Overview
In this issue…
- Lawyers are reminded that their parts in a kickback scheme can end them in prison.
- FCA Amendments propose weakening the Escobar ruling from 2016.
- The meaning of Contracts is not as broad as an FCA Relator would like, meaning Defendant narrowly avoided the presumed loss rule.
- Treble Damages of $3 million plus are not excessive, and a non-profit must pay.
Lawyer Kickbacks are Still Illegal . . . in Case There Was Any Question
United States v. Bennett, No. 6:22-cr-00022 (E.D. Tex. July 17, 2023)
An attorney in Texas was recently convicted in the Eastern District of Texas for laundering money through shell corporations and trusts in connection with a medical referral kickback scheme.
Peter J. Bennett created several business entities to hide and move funds to further a kickback scheme. Between 2015 and 2017, Little River Healthcare, a hospital in Rockdale, Texas, hired recruiters to bring in patients whose medical tests could be billed to federal healthcare programs by providing kickbacks to doctors exchange for referrals. Two such recruiters, Robert O’Neal and Stephen Kash, hired Bennett to create sham trusts and shell corporations to create bank accounts to conceal the kickbacks. Kickbacks were paid through the companies and trusts Bennett created to disguise them as investment returns. Bennett also utilized his own Interest on Lawyers' Trust Account (IOLTA), his law firm operating account, and a personal bank account to launder his clients' kickback proceeds. The scheme included the exchange of false and fraudulent invoices to facilitate and conceal the money laundering.
Bennett, who is awaiting sentencing, faces up to 20 years in prison and up to $500,000 in fines. The government also seeks $7.2 million to represent "the amount of property in the offense alleged in the indictment, for which the defendant is personally liable."
The FCA Defendant’s Knowledge Isn’t the Only One that Matters
Senator Chuck Grassley, the primary author of the 1986 amendments to the False Claims Act, has introduced “False Claims Act Amendments of 2023.” The bipartisan bill seeks to limit what Grassley refers to as "loopholes" that followed the Supreme Court’s 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar.[1]
An FCA claim requires proof that the "falsity" included in the submission to the government for payment is material to the government's decision to pay a claim. In Escobar, the Supreme Court held that materiality must be judged holistically, and further stated that a significant factor is whether the government knows the truth that a claim is predicated, at least in part, on false information and chooses to pay anyway. The Court explained that such payment by the government is "strong evidence" that a given requirement is not material.[2]
Senator Grassley and the bipartisan authors of the new bill are concerned that the Escobar decision weakened what Grassley calls the "single greatest tool in the fight against fraud." Accordingly, the new bill would provide that "[i]n determining materiality, the decision of the Government to forego a refund or to pay a claim despite actual knowledge of fraud or falsity shall not be considered dispositive if other reasons exist for the decision of the Government with respect to such refund or payment."
These proposed amendments come two years after Senator Grassley’s last attempt to amend the FCA. The 2023 amendments appear to respond to criticism that the proposed 2021 amendments were too stringent, by including in the language for determining materiality "if other reasons exist for the decision of the Government with respect to such refund or payment."
Should the amendments pass, courts will have to grapple with what constitutes "other reasons" informing the Government's payment decision.
When a Contract Isn't a Contract, at Least for Presumed Loss
United States ex rel. Gogineni v. Fargo Pac. Inc., No. 17-cv-00096, 2023 WL 4685941 (D. Guam July 21, 2023).
A district court recently denied a relator’s motion for summary judgment on the applicability of the "presumed loss rule," an amendment to the Small Business Act that provides a presumption that the government suffers a loss equal to the entire value of the contract when it relies on a contractor's misrepresentation of its size or status to award a set-aside contract to an ineligible business. 15 U.S.C. § 632(w)(1). In invoking the presumed loss rule, the relator thus requested that the court find the value of goods or services rendered by the government are "neither deducted in determining damages nor can such evidence be used to rebut the presumption that the loss is the total amount the government expended on the contract." The district court held that the presumed loss rule was inapplicable to the small business set-aside contract at issue.
This was a qui tam action brought by the relator alleging that defendants, including Fargo Pacific Inc. (Fargo), a general contractor in the Territory of Guam, and its President and General Manager submitted false claims in connection with two set-aside roofing contracts Fargo was awarded as part of the US Small Business Administration’s (SBA) 8(a) Business Development Program. Fargo was certified by the SBA as an 8(a) small business in 2011 based on various eligibility criteria, including being at least 51% owned and controlled by a US citizen who is socially and economically disadvantaged. As far back as 2007 and during the relevant period, the relator alleged that Fargo had entered into secret teaming agreements with another roofing company, which the relator alleged were actually joint venture arrangements that would render Fargo ineligible for the 8(a) set-aside contracts it was awarded.
In September 2009, the US Navy awarded Fargo an Indefinite Delivery/Indefinite Quantity (IDIQ) set-aside contract, with a potential performance period of up to five years. The contract was set-aside for firms certified for participation in the 8(a) program. In its motion for partial summary judgment, the relator alleged that although Fargo had been certified under 8(a), it was not independently owned and operated because its President and General Manager and Fargo did not have ultimate managerial and supervisory control over the operations of the company, as required by the SBA's regulations, the contract was procured through false pretenses.
Thus, at the core of the relator's claims was that by submitting a proposal and entering into the 2009 IDIQ contract, Fargo misrepresented its 8(a) status. Relator therefore claimed that the presumed loss rule should apply to the measure of damages.
Defendants argued that the presumed loss rule does not apply because, based on its plain terms, the rule only applies to a misrepresentation of size by a company other than small business. Defendants asserted that Fargo was a certified small business and that therefore, the rule did not apply to Fargo. In response, the relator contended that although Fargo was 8(a) certified, it was not "independently owned and operated" as the statutory definition of a small business concern requires, and therefore the presumed loss rule was applicable. The district court ultimately concluded that there was a genuine issue of fact as to whether Fargo was indeed a small business concern that was "independently owned and operated," and therefore it could not conclude that the presumed loss was inapplicable (as Defendants asserted) at the summary judgment stage.
The court also rejected Fargo's arguments that the presumed loss rule could only apply to misrepresentations regarding the size of a business concern, noting that the statute encompasses misrepresentations of "status" as well as size. The court then concluded that the issue of whether Fargo misrepresented its 8(a) status when it sought and received an 8(a) set-aside contract was an issue for a jury to resolve.
The Court did hold, however, that the presumed loss rule did not apply to any of the task orders issued under the IDIQ Contract. Defendants argued that proposal submission and award of the 2009 contract at issue occurred before the enactment of the presumed loss rule and therefore, the presumed loss rule does not apply to the task orders issued against the 2009 contract after the enactment of the presumed loss rule. The Court held that "contract" under the presumed loss rule did not include task orders placed under long-term contracts, and similarly found that the legislation that gave rise to the 2010 amendment to the Small Business Act contained provisions for set-aside orders, indicating that Congress was fully capable of distinguishing contracts and orders. Accordingly, the Court sided with Fargo in concluding that the presumed loss rule does not apply to the task orders under the 2009 contract because the statute's reference to "contract" does not compass orders placed against existing contracts. The court denied relator's motion for partial summary judgment, concluding as a matter of law that the presumed loss rule did not apply to task orders awarded to Fargo under the 2009 contract, and that actual damages must be proven at trial.
Non-Profits Cannot Escape FCA Judgments
BNSF Railway Co. v. Ctr. Asbestos Related Disease, Inc., No. 19-cv-40-M-DLC, 2023 WL 4597649 (D. Mon. July 18, 2023).
Following a jury trial, the court issued its Order on damages against Defendant Center for Asbestos Related Disease, Inc. (CARD)—a non-profit department of St. John's Lutheran Hospital providing screening, diagnosis, treatment, and monitoring for those exposed to asbestos in Libby, Montana—finding it liable for $3,243,795 in damages and $2,582,228 in penalties, and awarded Relator BNSF Railway Co. (BNSF) 25% of the proceeds awarded, with attorneys' fees and costs to be addressed later.
BNSF brought a qui tam action alleging that CARD submitted false claims for payment, false records or statements material to a false claim, and false records or statements material to an obligation to pay or transmit money or property to the government through false claims on Environmental Health Hazards Medicare Coverage forms submitted to the Social Security Administration, bills submitted to Medicare, and grants and reports to the American Toxic Substances Disease Registry and Centers for Disease Control and Prevention. A jury found 337 violations of the FCA, 246 before November 2, 2015, and 91 after that date, awarding the US $1,081,265 in damages.
First, the court addressed the treble damages provision of the FCA. For violations prior to November 2, 2015, the court may assess a civil penalty between $5,500 and $11,000 per violation, and after November 2, 2015, penalties between $13,508 and $27,018 per violation. Additionally, the relator is entitled to 25-30% of the proceeds of the action. BNSF deferred to the court, but requested penalties closer to the maximum of $5,164,638, while CARD argued no additional fines or damages should be imposed. The court found the low end of the statutory range, $2,582,228, was sufficient to achieve the aims of the FCA, as that would deter future wrongdoing and reflected the seriousness of the offense. It further awarded BNSF, as the relator, 25% of the proceeds.
Regarding CARD's Eighth Amendment argument, the court considered: "(1) the severity of the offense and its relation to other criminal activity; (2) the maximum penalty faced; (3) the harm caused[;] and (4) whether the defendant falls within the class of persons targeted by the applicable law." The court also considered CARD's ability to pay, whether the fine was necessary for deterrence, and sanctions in other cases for comparable violations. The court found (1) criminality inapplicable; (2) the penalty presumptively constitutional given that it within the statutory range, the fine was at the low-end, and the Ninth Circuit had approved of treble damages higher than this in prior cases; (3) that false claims to Medicare affect its administration, noting that damages were potentially far greater, but difficult to calculate, and that the actions were performed with requisite intent, so there was no good faith; and (4) that CARD is in the class of defendants targeted by the FCA. The court concluded its analysis noting that deterrence was highly important and, although CARD was a non-profit, it was able to pay. The court then set penalties totaling $3,243,795.
[1] 579 U.S. 176 (2016).
[2]Id. at 195.
