims with particularity.
Keywords: litigation, trial practice, False Claims Act, pleading a claim, Federal Rules of Civil Procedure