Jeffrey S. Bucholtz, Amy Bentsen Boring, Matthew V.H. Noller, King & Spalding LLP
OVERVIEW
This week’s top False Claims Act (FCA) developments include: a D.C. Circuit decision holding that the government cannot recover more than its claimed damages in an FCA suit against multiple defendants; a Tenth Circuit decision affirming the dismissal of a qui tam action; a decision from the en banc Fourth Circuit deadlocking over how to interpret the FCA’s scienter requirement; and the government’s creation of “strike force” teams to investigate and prosecute COVID-19 fraud.
1. D.C. Circuit holds that the government cannot recover more than its claimed damages in an FCA suit against multiple defendants
Overview:On August 30, the D.C. Circuit in United States v. Honeywell International Inc. held that when the government sues multiple defendants in an FCA action, its total recovery cannot exceed the amount of its claimed damages. As a result, a defendant will be entitled to offset any settlement amounts paid by other defendants against that defendant’s damages liability.
The Decision:The government filed an FCA action against several defendants, including Honeywell, for allegedly selling the government faulty bulletproof vests. The government sought a total of $35 million in damages. The defendants other than Honeywell settled for a total of $36 million, after which Honeywell sought a “pro tanto,” dollar for dollar, offset against its damages liability. The district court denied Honeywell’s request, holding that Honeywell remained liable for its proportionate share of damages. The district court certified its decision for interlocutory appeal.
The D.C. Circuit reversed. The court of appeals held that because the FCA does not itself provide a settlement offset rule, the court would decide the correct rule as a question of federal common law. To do so, the court relied on the Supreme Court’s decision in McDermott, Inc. v. AmClyde, 511 U.S. 202 (1994), which addressed the proper settlement offset rule in admiralty suits. There, the Supreme Court identified three “considerations” for selecting a settlement offset rule: “(1) consistency with relevant precedent; (2) promotion of settlement; and (3) judicial economy.”
The D.C. Circuit found the second McDermott factor “too inconclusive to provide guidance,” but held that the other two factors strongly favored Honeywell’s position. First, the court held that a pro tanto offset rule is more consistent with precedent interpreting the FCA as “impos[ing] joint and several liability without a right to contribution,” which generally prevents the government from recovering more than its total damages from multiple defendants. A proportionate-share offset rule, on the other hand, would conflict with the joint-and-several liability rule by “assign[ing] damages based on fault” and by letting the government “recover more than its total damages solely because some parties settled.” Second, the court held that a pro tanto offset rule better serves judicial economy because it avoids the difficult “calculation of proportionate fault” that would be required to determine a proportionate share.
The court rejected the government’s argument that apro tanto offset rule conflicts with the FCA’s “punitive goals” by excusing some defendants from paying damages. “The pro tanto rule,” the court held, “leaves the government in the driver’s seat to pursue and punish false claims according to its priorities,” including by “pursu[ing] settlement and/or seek[ing] damages against each violator in line with its assessment of relative fault.” In addition, a defendant who benefits from a pro tanto offset rule is still subject to the FCA’s civil penalties, “which serve a punitive purpose and may in some cases even exceed the statutory damages.” In a footnote, the court noted that a pro tanto offset rule will sometimes be detrimental to non-settling FCA defendants: “In the cases where a party settles for less than its share of liability, the pro tanto rule will mean the non-settling defendant will be liable for more than its proportionate share of the harm.”
Our Take: This is the first federal circuit court decision deciding what the settlement offset rule should be in FCA cases. It will be interesting to see how other circuits decide the issue, which has important implications for settlement negotiations in FCA cases.
2. Tenth Circuit affirms dismissal of qui tam action for failure to plead submission of false claims
Overview:On September 9, the Tenth Circuit in U.S. ex rel. Sorenson v. Wadsworth Brothers Construction Co.affirmed the district court’s orders granting the defendant’s motion to dismiss certain counts of a qui tam action and granting the defendant’s motion for summary judgment as to another count. Among other things, the court held that the relator had not adequately alleged that the defendant submitted a false claim to the government.
The Case: The relator alleged that the defendant, a construction contractor working on a federally funded transportation project, falsely certified its compliance with the prevailing-wage requirements of the Davis-Bacon Act, 40 U.S.C. §§ 3141-48. The Davis-Bacon Act requires contractors on most federally funded building projects to pay employees minimum wages calculated based on the prevailing wages “for the corresponding classes of laborers and mechanics employed on projects of a character similar to the contract work in the civil subdivision of the State in which the work is to be performed.” 40 U.S.C. § 3142(b). The Davis-Bacon Act is jobsite- and task-specific, requiring the payment of prevailing wages only to “mechanics and laborers employed directly on the site of work.” Id. § 31242(c)(1).
The relator alleged that, while working for the defendant on a federally funded construction job at Salt Lake International Airport, he had not been paid as required by the Davis-Bacon Act. The defendant, he alleged, had violated the FCA by falsely certifying its compliance with the Davis-Bacon Act. The district court dismissed the relator’s complaint, holding that the relator had not adequately alleged a Davis-Bacon violation and had not pleaded that any such violation was material. The district court also granted summary judgment to the defendant on the plaintiff’s separate claim that the defendant had retaliated against him for complaining about its alleged FCA violations.
On appeal, the Tenth Circuit affirmed, agreeing with the district court that the relator had not adequately pleaded a Davis-Bacon violation. The relator, the court held, did not identify the jobsites on which he worked and thus could not establish that he was entitled to Davis-Bacon wages or that the defendant violated the Davis-Bacon Act. The court also held that the relator’s allegations were too vague to establish that any Davis-Bacon violation was substantial enough to be material.
Finally, the Tenth Circuit affirmed the district court’s grant of summary judgment to the defendant on the relator’s retaliation claim. To prevail on a retaliation claim under the FCA, a plaintiff must show that (1) he engaged in activity protected by the FCA, (2) the defendant was put on notice of that protected activity, and (3) the defendant retaliated against him. The court held that the relator had not proved that he put the defendant on notice of any protected activity. Although the relator complained to his supervisors about his wages, he did not prove that he had ever expressed a belief that the defendant was violating the FCA.
Our Take:This decision reflects the importance of the FCA’s falsity and materiality requirements in weeding out non-specific claims in the early stages of FCA cases.
3. En bancFourth Circuit deadlocks over scienter standard for FCA claims
Overview:On September 23, theen banc Fourth Circuit in U.S. ex rel. Sheldon v. Allergan Sales, Inc. affirmed, “by an equally divided court,” a district court decision dismissing a qui tam action for failure to plead scienter. Theen banccourt vacated the Fourth Circuit’s earlier divided panel decision in the case, which had held that defendant cannot “knowingly” violate the FCA when the defendant’s conduct is consistent with an objectively reasonable reading of federal law and no authoritative guidance from the government warned the defendant away from that reading.
The Decision:As we have discussed in previous posts, the panel decision in Sheldon joined other circuits in applying the Supreme Court’s scienter analysis in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), to the FCA. The court adopted a two-part test to assess scienter: (1) did the defendant act consistent with an “objectively reasonable” interpretation of the underlying statute or regulation; and (2) did “authoritative guidance” warn the defendant away from that interpretation? Based on that test, it affirmed the district court’s decision dismissing the relator’s complaint for failure to plead scienter.
The Fourth Circuit granted en banc rehearing of the panel decision. At the en banc oral argument on September 15, however, the judges appeared sharply divided over what standard should govern the FCA’s scienter requirement. The en banc court’s decision reflects that division. With the judges evenly split (seven to seven) over whether to affirm or reverse the district court’s decision, the en banccourt issued a summary order vacating the panel decision and affirming the district court “by an equally divided court.”
As a result of the en banccourt’s decision, it is now an open question whether or how Safecoapplies to FCA claims in the Fourth Circuit. The Supreme Court is currently considering two petitions for certiorari asking it to decide whether Safeco applies to the FCA, including one on which it has requested the Solicitor General’s views.
Our Take:Theen banc Fourth Circuit’s decision reflects the disagreement that currently exists over how to apply the FCA’s scienter requirement. The decision may make the Supreme Court more likely to grant one or both of the pending certiorari petitions raising that question.
4. Government creates COVID-19 fraud “Strike Force” teams
Overview:On September 14, the Department of Justice announced the existence of three “Strike Force teams created to enhance the Department’s existing efforts to combat and prevent COVID-19 related fraud.”
The Announcement:The new Strike Force teams are part of DOJ’s COVID-19 Fraud Enforcement Task Force, which Attorney General Merrick Garland established in May 2021. The “criminal and civil enforcement efforts” carried out by the COVID-19 task force, the government announced, “have resulted in criminal charges against over 1,500 defendants with alleged losses exceeding $1.1 billion; the seizure of over $1.2 billion in relief funds; and civil investigations into more than 1,800 individuals and entities for alleged misconduct in connection with pandemic relief loans totaling more than $6 billion.”
The Strike Force teams will be based in Miami, Baltimore, Los Angeles, and Sacramento and will be composed of prosecutors and agents from a large number of federal agencies. These teams, according to Attorney General Garland, “will build on the Department’s historic enforcement efforts to deter, detect, and disrupt pandemic fraud wherever it occurs.”
Our Take: As we have discussed, COVID-19 fraud has been an enforcement priority for the government. The creation of these Strike Force teams indicates that the government intends to continue aggressively pursuing allegations of COVID-19 fraud.
In the News:
Pharmaceutical manufacturer agrees to pay $7.9 million to settle allegations of Medicare fraud.On September 15, the government announced a $7.9 million settlement with Akorn Operating Company. The government alleged that Akorn had defrauded Medicare by submitting reimbursement requests for generic drugs that had lost their eligibility for Medicare coverage.
Government announces first FCA settlement with Paycheck Protection Program (PPP) lender. On September 13, the government announced a $18,673.50 settlement with a Paycheck Protection Program lender accused of processing a PPP loan on behalf of an ineligible customer. The government stated that the settlement “is believed to be the nation’s first settlement with a PPP lender pursuant to the False Claims Act.”
Jeffrey S. Bucholtz is a partner on the Appellate, Constitutional and Administrative Law team in the Washington, D.C. office of King & Spalding LLP, Amy Bentsen Boring is a partner in the Special Matters and Government Investigations Group in the firm’s Atlanta office, and Matthew V.H. Noller is a senior associate in the Trial and Global Disputes Practice Group in the firm’s San Francisco office.
