False Claims Act Damages Retroactivity and the U.S. Supreme Court Orders the Second Circuit to Reconsider Case under the new Escobar Certification Standard

By: Christine V. Williams on 02/26/2017

February 27, 2017

By: Christine V. Williams

Not Legal Advice: Please consult your attorney for specific legal advice that may apply to you

In the Government’s 2016 fiscal year, it recovered $4.7 billion in settlements and judgments under the False Claims Act (“FCA”); becoming the third highest year in recovery.  Attorney General Sessions has indicated that the FCA violations will be aggressively pursued under this administration.

The FCA provides a cause of action against anyone who submits or causes to be submitted a false claim to the Government.  Violation of the FCA exposes a person or company to treble damages (three times the actual damages) and has a mandatory penalty for each false claim.  The FCA is a civil statute that is remedial in nature but punitive in design due to these treble damages and mandatory minimum penalty provisions.  The FCA’s mandatory penalties may be imposed even where the government has suffered no damages.  In 2016, the mandatory penalties were adjusted by various agencies, including the Department of Justice (“DOJ”).

Mandatory Penalties/Fines Per Claim (Invoice) Doubled In 2016

(a) For claims or statements made on or before October 23, 1996, the minimum penalty which may be assessed under 31 U.S.C. 3729 is $5,000 and the maximum penalty is $10,000.

(b) For claims or statements made after October 23, 1996, but before August 1, 2016, the minimum penalty which may be assessed under 31 U.S.C. 3729 is $5,500 and the maximum penalty is $11,000.

(c) For claims or statements made on or after August 1, 2016, but before January 1, 2017, the minimum penalty which may be assessed under 31 U.S.C. 3729 is $10,781 and the maximum penalty is $21,563.

DOJ Applies the Annual Adjustment Retroactively in 2017

After the fines were doubled, due to a law passed by Congress in 2015 which made up for no adjustments being made for years, a formula was put in place to adjust the damages for inflation annually.  On February 3, 2017, the DOJ not only made this annual inflation adjustment but made it retroactive to FCA violations that occurred after November 2, 2015, when Congress passed the annual adjustment law.  In practice, for potential FCA defendants, this could mean that those defendants face increases adjustments to the fines as the case progresses.  Some have speculated that threat of these types of adjustment could be used by the DOJ to leverage a settlement as the stakes in a case continue to rise.

The U.S. Supreme Court Revives a Case under the Escobar Standard

Universal Health Services v. Escobar (2016)

There was a split between the circuit courts in regards to implied liability under the FCA.  (For the full update from Outlook Law, please click here: https://outlooklaw.com/wp-content/uploads/2016/06/FCA-Liability-Implied-Certification.pdf.)  Specifically, some courts held contractors liable for “implied” certifications, meaning a Government contractor impliedly certifies that everything is true that is a condition of payment.  Other courts imposed liability only when such certification is explicit.  A few circuits found themselves in the middle-not imposing an automatic liability trigger, which all out implied certification seems to do, and not requiring full and explicit certifications to hold a Government contractor liable.

Executive Summary

On June 16, 2016, the U.S. Supreme Court unanimously resolved the circuit split.  The key questions resolved were the following: (1) omissions are misrepresentations, thereby implied certifications that are false may be a basis for liability if they are made knowingly and are material; (2) the FCA’s definition of what constitutes a defendant’s state of mind (or knowingly) when submitting an invoice is that the defendant must have implied or actual knowledge that the subject is material to inducing payment; and (3) the FCA definition of materiality cannot be so expansive so as to include every minor or insubstantial violation; especially when the Government routinely knows about the minor violation and pays such invoices anyway.

Since Escobar and now the U.S. Supreme Court Weighs In

Since the Escobar decision, courts have applied the standard somewhat differently with both the plaintiffs’ and the defendants’ bars declaring victory.  In February of 2017, the U.S. Supreme Court revived a case that the Second Circuit dismissed under the implied liability theory.  The Second Circuit had ruled that in order to be covered by the FCA, express compliance with a law or regulation must be a pre-requisite to payment.  The U.S. Supreme Court weighed in stating that the Second Circuit must re-evaluate the case using the standards outlined above, not that whether or not the certification was an explicit and a condition of payment.

With increased fines, annual adjustments, and the Courts willing to apply the implied liability standard of Escobar, a Government contractor would be well-served to have a robust compliance system in place that ensures true and accurate certifications for its contracts, including those that are firm fixed price (which many have mistakenly believed are not at risk under the FCA).