President Obama signed the Fraud Enforcement and Recovery Act containing significant amendments to False Claims Act the very day on May 20,2009 – the very day the pre-trial hearing on the Rigsby qui tam claim commenced in Southern District Mississippi Federal Count.
Among the most significant provisions of the new law are its amendments to the False Claims Act, 31 USC §§ 3729-33 (FCA). According to the Senate Judiciary Committee Report, these amendments—the first substantive revisions to the FCA in more than 22 years—were enacted to reverse judicial interpretations which “undermined” the statute by “limiting the scope of the law…”
The cumulative impact of these amendments is to alter significantly the landscape of FCA jurisprudence.
One analysis posed the question when is an amendment not an amendment. The answer – or rather the answer from the perspective of Congress – is when amendments are made as clarification to reflect the original intent of the law.
F. SECTION 4(F). EFFECTIVE DATE AND APPLICATION
(f) Effective Date and Application- The amendments made by this section shall take effect on the date of enactment of this Act and shall apply to conduct on or after the date of enactment, except that–
(1) subparagraph (B) of section 3729(a)(1) of title 31, United States Code, as added by subsection (a)(1), shall take effect as if enacted on June 7, 2008, and apply to all claims under the False Claims Act (31 U.S.C. 3729 et seq.) that are pending on or after that date; and
(2) section 3731(b) of title 31, as amended by subsection (b); section 3733, of title 31, as amended by subsection (c); and section 3732 of title 31, as amended by subsection (e); shall apply to cases pending on the date of enactment.
However, some of the amendments are intended to resolve splits among the district courts. These and others will provide guidance to the courts even if not specifically designated as applying to cases pending on the date of enactment. Many describe conduct very familiar to those who follow Katrina litigation:
Prohibited false statements now include any false statement that is “material to” an obligation to pay the government, and no intent to defraud is required.
FERA amends the FCA to prohibit making or using a false statement or record that is “material to” an obligation to pay or transmit money to the government—it is no longer required that the record or statement be used to conceal or decrease an obligation. Moreover, the amendments reverse the Supreme Court’s decision in Allison Engine Co. v. United States ex rel. Sanders
Conspiracy liability now includes conspiring to violate any prohibition under the FCA.
Under the former version of the FCA, conspiracy liability was limited to conspiring to submit false claims. FERA amends the FCA to extend liability to include any conspiracies to violate any of the other prohibitions under the FCA, such as making false statements or reverse false claims (i.e., knowingly retaining an overpayment).
The term “obligation” is now defined to specifically include “retention from overpayment.”
Under FERA, a party now violates the FCA if it “knowingly conceals, or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” The term “obligation” is now defined to specifically include “retention from overpayment.”
Protection extended to contractors and agents.
Whistleblowers have traditionally received protection from retaliatory actions such as demotion or firing taken by their employers as a result of reporting or participating in an FCA investigation or action…Now, under FERA, the FCA’s anti-retaliation provisions extend to contractors and agents of the company as well.
Finally, the amendments include several procedural revisions to the FCA, including: Relation back of government’s complaint; Expansion of civil investigative demand authority; and Expansion of government disclosure rights.
As stated earlier, the amendments/clarifications reflect Congressional concern about judicial decisions that limit FCA liability.
FERA’s amendments reverse judicial interpretations rendered in recent FCA decisions, including Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008), and United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004)—cases which the Senate Judiciary Committee characterized as erroneously and unduly restricting the scope of liability.
Despite the intent of Congress to the contrary, the amendments/clarifications have already been challenged in two court cases, if not more.
In the less than two months following its passage, at least two courts have issued opinions interpreting and applying FERA’s amendments to the False Claims Act (FCA), 31 U.S.C. § 3729 et seq.
On July 9, the U.S. Court of Appeals for the Fifth Circuit in United States ex rel. Longhi v. Lithium Power Technologies, Inc. cited FERA’s broad definition of materiality to support its adoption of the “natural tendency” test for materiality, holding that the technology company’s false statements regarding its qualifications to engage in its proposed research were material because they had “the natural tendency to influence and were capable of influencing the extremely competitive process for selecting small businesses to receive [Small Business Innovation Research Program] grants.”
…Noting that Congress declined to adopt a more restrictive materiality requirement in FERA, the court rejected the so-called “outcome materiality” and “claim materiality” standards and embraced the “natural tendency” test followed by the Fourth, Sixth, and Ninth Circuits. Under this standard, “[a]ll that is required under the test for materiality, therefore, is that that the false or fraudulent statements have the potential to influence the government’s decisions.” Applying this test, the court found:
Lithium Power’s false statements had the potential to influence the BMDO and Air Force’s decisions to award Lithium Power the SBIR grants. Lithium Power painted a picture of an established company that was so well-respected in the community that it had developed a strong relationship with two notable research organizations. In reality, Lithium Power was a company that was in its preliminary stages of development that had yet to demonstrate any proven success.
Although the company “went on to successfully design and manufacture lithium-based batteries that the BMDO and the Air Force found to be satisfactory,” the court ruled that the “ends” did “not justify the means it employed to receive the SBIR grants” and, thus, affirmed the district court’s grant of summary judgment in favor of the government and its award of nearly $5 million in damages and penalties.
The other court decision since enactment – United States v. Aguillon – is specific to the retroactive provision to the date of the date of the Supreme Court ruling in Allison.
On June 24, the U.S. District Court for the District of Delaware held in United States v. Aguillon that FERA’s amendment to former Section 3729(a)(2) (renumbered and codified at 31 U.S.C. § 3729(a)(1)(B))—eliminating the “actual payment or approval” requirement—did not apply retroactively under the Supreme Court’s Landgraf analysis because Congress did not explicitly provide for such “retroactive effects.”
While the court noted that the FCA was amended by FERA “to eliminate the actual payment or approval requirement,” the court applied the Supreme Court’s two-step Landgraf “retroactive effects” analysis to conclude that the new subsection (a)(1)(B) did not apply retroactively because “Congress has not provided the requisite instruction necessary for the amendments to be used to cause retroactive effects.”
The government filed a motion for reconsideration on June 30, arguing that the court misread FERA by failing to note that Section 4(f)(1) of FERA specifically states “subparagraph (B) of section 3729(a)(1) . . . shall take effect as if enacted on June 7, 2008, and apply to all claims under the False Claims Act (31 U.S.C. § 3729 et seq.) that are pending on or after that date.
Have we see the last of the little bit pregnant fraud? Maybe, but I bet we’ve seen the last Haag disaster survey and that we see a lot of very careful expert witnesses, engineering firms and adjusting agencies in the remaining litigation.