ABA National Institute on the Civil False Claims Act and Qui Tam Enforcement 2016

FCA Enforcement in Procurement and Non-Traditional Areas

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Moderator – Sara McLean Assistant Director, Commercial Litigation Branch (Fraud Section) U.S. Department of Justice Panelist – Marcia G. Madsen Mayer Brown LLP, Washington DC Panelist – Christopher B. Mead London & Mead, Washington DC Panelist – Amanda Rocque, Deputy Civil Chief, U.S. Attorney’s Office - District of Colorado Panelist – Michael Theis Hogan Lovells US LLP, Denver, Colorado Panelist – Wayne Wisniewski Director, Civil Recovery Division, Acquisition Integrity, U.S. Navy, Office of General Counsel

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Areas to Watch

• Department of Defense

• General Services Administration

• Mortgage Fraud

• Reverse False Claims

• Mineral Royalties

• Customs

• Grant Fraud

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Department of Defense

Implied Certification

Supply Chain

Competitive Process

Suspension and Debarment

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Implied Certification: Procurement & Contract Administration or Fraud?

• Speculating on the outcome of Universal Health Services v. U.S. ex rel. Escobar won’t add clarity, but the decision is extremely important to clarifying the law for Gov’t. Contractors

• The number of statutory & regulatory provisions applicable to contractors is enormous, also unique contract provisions

• Difference between procurement/contract administration and fraud?

• The FAR and agency supplements address agency business practices in multiple complex areas, e.g., accounting systems, intellectual property, that are specialties unto themselves. What is Agency’s role in management of its procurements?

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Implied Certification Issues

• U.S. ex rel. Thompson v. Honeywell Intl., Inc. 9th Cir. (2016)

• 9th Cir. considered claim by prime contractor employee that Honeywell charged the Gov't. for navigation system software license for Predator drones improperly due to a dispute over the impact of Gov't.-funded changes to the software

• Requires detailed knowledge and experience with data rights regulations and case law – errors by relators and Gov't. are common

• DOJ declined to intervene

• 9th Cir. looked at contractor’s interpretation of software licensing agreement and charges for privately funded functions of the software – found contractor’s interpretation reasonable

• Should these contract requirements be determined in the context of FCA cases?

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Implied Certification Issues

• TINA • U.S. v. BAE Systems Tactical Vehicle Systems (E.D.

Mich. 2016) • Gov't. alleges “overpricing” based on asserted failure to

disclose adequate cost data in contract for manufacture of medium tactical vehicles • Gov't. asserts BAE provided certified cost data that

showed higher prices than could be supported with company data.

• A contact dispute is underway at the ASBCA – in the discovery stage

• BAE states that it disclosed under pricing as a result of sweeps and that the Gov't. drove a hard bargain • Sweeps process is complex

• Statutory and contractual remedy without regard to FCA • Contract dispute or fraud? Buying agency’s role -

deference?

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Supply Chain

• New Counterfeit Parts rules, Human Trafficking rules, new labor mandates - supply chain issues

• FCA impact on suppliers – who may not have intended to or know their products were used in defense articles?

• U.S. ex rel. Westrick v. Second Chance Body Armor (D. D.C. 2015)

• Supplier to out of business body armor supplier contesting Gov't. efforts to revive FCA allegations that it failed to disclose durability issues with its product that was sold into the supply chain for the body armor contractor

• Supplier alleges it disclosed to the market and that Gov't. agencies were aware based on its own disclosures

• Purchases by GSA – no indication GSA checked or obtained information regarding material

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Supply Chain

• Materiality of supplier statements

• Cert Petition – U.S. ex rel. Marshall v. Woodward Inc.

• 7th Cir upheld dismissal of case on basis that allegedly false statements by Woodward – a supplier of fuel flow sensors for military helicopters - did not affect payments from DOD contracts

• Materiality of the statements

• Woodward did not know statements made to the Gov't. were false

• What is the effect of a certificate of conformance from a supplier if the supplier was unaware of the facts at the time? 9

FCA Impact on the DOD Competitive Process? • Hooper v. Lockheed Martin (9th Cir. 2012,

2016) • Former employee claimed intentional

underbidding by Loral on a cost-type contract for the Air Force • Case dismissed by D. Court initially - no evidence of

intentional underbid and cost-overruns are common

• 9th Cir. reversed and and case tried – jury found in LM’s favor

• Type of contract was important – cost type RFP – Gov't. requirements not firm; cost realism analysis by the Air Force

• Later contract modifications as program proceeded and AF learned more about its needs – AF witnesses testified on behalf of LM

• Post -verdict dispute re a jury instruction by defense counsel denied by trial court and affirmed by 9th Cir.

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FCA Impact on the DOD Competitive Process • U.S. v BAE Systems Southeast Shipyards – MD Fla.

• Filed under seal in 2014 (unsealed May 2016)– alleges that BAE steered subcontracts to certain companies without competition

• Challenges BAE’s purchasing system

• Theory is that BAE predecessor and another company had arrangement whereby two companies would bid to prime the work and list 3 other contractors as subcontractors

• Arrangement appears to be a teaming relationship

• Relator claims it results in work being awarded without competition and that BAE benefits because it recovers its incurred costs

• Prospects for use of FCA to challenge awards? 11

Suspension and Debarment

GAO Report: Agencies Improving

The Federal Acquisition Regulation (FAR) and the Nonprocurement Common Rule (NCR) specify numerous causes for suspensions and debarments, including fraud, false statements, theft, bribery, tax evasion, and any other offense indicating a lack of business integrity.

A suspension or debarment under either the FAR or NCR has government-wide effect for all purposes, so that a party precluded from participating in federal contracts is also precluded from receiving grants, loans, and other assistance, and vice versa.

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Government-wide Suspension and Debarment Actions for Fiscal Years 2009-2013

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Suspension and Debarment Actions in FY 2014 Extract from Interagency Suspension and Debarment Committee (ISDC) Section 873 of Public Law 110-417 Report to Congress, March 31, 2015

• AGENCY Suspensions Proposed Debarments Debarments • Air Force 109 177 138 • Army 131 392 279 • Defense Logistics Agency 15 164 110 • Navy 145 262 208 • Education 33 15 27 • Energy 42 42 21 • Environmental Protection Agency 119 176 148 • General Services Administration 11 56 50 • Health and Human Services 7 32 32 • Homeland Security 10 338 339 • Housing and Urban Development 197 272 278 • Interior 11 39 42 • Justice 9 8 8 • NASA 13 18 8 • National Science Foundation 9 33 25 • Office of Personnel Management 14 12 15 • Small Business Administration 27 26 21 • Social Security Administration 0 0 0 • State 16 28 24 • Transportation 43 51 47

• * * *

• Total Actions 1,009 2,241 1,929 14

Suspension and Debarment: Areas of Particular Interest

• Small Business Issues:

• Misrepresenting size/status 8(a) set aside contracts, See FAR Part 19

• Case of “deceased” service disabled veteran-owned small business

• Counterfeit parts and suppliers

• Internal controls to preclude or reduce fraud

• Ethics and Compliance programs

• Site visits; Use of third party monitors

• See FAR clause 52.203-13, Contractor Code of Business Ethics and Conduct, as prescribed by FAR 3.1004

• Supplier “Code of Conduct” 15

Suspension and Debarment: Areas of Particular Interest • Mandatory disclosures, FAR 52.203-13

• Credible evidence that a principal, employee, agent, or subcontractor … has committed

• A violation of Federal criminal law involving fraud, conflict of interest, bribery, gratuities or civil False Claims Act

• Labor hour mischarging

• Beginning to see more significant cases

• Grants and Research

• ITARS, University research, multiple grants

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Suspension and Debarment

• Indictment and conviction based actions

• Glenn Defense Marine

• Fact based actions

• Deployment Medicine

• Unauthorized procedures

• Use of counterfeit and unlicensed computer software

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General Services Administration

Pricing Fraud

Country of Origin Violations

Ongoing Conduct

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Multiple Award Schedule (MAS) Contracts

• GSA negotiates terms for commercial items

• Entire government can buy

• Government’s top commercial-item purchase channel

• $33 billion spent in 2015

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Pricing Fraud

• Record settlements

• $199.5 million - Oracle (2011)

• $128 million - NetApp (2009)

• $98.5 million - PeopleSoft (2006)

• $78 million - EMC (2010)

• $75.5 million - VMware & Carahsoft (2015)

• >$40 million - HP (2010), Cisco (2010), Iron Mountain (2014), Sun MicroSystems (2010)

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Pricing Fraud

• Major litigation • United States ex rel. Morsell v. Symantec Corp.,

No. 12cv00800 (D.D.C.).

• United States ex rel. Shemesh v. CA Inc., No. 09-1600 (D.D.C.).

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Pricing Fraud

• Cornerstone = Most Favored Customer Pricing

• GSA contracting officers must “seek to obtain the offeror's best price (the best price given to the most favored customer)” 48 C.F.R. § 538.270(a)

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Pricing Fraud

• Defective Pricing • GSA uses contractor commercial sales practice

disclosures to:

• negotiate maximum prices

• select “basis of award” customer(s) whose improved pricing will automatically improve U.S. price

• False CSPs => inflated government price

• False CSPs => wrong basis of award customer

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Pricing Fraud

• Price Reduction Clause Violations • The relationship between prices charged the basis

of award customer and Government must be maintained for the life of the contract. See 48 CFR 552.238-75.

• Failure to track/share BOA prices => US overpays

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Country of Origin Violations

• Acquisition of foreign vs. domestic products

• Buy America Act (BAA), 41 U.S.C. §8301-8305, FAR 25.1

• Trade Agreements Act (TAA), 19 U.S.C. §2501-2581, FAR 25.4, 52.212-3; 52.225-5.

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TAA “Country of Origin”

• Trade Agreements Act of 1979 (TAA), 19 USC §§ 2501, et seq., implements World Trade Organization agreement on government procurement standards

• Buy American Act, 41 U.S.C. §§ 8301–8305, is waived where TAA applies

• TAA origin restrictions are incorporated into standard Federal government contracts (e.g., GSA and VA supply schedule)

• Forbids purchase of products that are not manufactured or “substantially transformed” in the United States or other “designated countries”

• Manufacturer of medical devices or pharmaceuticals supplying the federal government with products falsely identified as TAA-compliant can be sued under the FCA. 26

Country of Origin Violations

• U.S. ex rel. Folliard v. Gov’t Acqs., Inc. and Govplace, No. 13-7049 (D.C. Cir. Aug. 29, 2014)

• Govplace sold Hewlett Packard products to GSA, relying on certifications from a distributor that HP products originated from designated countries.

• Govplace disclosed to GSA its reliance on the distributor for country of origin certifications.

• Court affirmed summary judgment for defendant, holding that a contractor is ordinarily entitled to rely on a supplier’s certification that a product meets TAA requirements.

• Defendant’s reliance was reasonable, and defendant failed to raise a genuine issue of material fact as to whether Govplace knowingly sold products to GSA that did not comply with TAA requirements.

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Country of Origin Violations

United States ex rel. Liotine v. CDW Government, Inc., 2012 WL 2807040 (S.D. Ill. July 10, 2012)

“If it is proven that [the defendant] knowingly sold the government products in violation of the [Trade Agreements Act], then the correct measure of damages would be the entire amount paid for those products.”

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Ongoing Conduct

ON GSA SCHEDULE SALES

+

OVERPAYMENT DISCLOSURE OBLIGATIONS

+

THE CRIME/FRAUD EXCEPTION TO THE ATTORNEY-

CLIENT PRIVILEGE

= ? 29

Ongoing Conduct

• In most GSA schedule FCA cases, the defendant is engaged in ongoing conduct that the government alleges is wrongful

• Defective Pricing occurs at the outset of the contract—all ongoing sales are potentially false claims

• If the Defendant fails to disclose Price Reduction Clause violations, all subsequent ongoing sales are potential false claims

• Software and other sales of goods and services sometimes involve maintenance and support charged as a percentage of the original sales price—all ongoing sales are potential false claims

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Ongoing Conduct: Overpayment Disclosure Obligations

• Standard overpayment clause 48 C.F.R. 52.232-25(d)

• (d) Overpayments. If the Contractor becomes aware of a duplicate contract financing or invoice payment or that the Government has otherwise overpaid on a contract financing or invoice payment, the Contractor shall--

• (1) Remit the overpayment amount to the payment office cited in the contract along with a description of the overpayment including the--

• (i) Circumstances of the overpayment (e.g., duplicate payment, erroneous payment, liquidation errors, date(s) of overpayment);

• (ii) Affected contract number and delivery order number if applicable;

• (iii) Affected contract line item or subline item, if applicable; and

• (iv) Contractor point of contact.

• (2) Provide a copy of the remittance and supporting documentation to the Contracting Officer. (End of clause)

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Ongoing Conduct: Overpayment Disclosure Obligations

• Contractor code of business ethics and conduct 48 C.F.R. 52.203-13(b)(3)

• --(3)

• (i) The Contractor shall timely disclose, in writing, to the agency Office of the Inspector General (OIG), with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of this contract or any subcontract thereunder, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed--

• (A) A violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; or

• (B) A violation of the civil False Claims Act (31 U.S.C. 3729-3733).

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Ongoing Conduct: Overpayment Disclosure Obligations

• Causes for debarment 48 C.F.R. 9.406-2(b)(1)(vi)

• (vi) Knowing failure by a principal, until 3 years after final payment on any Government contract awarded to the contractor, to timely disclose to the Government, in connection with the award, performance, or closeout of the contract or a subcontract thereunder, credible evidence of--

• (A) Violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code;

• (B) Violation of the civil False Claims Act (31 U.S.C. 3729-3733); or

• (C) Significant overpayment(s) on the contract, other than overpayments resulting from contract financing payments as defined in 32.001.

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Ongoing Conduct: Overpayment Disclosure Obligations • Causes for suspension 48 C.F.R. 9.407-

2(a)(8)

• (8) Knowing failure by a principal, until 3 years after final payment on any Government contract awarded to the contractor, to timely disclose to the Government, in connection with the award, performance, or closeout of the contract or a subcontract thereunder, credible evidence of--

• (i) Violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code;

• (ii) Violation of the civil False Claims Act (31 U.S.C. 3729-3733); or

• (iii) Significant overpayment(s) on the contract, other than overpayments resulting from contract financing payments as defined in 32.001; or

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Ongoing Conduct: Crime/Fraud Exception

• Communications otherwise protected by the attorney-client privilege are not protected if made to further a crime, fraud, or other misconduct. Clark v. United States, 289 U.S. 1, 14 (1933)

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Ongoing Conduct: Crime/Fraud Exception

• Does not require the attorneys to knowingly participate in the fraud, only the client

• The crime-fraud exception applies when (1) the client made or received the otherwise privileged communication with the intent to further an unlawful or fraudulent act; and (2) the client has carried out the crime or fraud. In re Sealed Case, 107 F.3d 46, 49 (D.C. Cir. 1997) (citations omitted); Tri-State Hospital Supply Corp. v. United States, 238 F.R.D. 102, 104 (D.D.C. 2006).

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Ongoing Conduct: Crime/Fraud Exception

The movant “must first make a prima facie showing of a violation sufficiently serious to defeat the privilege, and second, establish some relationship between the communication at issue and the prima facie violation.” In re Sealed Case, 754 F.2d 395, 300 (D.C. Cir. 1985). It is not necessary to prove the existence of a crime or fraud beyond a reasonable doubt. Id.

“A prima facie violation is shown if it is established that the client was engaged in or planning a criminal or fraudulent scheme when it sought the advice of counsel to further the scheme…. The [movant] satisfies its burden of proof if it offers evidence that if believed by trier of fact would establish the elements of an ongoing or imminent crime or fraud.” Id.

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On the GSA Horizon

• United States ex rel. Escobar v. UHS (S. Ct.) • Pricing claims unaffected: expressly false claims

• Country of origin claims ????

• GSA Regulatory Changes: March 4, 2015

proposed rule eliminates price reduction clause

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Mortgage Fraud

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Housing and Mortgage Fraud

• DOJ has recovered over $5 billion in housing and mortgage fraud from January 2009 to the end of fiscal year 2015, including FCA recoveries of $365 million in 2015.

• Recoveries are part of the broader enforcement efforts by President Obama's Financial Fraud Enforcement Task Force. • $212.5 million settlement with First Tennessee Bank N.A

• First Tennessee admitted that from 2006 to 2008, through its subsidiary, First Horizon Home Loans Corporation, it originated and endorsed mortgages for federal insurance by FHA that did not meet eligibility requirements.

• First Tennessee also admitted failing to report such deficiencies to the authorities as required under the program despite widespread knowledge by its senior managers by early 2008.

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Housing and Mortgage Fraud

• $123.5 million settlement with MetLife Bank N.A.

• Metlife admitted similar misconduct regarding the loans it originated and endorsed from September 2008 to March 2012.

• $29.6 million settlement with Walter Investment Management Corp.

• Government alleged that the company, through its subsidiaries caused false claims for fees and other costs in servicing reverse mortgages under the HUD’s Home Equity Conversion Mortgages Program

• HUD insures banks and other institutions that service the mortgages against loss, providing the institution complies with requirements to ensure the quality of such loans.

• Walter Investment allegedly failed to comply with these requirements.

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FCA Mortgage Fraud Jurisprudence

• U.S. v. Veneziale, 268 F.2d 504 (3d Cir. 1959) • False or fraudulent statement in application for FHA-insured loan gives rise to a

false claim for payment upon default and demand on the guaranty. A fraudulently-induced contract may create liability under the FCA when that contract later results in payment thereunder by the government.

• False statement as to the purpose for which funds were borrowed was “an essential inducement” to FHA, even though “the wrongdoer neither sought nor obtained any transfer of government funds or property to himself.”

• U.S. First Nat’l Bank of Cicero, 957 F.2d 1352 (7th Cir. 1992) • Evidence that Government would not have guaranteed SBA loan “but for” bank's

false statement is sufficient to establish causal relationship between false claim and government's damages necessary to permit recovery under the FCA.

• U.S. v. Hibbs, 568 F.2d 347 (3d Cir. 1977). • Real estate broker who submitted certifications to FHA misrepresenting the

condition of residential properties was not liable for the full value of the mortgages where “the defaults were caused either by the mortgagors' changed financial circumstances or irresponsibility, and there was no causal connection between the false certifications and the default,”

• FCA requires “a causal connection between loss and fraudulent conduct….”

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Reverse False Claims

Mineral Royalties

Customs

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31 U.S.C. § 3729(a)(1)(G)

Any person who . . . knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government . . . is liable to the United States. . . .

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Mineral Royalty Fraud: Overview

• Royalties paid based on self-reported volumes and values of minerals from leases on public lands

• Billions of Dollars at Stake

• Players & Terms

• Fraud Schemes

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Mineral Royalty Fraud

Revenue Type Commodity

2015

Sales Volume Revenue

Reported Royalties

Coal (ton)

409,592,750.95 $757,087,406.15

Gas (mcf)

3,787,244,977.72 $1,452,457,735.92

NGL (gal)

5,356,576,687.86 $282,945,880.15

Oil (bbl)

689,357,998.51 $5,605,575,165.61

Other Products

5,338,207,676.46 $163,907,404.09

Rents

$266,046,422.69

Bonus

$1,218,352,816.82

Other

($112,141,696.28)

Total $9,634,231,135.15

• Resource Revenues: $9.6 billion in FY 2015

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Mineral Royalty Fraud

Coal (ton) 8%

Gas (mcf) 15%

NGL (gal) 3%

Oil (bbl) 57%

Other Products 1%

Rents 3%

Bonus 12%

Other -1%

Revenues by Source

• $9.6 billion in resource revenues in FY 2015

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Mineral Royalty Fraud

Resource Revenues for FY 2015 (top 20)

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Wyoming: $1.8 billion

New Mexico: $1 billion

North Dakota: $661 million

Utah: $336 million

Colorado: $295 million

California: $137 million

Louisiana: $95.6 million

Montana: $87.6 million

Oklahoma: $51.2 million

Alaska: $40.2 million

Arizona: $29.7 million

Texas: $20.4 million

Alabama: $14.9 million

Idaho: $14.6 million

Missouri: $10 million

Nevada: $9.5 million

Mississippi: $6.9 million

Arkansas: $5 million

Kansas: $3.1 million

South Dakota: $2.4 million

Mineral Royalty Fraud

• Historic Qui Tam Recoveries

• United States ex rel. Johnson Qui Tam

• Knowing underpayment of oil royalties

• 16 major oil companies

• $428.5 million in settlements (1998-2001)

• United States ex rel. Wright Qui Tam

• Knowing underpayment of natural gas royalties

• 16 major oil companies

• $310 million in settlements (2000 to 2012)

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Mineral Royalty Fraud

• Continuing Investigations & Settlements:

• Louis-Dreyfus Energy Services: $4 million

• Gary-Williams Energy Company: $2.7 million

• Yates Petroleum: $416,000

• Gunnison Energy/SG Interests: $550,000

• Big Sandy Oil Company: $73,000

• Slawson: $66,000 50

Mineral Royalty Fraud

• Office of Natural Resources Revenue (ONRR)

• Office of Natural Resources Revenue within the Department of the Interior

• Formerly known as Minerals Management Service (MMS)

• Headquartered in Washington, DC, but main operations are located in Lakewood, Colorado

• Field offices are located in New Mexico, Oklahoma, and Texas

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Mineral Royalty Fraud

• ONRR: Mission

• Collects and disperses royalties owed by energy companies for drilling and production on:

Offshore Federal leases (Outer Continental Shelf)

Onshore Federal leases

Onshore Indian leases

• Conducts audits and compliance review to ensure that production reports and payments are accurate

• Trust responsibility on Indian leases

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Mineral Royalty Fraud

• ONRR: Mission

• There are different types of energy that ONRR manages

Oil

Gas (including coalbed methane)

Geothermal

Solids (i.e., coal and mining)

Renewable energy sources

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Mineral Royalty Fraud

• ONRR: Statutes and Regulations

• Federal Oil and Gas Royalty Management Act (FOGRMA), 30 U.S.C. § 1701

• Regulations found at 30 C.F.R. 203 et seq.

• Guidance through “Dear Payor” and “Dear Reporter” letters

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Mineral Royalty Fraud

• Bureau of Land Management: Responsible for overseeing the production side of mineral exploration and production

Decides which federal lands should be approved for exploration and development

Auctions land for federal leases

Supervises mineral operations (checking meters, making sure there are no spills, etc.)

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Mineral Royalty Fraud: Basic Terms

• Lease = agreement with the US that allows company to extract minerals from federal land or Indian land

• Royalty Rate = percentage of money due to the US from the sales of the mineral

12.5% for federal leases

16% or more for Indian leases

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Mineral Royalty Fraud: Basic Terms

• Payor = Entity responsible for reporting to ONRR how much royalty is due, and paying those royalties

• Operator = Entity responsible for operations and production on the lease

• OGOR Report = monthly report to ONRR reporting production volume for the lease

• 2014 Report = monthly report to ONRR reporting sales from the lease

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Mineral Royalty Fraud

• Avoiding an Obligation to Pay:

• Knowingly avoiding or decreasing obligations to pay royalties owed to the United States

• FCA liability will usually be a reverse false claim under 31 U.S.C. § 3729(a)(1)(G)

• But could also be a conspiracy to commit fraud under 31 U.S.C. § 3729(a)(1)(C)

58

Mineral Royalty Fraud

• Where’s the False Statement?

• False statements can be found in:

Applications

Diagrams

Production reports (OGOR reports)

Monthly Royalty Reports (2014 reports)

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Mineral Royalty Fraud

• Royalty Fraud Schemes:

• Sweetheart deals with related companies that ultimately reduce federal royalties

• Underreporting production

• Reporting same production/sales, month after month, with no variance

• Overstating transportation allowances, processing allowances, or other deductible production costs

60

Mineral Royalty Fraud

• Royalty Fraud Schemes:

• 2014 “corrections” that constitute purposely delayed payments

• Improper gas measurement resulting in loss of royalty

• Intentional alteration of gas meters to reduce reportable production volumes

• Knowingly misreporting the sales volume

61

Mineral Royalty Fraud

• Royalty Fraud Schemes:

• Horizontally drilling into and producing from federal land without a lease

• Theft of oil or gas from federal land

• Falsification of blowout preventer tests

• Failure to report and cover up of an oil spill

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The FCA and Customs Law

• Violations of U.S. trade law serve as a basis for FCA liability

• Typical cases involve allegedly false statements as to:

• Tariff classification

• Entered valuation

• Country of origin

• Free trade eligibility

• Applicability of anti-dumping or countervailing duties

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Significant Customs Settlements

• U.S. v. CMAI Indus. (2012)—$6.3 million for misclassification of auto parts manufactured in China

• U.S. ex rel. Dickson v. Toyo Ink Mfg. Co. (2012)—$45 million for misclassifying country of origin of an ink colorant

• U.S. ex rel. John Doe v. Siouni and Zarr Corp. (2014) —$10 million

for understating the value of imported clothing

• In re Z Gallerie (2015)—$15 million for misclassifying wooden bedroom furniture imported from China

• U.S. ex rel. University Loft Co. v. University Furnishings, LP, et al. (2015)—$15 million for misclassifying wooden bedroom furniture imported from China

• U.S. ex rel. Graphic Electrode Sales, Inc. v. Ameri-Source Holdings, Inc. et al., (2016 )—$3 million, corporate plea agreement, and criminal fine for misclassifying the size of electrodes

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U.S. ex rel. Jimenez v. OtterBox

• Qui tam complaint alleged that Otter Products failed to calculate and include the value of “assists” in the dutiable value declared to customs for mobile phone cases imported from China.

• An “assist” occurs when an importer of foreign merchandise provides something of tangible value to the overseas producer of that merchandise. This reduces the cost of production for the overseas producer.

• The importer must add the value of any "assist” to the transaction value of imported merchandise in order correctly to assess duties imposed on an ad valorem basis.

• OtterBox provided manufacturing tools and dies, but did not account for the value of the assists when product was imported.

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• Relator alleged that the import declarations were false records to avoid payment of the appropriate duties—a “reverse false claim.”

• OtterBox did not dispute that they had failed to account for the assists. On the contrary, OtterBox had submitted “prior disclosures” to Customs conceding that the product had been undervalued upon importation.

• But, OtterBox asserted that the “prior disclosure” proceeding commenced in the CIT under 19 U.S.C. § 1592(c)(4) was an “administrative money penalty proceeding” in which the U.S. was a party, precluding subject matter jurisdiction over the qui tam complaint.

U.S. ex rel. Jimenez v. OtterBox

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• OtterBox moved to dismiss under 31 U.S.C. § 3730(e)(3), arguing that:

• Allowing qui tam case to proceed would undermine the purpose of the prior disclosure statute

• There would be a chilling effect on importers self-disclosing errors if their voluntary disclosure could be used as the basis of an FCA enforcement action

• The United States disagreed that OtterBox’s prior disclosure constituted an “administrative penalty proceeding” under 31 U.S.C. § 3730(e)(3) and filed a Statement of Interest to that effect.

• Case settled for $4.3 million on April 1, 2014, while the 3730(e)(3) motion was still pending.

U.S. ex rel. Jimenez v. OtterBox

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Jurisdiction over FCA suits for customs duties

• Is there jurisdiction in U.S. District Court over FCA suits arising out of alleged underpayment of customs duties? • 28 U.S.C. § 1582(3) vests in the CIT exclusive jurisdiction over any civil

action arising out of an import transaction commenced by the U.S. to recover customs duties.

• U.S. v. Universal Fruits & Vegetables Corp., 362 F.3d 551 (9th Cir.

2004) • Summary judgment for U.S. in C.D. Cal. in FCA suit commenced by U.S. to

recover customs duties. • Ninth Circuit reversed, finding district court lacked jurisdiction, and

remanded with instructions to transfer to CIT. • CIT ultimately concluded it lacked jurisdiction to award penalties and

“damages” under the FCA as opposed to customs duties. 433 F.Supp.2d 1351 (CIT 2006).

• U.S. ex rel. Huangyan v. Nature’s Farm Products, 370 F. Supp. 2d

993 (N.D. Cal. 2005) • Held that the district court had jurisdiction because the case had been

commenced by a relator

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“Obligation” to Pay Duties

• Post-FERA, the FCA states that the term “obligation” means “an established duty, whether or not fixed . . . .”

• Importers have an existing, non-contingent and nondiscretionary liability for customs duties. See 19 C.F.R. §§ 141.4, 159.2; 19 U.S.C. § 1503.

• But see U.S. ex rel. Customs Fraud Investigations v. Victaulic, 2015 WL 1608455 (E.D. Pa. Apr. 10, 2015) (holding that “marking duties” are not a duty owed to the government upon importation of the foreign merchandise).

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Grant Fraud– Whose Interest at Stake? • U.S. ex rel. Harman v. Trinity Industries (5th Cir.)

• Relator claimed that competitor guardrail manufacturer (Trinity) defrauded FHWA by certifying its guardrail system met FHWA safety standards when the system had been changed

• FHWA reviewed the relator’s claims and found that Trinity’s system was in compliance with FHWA requirements

• D. Court allowed the case to go to the jury which found Trinity liable - $663 M judgment

• Relator sought testimony from FHWA officials to show they were misled – DOJ denied request

• Can there be a “fraud” against the U.S. if the agency responsible for interpreting the regulations concluded there was no issue?

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Grant Fraud

• Can a claim be false if the agency has made a decision that the conduct at issue is not material to its payment decision?

• Once the relevant agency has spoken, is there any remaining basis for a claim?

• Clearly raises the question of the responsibility of the agency with substantive jurisdiction over the matter – not a unique issue to the grants context

• Currently pending before the 5th Circuit

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Grant Fraud

• DOT Programs • Claims arise for false statements and certifications to obtain

funding under FTA and FHWA programs at the state and local level

• U.S. Dep’t of Transp., ex rel. Arnold v. CMC Eng’g (3rd Cir. 2014) – dispute over credentials of consultants for work on PennDOT projects

• U.S. ex rel. Fields v. Bi-State Dev. Agency Missouri-Illinois Metro Dist. (E.D. Mo. 2015) – allegations of false certifications under the Hatch Act and Uniform Relocation Act in connection with FTA project

• Actions can highlight lack of financial and administrative controls by officials at state and local level

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1

FCA Enforcement Against Hospitals, Device and Pharmaceutical Companies and Other Health Care Industry Companies

By: Thomas S. Crane, JD, MHSA 1. 60-DAY OVERPAYMENT RULE In 2009, The Federal Emergency Relief Act (FERA) expanded federal FCA liability to include, among other things, liability for knowingly and improperly retaining overpayments as part of the liability provisions for reverse false claims. In 2010, Congress further clarified the liability for retention of overpayments under two provisions of the Patient Protection and Affordable Care Act (ACA):

• Section 6402(a) (codified at 42 U.S.C. 1320a-7k(d)) of the ACA provides that a person

who has received an overpayment must report it by the later of: (i) the date which is 60 days after the date on which the overpayment was identified or (ii) the date any corresponding cost report is due, if applicable. Any overpayment retained by a person after the deadline is considered an "obligation" for purposes of the FCA. The term "person" includes providers, suppliers, Medicaid managed care organizations and PDP sponsors.

• Section 6402(d) of the ACA extends civil money penalty (CMP) liability to any person

“that knows of an overpayment and does not report and return the overpayment…” Penalties include a $10,000 fine for each item or service, plus an assessment of up to three times the amount claimed for each item or service. There is also potential exclusion from participation in federal health care programs, including Medicare and Medicaid.

The regulation implementing this “60-day rule” was promulgated on Feb. 12, 2016. It created a new section 42 C.F.R. 401, subpart D - "Reporting and Returning of Overpayments."

• Among its provisions and preamble commentary –

o The rule imposes overpayment liability in situations where a provider may not have actual knowledge of the overpayment.

o “When a person obtains credible information concerning a potential overpayment, the person needs to undertake reasonable diligence to determine whether an overpayment has been received and to quantify the amount. The 60-day time period begins when either the reasonable diligence is completed or on the day the person received credible information of a potential overpayment if the person failed to conduct reasonable diligence and the person in fact received an overpayment.”

o "A person has identified an overpayment when the person has, or should have through the exercise of reasonable diligence, determined that the person has received an overpayment and quantified the amount of the overpayment. A person should have determined that the person received an overpayment and quantified the amount of the overpayment if the person fails to exercise reasonable diligence and the person in fact received an overpayment."

o “[T]here are instances where payment is made for an item or service specifically

not payable under the Act (for example, claims resulting from Anti-Kickback Statute or physician self-referral law violations or claims for items and services furnished by an excluded person), or where the payment was secured through fraud. In these types of situations, the overpayment typically consists of the entire amount paid.”

60-day Overpayment Rule: https://goo.gl/fQfw1S

U.S. ex rel. Kane v. Healthfirst, Inc., No. 11-2325 (S.D.N.Y.) In Kane, a Medicaid managed care company sent erroneous electronic remittances that resulted in hospitals erroneously (and blamelessly) submitting claims to secondary payers, including Medicaid. Upon its discovery, in September 2010 the NY Comptroller advised hospitals of the improperly submitted claims. The hospital’s claims persisted from early 2009 until late 2010, until a software vendor fixed the glitch. Kane, an employee in the hospital’s revenue cycle department, was assigned to investigate. In February 2011 he sent an internal email identifying >$1M in erroneous claims, with approximately one-half of which were later definitively determined to be overpayments. Kane was soon terminated, and shortly thereafter filed the qui tam complaint. The defendants allegedly “failed to take steps to repay all of the affected claims within 60 days after those claims had been identified.” The claims were not repaid until March 2013, long after DOJ served a civil investigative demand in June 2012. The federal government and the state of New York intervened. In denying Defendants’ motion to dismiss –

• The court rejected defendant's argument that the “identification” of a claim only occurs when it is “known with certainty.” The court held that the February 2011 internal email (but not the Comptroller’s 2010 letter) satisfied the identification threshold, reasoning that identification is made when “a provider is put on a notice of a potential overpayment.”

• The court found the 60 day rule “can potentially impose a demanding standard of compliance in particular cases. . . [and] contains no language to temper of qualify this unforgiving rule.”

• The court left the question of the burden of over-reach on “prosecutorial discretion.” Opinion: https://goo.gl/4dGl7P

2. OFF-LABEL PROMOTION

Amarin Case and Settlement with FDA. On March 8, 2016, Amarin Pharma and the FDA announced a settlement of a case brought by Amarin and four physicians alleging that the FDA's prohibition against off-label promotion violated the company's first amendment rights. The settlement follows the company's landmark victory over the FDA in August 2015. In that case, Amarin argued that it had a first amendment right to distribute truthful and non-misleading promotional information to physicians about unapproved uses of the company's omega-3 drug Vascepa. Under the settlement, FDA officials agree to be bound by the court's conclusion, and a special procedure will be provided in which the FDA will give advance review to as many as two promotional communications annually for off-label uses of Vascepa. The agreement also establishes a specific timetable and process for resolving any of the FDA's concerns over the communications. Amarin Opinion and Settlement: https://goo.gl/u8Fb4G

U.S. v. Vascular Solutions, Inc. and Howard C. Root, No. 5:14-CR-00926 (W.D. Tex.). This case involved allegations that Vascular Solutions, Inc. (“VSI”) and its CEO Howard Root conspired to violate the Federal Food, Drug, and Cosmetic Act and sold misbranded medical devices. The FDA cleared the company’s Vari-Lase device for treatment of superficial veins, but doctors sometimes used the device off-label to treat perforator veins, the short veins that connect the superficial and deep vein systems. VSI unsuccessfully sought FDA clearance for use of the Vari-Lase device to treat perforator veins and developed a special Vari-Lase “Short Kit” that, according to the government, was designed to make it easier to treat perforator veins. DOJ alleged that VSI unlawfully distributed and promoted the Vari-Lase device, including the Short Kit, for a new intended (i.e., off-label) use to treat perforator veins; additionally, DOJ alleged that VSI misrepresented clinical data about the safety and effectiveness of the product for perforator vein ablation and misinformed doctors that Medicare and private payers would cover perforator vein procedures. After defendants rejected a plea deal and went to trial, on February 26, 2016 the jury found both VSI and Root not guilty. The verdict came shortly after the Amarin decision, discussed above, upon which VSI relied heavily. U.S. ex rel. Colquitt v. Abbott Laboratories et al, No. 3:06-cv-01769 (N.D.T.X.) Qui tam action brought by former regional sales director for the Abbott unit Guidant. The U.S. declined to intervene in the case. The relator alleged that Guidant (with its line of business sold to Abbott) actively promoted the use of its bile-duct stents for use in vascular stent procedures—an off-label use not approved by the FDA. The relator, after leaving Abbott, stated working at the law firm that represented him in this case. Abbott argued that the use of bile-duct stents for peripheral vascular or arterial disease was an accepted medical practice and that Medicare knowingly approved of payments for such use. Medicare reviewed the use in 2008 and did not alter its coverage policy. On April 7, 2016, the jury ruled in favor of Abbott.

3. STATISTICAL SAMPLING/EXTRAPOLATION

US ex rel. Martin v. Life Care (E.D.Tenn.). U.S. attempted to extrapolate from a sample of 400 to estimate to a universe of 150,000 claims that 200 skilled nursing facilities submitted over a seven year period. Court ruled that providing individualized proof for each claim "would require the devotion of more time and resources than would be practicable." The court agreed that the defendants made compelling arguments against sampling, but it believed this issue was best determined by the fact finder rather than the court. Denial of Summary Judgment: https://goo.gl/Qm1v2X

US ex rel. Michaels v. Agape Senior Community (D.S.C.). Court rejected extrapolation to prove liability since medical necessity cases require a “highly fact-intensive inquiry” and medical testimony after a thorough review of detailed, individual patient records. Instead of extrapolation, the court ordered a trail on a subset of the alleged false claims. The parties then settled, but the U.S. (which declined to intervene) rejected the proposed settlement as too low based on its extrapolation of the damages. Currently pending appeal in the 4th Circuit. Department of Justice Brief: https://goo.gl/pDLGhG

4. MEDICAL NECESSITY

United States of America et al v. Prime Healthcare Services Inc et al, No. 2:11-cv-08214 (C.D. Cal). Qui tam suit filed by former employee alleging that the company directed emergency department physicians to admit patients, even if it wasn't medically necessary to do so, in order to receive higher inpatient reimbursement rates for treatments. On May 23, 2016, DOJ filed a to the government's motion for partial intervention, with an attached Affidavit detailing the government’s allegation against Prime Healthcare Foundation and its Board Chairman, which is notable in light of the Yates Memo discussing the DOJ's focus on individual accountability. Notably, in December 2013, the relator’s complaint was unsealed after the government filed a notice it was not intervening at that time. In this recent motion, the government described what it learned since that time, specifically, as alleged, the Board Chairman (1) took action against Emergency Department (“ED”) doctors that did not admit Medicare beneficiaries in sufficient quantities; (2) favored ED doctors whose patients had a relatively high rate of admission; (3) and told ED doctors to admit or discharge patients based on different waiting times depending whether the patient had insurance. DOJ’s Motion to Intervene: https://goo.gl/EViXyT

US ex rel. Paradies v. AseraCare Inc., No. 12-cv-03466-JFA (N.D. Ala.). October 19, 2015, a jury found for the U.S. on claims that AseraCare, a national hospice chain, submitted false claims for medically unnecessary hospice care. October 23, 2015, the court sua sponte declared a mistrial, finding it should have granted defense request for a jury instruction that difference of opinion is not enough to establish falsity. October 29, 2015 the court granted defendant’s motion for a new trial. On November 3, 2015, the court sua sponte ordered summary judgment briefing.

On March 31, 2016, the court granted summary judgment for defendant, quoting Blaise Pascal at the beginning of the opinion: “Contradiction is not a sign of falsity, nor the lack of contradiction the sign of truth.” The court held that "allowing a mere difference of opinion among physicians alone to prove falsity would totally eradicate the clinical judgment required of the certifying physicians." Opinion: https://goo.gl/jFpyzK

U.S. ex rel. Cretney-Tsosie v. Creekside Hospice II, LLC, et al., No. 13-167 (D. Nev.). FCA case based on DOJ’s Complaint in Intervention alleges: (a) hospice was “involved in specific business practices, including setting aggressive census targets, offering incentives and bonuses tied to the census targets, and encouraging, and often instructing, medical staff to include false documentation in medical records;” and DOJ medical reviews finding patients not Medicare eligible for hospice care. The hospice's motion to dismiss took issue with complaint's conclusion that certain patients were not terminally ill. For example, the complaint suggested that a lung cancer patient was not terminal because his cancer was not metastatic. The motion to dismiss argues that FCA liability cannot be based on clinical disagreements over hospice physicians’ certification of eligibility based on after-the-fact clinical reviews by DOJ medical experts. Briefing complete; case awaiting District Court decision DOJ Amended Complaint: https://goo.gl/oQUBFQ

Implantable Cardioverter Defibrillator (ICD) Cases (2015 and 2016). In 2015, the DOJ reached 70 settlements involving 457 hospitals in 43 states for more than $250 million related to cardiac devices that were implanted in Medicare patients in violation of Medicare national coverage determination (NCD). The NCD provides that ICDs generally should not be implanted in patients who have recently suffered a heart attack or recently had heart bypass surgery or angioplasty. The NCD expressly prohibits implantation of ICDs during specific waiting periods, with certain exceptions. The DOJ alleged that from 2003 to 2010, each of the settling hospitals implanted ICDs during periods OF TIME prohibited by the NCD. In 2016, the DOJ settled with an additional 51 hospitals in 15 states for more than $23 million related to implanting of ICDs. Department of Justice Press Releases: https://goo.gl/lJ0ud3

5. THE ANTI-KICKBACK STATUTE AND THE STARK LAW

US ex rel Drakeford v. Tuomey Healthcare Sys, Inc., No. 13-2219 (4th Cir.). This case centered on part-time employment agreements. Under the agreements, physicians were required to perform their outpatient procedures at the hospital. The hospital paid the physicians a base salary that fluctuated annually based on the physicians' net professional collections for outpatient procedures. Physicians also received a productivity bonus of 80% of the amount of their professional collections for the year, and an incentive bonus of up to 7 percent of their earned productivity bonus. This allegedly allowed the physicians to receive up to 119 percent of the collections for their services. After two trials and two appeals, the Fourth Circuit affirmed the jury's conclusion that Tuomey Healthcare System had entered into physician agreements where the compensation varied with the volume or value of the physician's referrals. Tuomey settled the case in 2015 for $72.4 million. Opinion: https://goo.gl/hQHduV

United States, et al. ex rel. Lutz, et al. v. Health Diagnostic Laboratory, Inc., et al., Case No. 9:14-CV-0230-RMG (D.S.C.). Medical screening company Health Diagnostics Laboratory Inc. (HDL) paid $47 million in 2015 to resolve allegations it violated the FCA by paying kickbacks to doctors for referrals and waiving patient fees. As alleged in the lawsuits, HDL, Singulex and Berkeley induced physicians to refer patients to them for blood tests by paying them processing and handling fees of between $10 and $17 per referral and by routinely waiving patient co-pays and deductibles. In addition, HDL and Singulex allegedly conspired with BlueWave to offer these inducements on behalf of HDL and Singulex. As a result, physicians allegedly referred patients to HDL, Singulex and Berkeley for medically unnecessary tests, which were then billed to federal health care programs, including Medicare. Complaint and Settlement: https://goo.gl/kTHKXO

Tri-City Medical Center Settlement. On January 14, 2016 Tri-City Medical Center in Oceanside, California, agreed to pay more than $3 million to resolve Stark Law and Anti-Kickback Statute allegations involving excess physician pay and technical paperwork problems. Five of the arrangements with a former chief of staff were allegedly not commercially reasonable or for fair market value. 92 other arrangements with physicians failed to quality for Stark Law exceptions. In July 2011 Tri-City had voluntarily disclosed the potential violations under the OIG’s Self-Disclosure Protocol. Reportedly, the case was also brought to the local US Attorney’s Office out of a desire to obtain a False Claims Act release. Other Significant Qui Tam FCA Hospital Settlements in the Past Year Based on Stark Law Allegations

• US ex rel. Parikh v. Citizens Medical Center (April 2015) • US ex rel. Payne v. Adventist Health System (September 2015) • US ex rel. Reily v. North Broward Dst. (September 2015) • US ex rel. Schaengold v. Memorial Health, Inc. (December 2015)