The Ninth Circuit Court of Appeals in the recently issued case of United States ex. rel. Rose v. Stephens Institute (Rose) held that the two-step test of Universal Health Services, Inc. v. United States ex rel. Escobar (Escobar) is mandatory in implied false certification cases brought under the False Claims Act (FCA).

In Escobar, the Supreme Court held that implied certification cases under the FCA can proceed where the defendant makes a claim with specific representations and the defendant’s failure to comply with a material requirement makes those representations false or misleading.

 [W]e hold that the implied certification theory can be a basis for liability, at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.

However, the question left open in the wake of Escobar was whether proving these two conditions was necessary or merely sufficient to prevail in an implied certification FCA case, an issue on which lower courts have split since Escobar, as previously discussed in this blog.

In Rose, the Ninth Circuit appears to have joined those courts which have held that the Escobar test is a necessary condition which the government or a qui tam relator must meet to prevail in an implied certification case.  This is good news for defendants in the Ninth Circuit because the plaintiff must meet a more exacting standard (i.e., show that the defendant made an affirmative statement that is proven to be false or misleading by the defendant’s failure to comply with a material requirement) in order to proceed on an implied certification case.

In Rose, the relators were former admissions representatives for the Academy of Art University in San Francisco. The relators alleged violations of Title IV of the Higher Education Act in that the Academy’s incentive compensation plan improperly violated the Department of Education incentive compensation ban. The relators claimed compliance statements made to the Department constituted FCA violations. The Academy brought a motion for summary judgment in the district court, which was denied.

Following the denial, the Supreme Court issued Escobar. The Academy filed a motion for reconsideration, which was likewise denied. An interlocutory appeal to the Ninth Circuit followed, which included the question of whether Escobar’s two-part test was mandatory in all implied certification cases.

The three-judge panel in Rose held that the Escobar test was indeed mandatory in such actions and thus upheld the central premise of Escobar that an implied false certification theory must comply with at least the two-step test, though the panel noted if the issue came before the court en banc, the full Ninth Circuit might find that the Escobar standards are not necessary in all cases.  Thus, the Rose opinion suggests that, if confronted with the issue on a later date, the Ninth Circuit may allow plaintiffs to proceed on an implied certification case without needing to prove the specific two parts of the Escobar test as they may be able to rely on other or broader elements such as those set forth in prior Ninth Circuit decisions interpreting the implied certification theory of FCA liability.  However, for the time being, the Rose decision bodes well for defendants and reinforces the point that, although Escobar brought much-needed clarity to implied certification theory cases under the FCA, the issue remains jurisdiction-specific for the time being, which should be a consideration and a reality in any defense strategy.

Regardless of your industry, companies that have business dealings with the federal government face the persistent risk of False Claims Act (FCA) investigations and lawsuits. The FCA, 31 U.S.C. §§ 3729 – 3733, imposes civil and criminal liability for knowingly making a false or fraudulent claim to the United States for money or property; or to avoid an obligation to pay money (reverse false claim). 31 U.S.C. §§ 3279-3733. Under the FCA, the government may bring its own action or may intervene in the existing qui tam complaint, a private right of action brought by a whistleblower (relator), against an individual or company accused of engaging in fraudulent activities against the government. Contractors face the possibility of treble damages.  In addition, the contractor may face civil penalties. 31 U.S.C. 3729(a)(1)(G). In 2018, The maximum per claim penalty is $22,363.

In recent years, FCA claims have been on the rise as the government continues to crack down on fraud, waste, and abuse in order to protect taxpayer dollars. The DOJ reported it obtained over $3.7 billion from FCA cases in FY 2017—making it the eighth straight year the federal government recovered more than $3 billion in FCA cases. This trend does not appear to be changing any time soon.

The uptick in FCA activity has made insurance coverage for FCA contractors an evolving area of law subject to different interpretations by different courts. Accordingly, any risk management program that should include insurance coverage that may be leveraged to cover FCA investigations and claims.  To proactively manage these risks, companies should make sure they (1) have appropriate liability insurance in place, given their risk profile; (2) if a FCA claim is asserted against the company, to respond in a manner that does not jeopardize coverage; and (3) carefully consider insurance coverage issues prior to resolving an FCA lawsuit.

Review Your Policy Language

Claims under the FCA primarily implicate three types of liability insurance: (1) directors and officers (D&O) liability insurance; (2) employment practices liability (EPL) insurance; and (3) errors and omissions (E&O) insurance. Although the three types of policies provide different coverages, each commonly covers loss resulting from a claim for a negligent act (as defined in the policy).

As with any insurance matter, the starting point is with the policy itself. How is “claim” defined? How is “loss” defined? How are “professional services” defined? It is important to be aware of how these terms are defined in your policy. The term “claim,” for instance, may not be limited to the filing of the lawsuit—it may include the service of subpoena, a written or oral demand for monetary damages or equitable relief, or even a request to toll statute of limitations. Some policies expressly provide that the definition of “claim” includes government investigations and informal investigations. The policy’s definitions not only set the parameters for what is covered, but also may affect your notice obligations. It may be beneficial for policyholders to procure insurance policies with a broad definition of “claim,” but policyholders should note that there may be a corresponding need to make sure notice is provided in a broader set of circumstances.

Likewise, the definition of “loss” is critical. To maximize potential protection for FCA claims and to better navigate inevitable disputes with the insurance company, the definition should expressly include fines and penalties and any damages multipliers. Similarly, policyholders should avoid definitions of “loss” that exclude “matters uninsurable.” For instance, policies may exclude returned money (restitution) from their definition of “loss” under the policy.

Policyholders should anticipate that insurers may attempt to avoid coverage obligations by asserting exclusions in the policies apply. Be wary of language in your policy for exclusions for fraud or intentional, reckless, or even grossly negligent conduct as well as notice provisions that may later bar your ability to seek coverage against an insurer.

Things to Remember While Negotiating FCA Settlements to Preserve your Coverage Rights

Like most claims, many FCA lawsuits are ultimately resolved by settlement. When drafting a settlement agreement, be cognizant of your insurance policy, including how the conduct is characterized, and whether your settlement needs to include language to allocate between covered and non-covered portions based on the “relative legal exposure” of the covered and non-covered claims (so as to streamline future claims against your insurer). Under this method, the portion of the settlement amount that may be allocated to a non-covered loss is determined by the extent that liability motivated the parties to settle. These considerations will be important in determining how settlements are structured and language is drafted. Nonetheless, the policy language, jurisdiction and public policy will determine to what extent the insurance company can allocate an FCA settlement to a non-insured loss.

It is no secret that the False Claims Act (“FCA”) is the government’s primary anti-fraud tool and that recoveries under the statute have hit record highs in recent years.  For example, since 1987, FCA recoveries have totaled $56 billion with no single year since 2010 falling below $3 billion.  Moreover, most of these cases have been brought by qui tam relators and where the Department of Justice (“DOJ”) did not intervene.  Accordingly, DOJ’s remarks during the American Bar Association’s June 14, 2018, 12th National Institute on the Civil False Claims Act and Qui Tam Enforcement, were certainly welcome for industry.

During this session, top DOJ leadership addressed a number of “reform” projects of significant interest.  First, DOJ emphasized that the greater the degree of cooperation that DOJ receives from a defendant or potential defendant the more leniency the company may receive when it comes time for settlement.  In this regard, the FCA allows for penalties ranging between $11,181 and $22,363 per false claim and treble damages, which allows damages to rack up quickly.  DOJ confirmed that companies which fully cooperate with the Department can expect to receive “tremendous enforcement discretion with respect to structuring settlements while also providing a discount.”  DOJ stated that cooperation can come in many forms, but that the government is usually looking for voluntary disclosures (which DOJ considers to be most valuable), sharing information during an internal investigation, making individuals available for interviews, and identifying culpable individuals (in accordance with the Department’s focus in the Yates Memorandum on individual, and not just on corporate, responsibility).

DOJ also acknowledged that even the best compliance systems fail from time-to-time and assured that “when fraud occurs, the DOJ will give the greatest consideration” to companies that live by a robust compliance culture that is deeply engrained in the organization.  These comments reinforce the fact that having a compliance program is only the first step because it is even more critical that companies continuously update, monitor and stress those principles to its stakeholders, while still making compliance both practical and effective to apply from a business standpoint.

DOJ did not specify the types of leniency that companies can expect, but if lessons can be taken from parallel criminal fraud cases, the incentives for cooperation may result in a below double damages multiplier (or perhaps even no multiplier), a reduction of penalties from even the low end of the range, and no requirement for a corporate integrity agreement and monitor.

Finally, DOJ spoke about two other pressing issues—DOJ’s authority to dismiss frivolous qui tam cases and cases which rely on informal agency guidance, as opposed to an actual regulation or statute, to allege a legal violation in support of a false claim.  As for its dismissal authority, DOJ acknowledged that its policy of dismissing frivolous cases, as set forth in the Granston Memorandum, remains an important objective for DOJ but acknowledged that such dismissals by DOJ, to date, have been rare.  That said, DOJ is “now instruct[ing] [its] attorneys” to give a hard look at cases where DOJ has declined to intervene to determine whether dismissal is warranted.  While results remain to be seen, this and similar recent statements by senior DOJ leadership signal that the Department is trending down this appropriate path.

And, with regard to reliance (often by qui tam relators) on internal and informal agency policies or practices to fashion the basis for a legal violation, DOJ’s remarks, which are consistent with statements in the Brand Memorandum, are especially welcomed because those informal policies lack the force and effect of law and should not serve as the basis for alleging an actual legal violation that could cost a company millions of dollars, especially when such policies and practices are both subjective and inconsistent in their application.

In sum, DOJ continues to send a positive message that companies which act as good corporate citizens by conducting their businesses ethically and in good faith, pursuant to established compliance systems, and which promptly disclose any potential issues to the government will enjoy the benefits of those practices, and that meritless cases should not be used to extract millions of dollars from responsible contractors.

The case of Green Valley Company, ASBCA No. 61275, presents an interesting conundrum for contractors facing fraud allegations who also have a contract claim against the government.  In 2006, the contractor presented invoices for payment to the government.  In 2017, the contractor converted those invoices into a certified claim requesting payment.  Under the CDA, the contractor had clearly exceeded the 6-year statute of limitations.  However, the contractor requested the ASBCA equitably toll the CDA for what appeared to be sensible grounds.  From 2009 until 2016, the contractor had been defending a lawsuit the government filed against it alleging false claims act violations and breach of contract among other causes of action. The government had simultaneously been considering the contractor for debarment, the death penalty of government contracts.

The contractor argued it could not have submitted its claim to the contracting officer while the lawsuit was pending because the government would have alleged the contractor had made yet another false claim thus further potentially exposing the contractor to additional treble damages.  The ASBCA rejected the contractor’s argument stating “[n]or does [the contractor] explain why the possibility that the government might respond to its claim with fraud based defenses or causes of action would block it from submitting a claim.  The mere fact that such a response from the government might be undesirable to [the contractor] is irrelevant.”  Thus, the contractor’s claim was held to be outside the statute of limitations and the appeal was considered time-barred. Continue Reading Threat of Contractor Death Penalty Does Not Toll the CDA Statute of Limitations

The Granston memorandum released in early 2018 caused a stir amongst False Claims Act qui tam relators and defendants alike. The practical effects of the Granston memo, however, are not yet fully apparent. Defendants in FCA suits should nonetheless take note that following the release of the Granston memo, the Department of Justice has doubled-down on the importance of its dismissal power.

Leveraging the Government’s Position

One issue the Granston memo raises is whether defendants can leverage the government’s dismissal power in qui tam suits pursuant to seek dismissal pursuant to 31 U.S.C. § 3730(c)(2)(A). Two months after the Granston memo’s release there is some indication that it may have a positive effect on dismissals. Deputy Associate Attorney General Stephen Cox delivered confirming remarks at the Federal Bar Associations Qui Tam Conference on February 28, 2018:

Continue Reading Borrowing a Page from the USAO’s Playbook—Get Your FCA Suit Dismissed

Howard Roth authored an article on Buy America and Buy American for the Seattle Daily Journal of Commerce.

Below, learn about the differences between the two acts and why they matter to contractors.

In this first year of Donald Trump’s administration, American sourcing requirements are receiving heightened focus that impacts business by providing opportunities and threats.

For instance, President Trump’s “Buy American HireAmerican” executive order restates the policy of the government to buy American. Federal agencies are required to make an assessment of what the executive order calls the “Buy American Laws” aimed at maximum use of United States materials. The executive order is now on the road to changing the landscape of preferences for American products by the end of the year. Continue Reading Buy America and Buy American: What’s the difference and why it matters

Escobar was initially feared as authorizing another avenue for plaintiffs bringing False Claims Act (FCA) claims. Some federal district courts, however, have used the two-step test of Escobar as a stringent requirement for an implied certification theory for proceeding against a contractor. Other courts, however, have charted a different pathfinding that the two-test step is not a requirement, but rather one means of establishing an implied certification theory based claim.  This is an important development for companies to understand in the face of FCA litigation.

The U.S. Supreme Court held in Escobar that a claim under the implied certification theory, which we wrote about previously, required that: (1) the claim make specific representations about the goods or services and (2) the failure to disclose those representations make the claim misleading. The issue arising in recent cases is whether Escobar created an exclusive two-step test that applies to any false certification theory.

Some recent cases illustrate diverging views on the application of the two-part test:

Continue Reading Escobar: Two-Stepping Away from False Claims Act Liability?

With every new administration, there is both great uncertainty and opportunity in federal government contracting. To help you navigate the rough seas of doing business with the federal government in this new administration, we have assembled nationally recognized practitioners who will cover topics relevant to government contractors large and small, novice and seasoned. Session topics include:
– Ten Things Every Contractor Needs to Know When Doing Business with the Federal Government
James F. Nagle | Oles Morrison Rinker & Baker LLP | Seattle, WA
 
– Writing a Winning Technical Proposal – From the Contracting Officer’s Perspective
Mona Carlson, Mary Jo Juarez | PTAC Kitsap Economic Dvlpmnt. Alliance – Navy Contracting Officer (retired) | Kitsap, WA
 
– Keys to Winning Bid Protests and Defending Contract Awards
Adam K. Lasky | Oles Morrison Rinker & Baker LLP | Seattle, WA
 
– Navigating the Complex Rules Governing Data Rights
Jonathan M. Baker | Crowell & Moring LLP | Washington D.C.
 
– Overlooked Risks of Being a Lower-Tier Government Contractor
Alan C. Rither | Pacific Northwest National Laboratory | Richland, WA
 
– Mistakes to Avoid in the Claims and Litigation Process
Donald G. Featherstun | Seyfarth Shaw LLP | San Francisco, CA
 
– Adapting to Buy American and Domestic Preference Rules in the Trump Administration
Howard W. Roth | Oles Morrison Rinker & Baker LLP | Seattle, WA
 
– Understanding & Managing the Risk of Suspension & Debarment
Dominique L. Casimir | Arnold & Porter Kaye Scholler LLP | Washington D.C.

Thursday, November 16th 

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Register for seminar or webinar at www.washingtonptac.org/seminar

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14567606128_ee826cf9bd_kFollowing Executive Order 13788 issued April 18, 2017, “Buy American and Hire American,” contractors and subcontractors should prepare for increased enforcement of the Buy American Act (BAA), Buy America legislation, the “Little Buy American Acts,” and related civil or criminal prosecution under the False Claims Acts (FCA).

In recent years, the Department of Justice has increased efforts to prosecute FCA violations in concert with BAA or Buy American violations. In 2016 alone the Department of Justice obtained more than $4.7 billion in settlements and judgments from civil cases under the FCA, its third highest recovery.

Every contractor or subcontractor on a federally funded project supplying construction materials must certify that the materials used are in compliance with the BAA.  Construction work for the DOT, DoD, and other federal agencies may trigger compliance requirements under both with the BAA and Little Buy American Acts. Certificates of compliance, however, can be fruitful grounds for federal prosecutors looking for FCA violations

When a certificate of compliance does not accurately reflect the origin of the materials used under the BAA or Little Buy American Acts, there is a high likelihood that FCA liability may follow. Executive Order 13788 is likely to bring additional attention to the dual enforcement of buying American under the FCA.

A few recent cases illustrate the FCA risks arising from BAA and related laws that require compliance certifications:

  • In 2016, Wisconsin-based architectural firm Novum Structures LLC entered a guilty plea and agreed to pay $3 million to resolve its criminal and civil liability under the False Claims Act 18 U.S.C. § 1001 arising from its concealment of the use of foreign materials on construction projects involving federal funds. Novum has also agreed not to contest its debarment from federal funded projects.

Continue Reading Uptick in Buy American Enforcement Means Increased False Claims Act Risks

A federal judge in the Western District of Washington has ruled that tribal employees may still be liable in their individual capacities under the False Claims Act, even if Native American tribes themselves are protected from such suits by sovereign immunity. This interpretation could have important implications for Alaska Native-owned and Native American-owned businesses as federal courts across the country confront a range of tribal sovereignty issues in the coming months. Continue Reading Tribal Employees Potentially Liable Under False Claims Act, Washington Federal Court Finds