FERA Adds Anti-Fraud Funding, Expands False Claims Act Exposure

Tuesday, June 30, 2009 - 00:00

The Fraud Enforcement and Recovery Act ("FERA"), signed into law on May 20, 2009, significantly expanded the federal government's power to investigate and prosecute fraud against the government. FERA appropriates $492 million over the next two years for financial fraud enforcement and amends various fraud-related sections of the United States Code. The new law also amends the False Claims Act ("FCA") in ways that expand exposure for a wide range of business transactions.

Before FERA, the FCA imposed liability for false statements made to the government or false statements that were made to induce the government to pay a false claim. Following FERA, the FCA purports to impose liability for false claims made to virtually any recipient of federal funds. Liability under the amended FCA may now attach regardless of whether the entity accused of fraud presented the false claim to the government or otherwise intended to induce payment by the government.

FERA also purports to expand liability for retaining money owed to the government. Under the old law, a person or entity was liable for retaining money owed to the government if that entity used a false statement for the purpose of concealing, avoiding, or decreasing an obligation to the government. After FERA, relators likely will argue that the FCA imposes liability on an entity that fails to repay the government even absent a false statement or other wrongful action.

Most courts already hold that false statements are actionable under the FCA only if they are "material" to the government's decision to pay a claim. FERA made materiality an explicit element for two of the FCA's seven liability subsections and resolved a split among the courts on precisely how such a materiality requirement should be applied. A number of courts had held that a false statement could be regarded as material only if the government would not have paid the claim if it knew of the inaccuracy. FERA rejected that standard. The FCA now defines "material" as anything "having a natural tendency to influence, or being capable of influencing, the payment or receipt of money or property." Under FERA, a falsity could thus be considered "material" even if it had no impact on the government's payment decision.

FERA makes three other significant amendments to the FCA. First, it expands protection for "whistleblowers" who lawfully attempt to stop a violation of the FCA. Second, it permits whistleblower plaintiffs to access information gained from government subpoenas. And lastly, it effectively expands the statute of limitations for FCA actions, specifying that government complaints "relate back" to earlier whistleblower complaints.

FERA Expands False Claims Act Liability To Indirect Recipients Of Federal Funds

Most FCA actions are brought by whistleblowers, known as qui tam relators, on behalf of the federal government. As an incentive for providing information the government might not have uncovered, the FCA entitles successful qui tam relators to between 15 and 30 percent of the damage award or settlement recovered on behalf of the government.

The FCA's liability provisions, 31 U.S.C. § 3729 (a)(1) through (a)(7), have been re-codified and now appear at 31 U.S.C. § 3729(a)(1)(A-G). Anyone found to have violated any of these provisions may be liable for up to $11,000 per false claim and three times the amount of damages sustained by the government as a result of such false claims. Historically, however, most relators assert a theory of liability under former subsections (a)(1) and (a)(2).

Under subsection (a)(1), anyone who "knowingly present[ed], or cause[d] to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval" violated subsection (a)(1). Courts interpreted this as requiring the "presentment" of a claim to the government. Even if an entity paid the claim using government funds, merely submitting a false claim to a recipient of federal funds did not violate subsection (a)(1). Instead, the defendant must have submitted or caused another to submit a false claim to the federal government .

Subsection (a)(2), in contrast, focused on the intended payment source. Anyone who used a false statement to get a false claim paid by the Government violated subsection (a)(2). Although subsection (a)(2) contained no presentment requirement, liability did not attach absent some finding that the defendant meant for the false statement to induce payment by the government . Mere payment by a federal grantee would not create liability.

Thus, under either subsection (a)(1) or (a)(2), FCA liability existed only for entities that directly or indirectly induced payment by the government . FERA's changes, however, have significantly revised subsection (a)(1) and (a)(2) as well as other aspects of the FCA that often directly limited liability. In practical terms, the FCA now imposes liability for a much broader category of false claims than before.

The changes to subsection (a)(1) and (a)(2), for example, now attach liability without regard to whether the government received a false claim or the defendant otherwise meant to induce payment by the government. Specifically, FERA eliminates the "presentment requirement" from subsection (a)(1). Now, anyone who does business with virtually any recipient of federal money could face potential FCA exposure, even if they never presented or caused the recipient of government funds to present an allegedly false claim to the government.

Additionally, FERA removes the language "to get a false or fraudulent claim paid or approved by the Government" from the former subsection (a)(2), directly abrogating the Supreme Court's decision in Allison Engine Co. v. United States ex rel. Sanders , 128 S.Ct. 2123, 2129-30 (2008). Relying on the exact language FERA deleted, a unanimous Court held that imposing liability without evidence of an intent to extract payment from the government "would expand the FCA well beyond its intended role of combating fraud against the Government ." Id . at 2128 (quotations omitted, emphasis in original). Apparently, however, Congress sees the FCA playing a much greater role. Relators may contend that the FCA, as amended, now provides a cause of action for false statements made to virtually any recipient of federal money regardless of whether the entity making the statement ever intended to induce payment by the government.

FERA Expands FCA Exposure For The Retention Of Government Overpayments

FERA makes two substantive changes to the "reverse false claims" provision, formerly subsection (a)(7) (now codified at § 3729(a)(1)(G)). These changes complicate a recipient's responsibility for ensuring the accuracy of government payments. FERA amends subsection (a)(7) to conform with the amended subsection (a)(2). Now, the FCA purports to impose liability for false records or statements even if the entity never intended its allegedly false records or statements to result in the retention of a government overpayment.

FERA also expands liability for reverse false claims by imposing liability for the retention of government overpayments even in the absence of a false record or statement. Liability under subsection (a)(7) had been dependent on the submission of a false statement. FERA eliminates that. Moreover, FERA specifies that the duty to repay the government need not have become fixed. That means a qui tam relator might argue that a Medicare provider who receives interim payments can incur FCA liability for the "knowing" retention of overpayments, even prior to reconciliation of the final amount owed. Because the FCA defines "knowingly" to include deliberate ignorance or reckless disregard, a plaintiff might sue under the FCA even if the provider was not aware that it had been overpaid.

FERA Adds A Broadly Defined Materiality Requirement To The FCA

FERA codifies a broadly defined "materiality" element into subsections (a)(2) and (a)(7) (now subsections (a)(1)(B) and (a)(1)(G)). In suits under subsections (a)(2) and (a)(7), FERA requires that the alleged false statements be "material to a false or fraudulent claim" and defines "material" as something "having a natural tendency to influence, or being capable of influencing, the payment or receipt of money or property." The new definition of "material" resolves a split among the courts by adopting the more liberal definition. Under this new definition, a falsity may be considered "material" even if it had no actual impact on the government's payment decision.

Other FCA Amendments IncludedIn FERA

FERA makes three other significant amendments to the FCA.

First, FERA expands the right of action for whistleblowers to government contractors or agents, in addition to employees, who make an effort to stop an FCA violation, regardless of whether the underlying efforts were made in furtherance of an FCA action.

Second, the new law expands the FCA's statute of limitations. FERA codifies an exception to the normal tolling doctrine that, for statute of limitations purposes, treats the government's later-filed allegations as if they were filed when the case was initiated. This makes it easier for the government to wait years before unsealing a complaint or even advising the defendant that it has been sued.

Third, FERA explicitly allows whistleblowers and their counsel to have access to documents and information produced to the government in response to a Civil Investigative Demand ("CID"). This access creates potential problems. Confidentiality issues will arise from non-government personnel accessing this information. Additionally, this access could enable relators to supplement speculative allegations with government information, perhaps allowing otherwise frivolous suits to survive dismissal.

Some Of FERA's Changes Apply Retroactively

Most of FERA's amendments apply to suits based on conduct occurring on or after May 20, 2009. FERA, however, purports to make its changes to subsection (a)(2) apply retroactively to cases pending on June 7, 2008, two days before the Supreme Court announced its decision in Allison Engine . The changes related to the new FCA-specific relation-back provisions also apply retroactively to all cases pending on May 20, 2009. These retroactive provisions threaten to resurrect previously determined lawsuits.

The Consequences Of FERA's Enactment

The amendments enacted, coupled with nearly half a billion dollars appropriated for enforcement, underscore the government's intent to pursue any perceived fraud against the government. This has implications for anyone who does business with the myriad entities now receiving federal funds. Companies that have not previously considered their exposure to liability from the government should take a hard look at their potential liablity. Under the new law, any person or entity that submits a claim to virtually any recipient of federal funds faces potential FCA lawsuits, as if the claim had been submitted directly to the government. Anyone who makes a false statement to a recipient of federal money could be liable to the government without regard to whether the false statement had any impact on the government fisc.

FERA will undoubtedly lead to increased litigation risk and attendant costs. When coupled with the government's investment in enforcement, it makes good business sense to review existing compliance programs as soon as possible. Nolan S. Young and Lee Perla , Associates in the Washington office of international law firm Jones Day, focus on complex litigation. Mr. Young has represented health care providers in civil and criminal investigations of alleged violations of the Medicare antikickback law, the Stark Law, and the False Claims Act. Mr. Perla is experienced in contract dispute, Federal Tort Claims Act, section 1983, intellectual property and class action matters.

Please email the authors at nyoung@jonesday.com or lperla@jonesday.com with questions about this article.