Author Archives: Brandon Mark

Supreme Court Hears Arguments in Major False Claims Act Case

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As we previewed a few months ago, the United States Supreme Court will hear arguments in Universal Health Services v United States ex rel. Escobar today, which has the potential to significantly change the scope of potential liability under the federal False Claims Act. As one Department of Justice lawyer in the civil fraud division joked recently, if the outcome is not favorable, he might be looking for a new job in the near future.

Humor aside, Escobar could significantly reshape the legal landscape for the False Claims Act. At issue are two questions that the courts of appeals have wrestled with in recent years: (1) does the Act impose liability for fraudulent nondisclosure, so-called “implied certification” claims, and (2) if so, what are the contours of that legal doctrine.

These are not merely technical questions. If the False Claims Act does not recognize liability for what amounts to fraudulent nondisclosure, then government contractors and others who receive government money can avoid liability for fraud, even if their actions do not comply with the law, so long as they don’t actually say they are complying. Merely by remaining silent, contractors can avoid liability under the Act if the implied certification claims are not recognized by the Act.

The famous SCOTUSblog already has a good preview of the oral arguments slated for today, so rather than rehash what is anticipated during today’s oral arguments, we wanted to share a summary of the arguments of the federal government in its amicus brief.

Not surprisingly, the federal government took the position that the False Claims Act did indeed recognize liability for implied false certifications. As the federal government argued in its amicus brief, “[a] request may … be ‘false or fraudulent’ if the claimant knows that legal or contractual requirements have not been met but seeks payment from the government without disclosing that fact.”

In particular, the federal government argued that the contrast between Sections 3729(a)(1)(A) and 3729(a)(1)(B) demonstrated that Congress intended for fraudulent nondisclosures to be actionable under the False Claims Act. Unlike subsection (B), Section 3729(a)(1)(A) does not require a false record or statement, but merely requires that the claim itself be false. The government’s argument is that a claim premised on compliance with certain legal restrictions is false if the party receiving the money is not in compliance, even if the party doesn’t actually say it is in compliance when it requests the money.

As the Solicitor General explained in the government’s amicus brief, the Supreme Court has often looked to common-law principles when construing the False Claims Act. The government explained in its brief, “[a] variety of common-law concepts reflect the understanding that a statement may be ‘false or fraudulent’ if it omits information necessary to keep it from being misleading, even if the statement itself contains no express untruths.”

The government continued, “[j]udicial references to the ‘implied certification’ theory of FCA liability are best understood as shorthand for the established principle that a communication can be materially misleading, and can give rise to liability for fraudulent misrepresentation if the requisite scienter is established, even though it contains no explicit false statement.”

According to the Justice Department, “[e]very claim for payment constitutes the claimant’s affirmative representation that it is entitled to be paid.” Accordingly, “[t]hose affirmative representations trigger the corollary principle that, ‘if the defendant does speak, he must disclose enough to prevent his words from being misleading.’”

On the second question of whether such implied certification liability should be limited to only those circumstances where compliance with a certain legal requirement is a “condition of payment” as opposed to merely a “condition of participation,” the government urged the Court to extend the liability to all material misstatements.

The government explained that the restrictive interpretation urged by the Petitioner did not reflect the practical reality of the numerous government programs covered by the Act. As the government explained,

“Many government programs and contracts involve sequential steps. At the first step, by forming contracts with the government or establishing their eligibility to participate in federal programs, would-be recipients obtain initial access to a continuing stream of federal funds. Once initial eligibility to receive those funds has been established, contractors and program participants often submit periodic requests for payment, as goods are delivered or services performed, without being required to reaffirm their continued compliance with all relevant conditions. The recipient’s continued compliance with those conditions, however, still lies at the heart of ‘what [the government] bargained for.’”

In light of these realities, the government argued that “given the wide variety of governmental contracts, programs, and awards, FCA liability should not depend on whether the claim form itself reiterates all contractual and legal requirements,” but instead, “when a claimant requests full payment from the government, despite ‘knowing’ that it has violated ‘material’ requirements, that claimant has submitted a ‘false or fraudulent claim.’” (citation omitted).

As for the arguments that the government may have other regulatory tools at its disposal for addressing violations, the government explained that the False Claims Act is part of that toolkit and that it should be the government’s discretion to choose the remedy that best fits its needs under the circumstances. As the government explained, “[w]ithholding payment is one of many tools that the government uses when a claimant has failed to live up to its end of the deal” but the “government … must decide whether to impose a lesser sanction, to renegotiate the deal, or to demand a different form of performance; and its choice of a response other than non-payment does not imply that the breached condition was unimportant.”

Another Utah Renewable Energy Business Is A Complete Fraud Says DOJ

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A month ago, we reported on news that local Utah company Washake Renewable Energy had fraudulently obtained millions in government renewable energy grants to create energy that the company, in fact, never actually made.

This month brings news of yet another Utah company fraudulently profiting off of renewable energy claims that are completely bogus. This time, the feds have accused RaPower-3 LLC and International Automated System Inc. of selling renewable energy tax credits to customers. The companies told customers they could claim tax credits for a “revolutionary new” solar power technology located in Millard County. It turns out that the company’s “solar thermal lenses” were nothing but stretched plastic that, according to the Department of Justice, “do not and will not produce solar energy that could be collected and used for any purpose.” The DOJ says that the  ”so-called technology is a sham.”

Not surprisingly, the scam was perpetrated using multilevel marketing techniques. Buyers of the credits were promised huge tax credits for a small investment. Sounds too good to be true, right? Well, it was.

Although the federal government has disallowed the tax-credit claims, the IRS has already spent $4 million in legal fees challenging the claims. In other words, the rest of us get to pay for the privilege of cleaning up this mess.

As we lamented with the Washake Renewable Energy scandal, if just one honest person on the inside had blown the whistle earlier, the whole thing could’ve been stopped and the whistleblower may have been rewarded for fulfilling his or her civic duty.

The Intersection of the Eleventh Amendment and the False Claims Act–A Recurring and Difficult Issue

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One of the most common recurring issues in False Claims Act (FCA) cases is whether the Eleventh Amendment immunizes the defendant from suit. Given the amount of federal funds that flow to other levels of government–states, state agencies, counties, cities, and other quasi-governmental bodies, these entities are frequently the target of FCA cases. Since FCA liability depends first and foremost on the receipt of federal funds, the sectors that receive the most federal funds are those most likely to be the subject of such suits.

The Eleventh Amendment bars suits for monetary damages against states unless Congress has abrogated that immunity, and it is well established that Congress did not abrogate that immunity through the FCA. U.S. ex rel. Sikkenga v. Regence BlueCross, 472 F.3d 702, 718 (10th Cir. 2006). It is equally clear that the Eleventh Amendment does not immunize cities, counties, and other lower-levels of state government. Sturdevant v. Paulsen, 218 F.3d 1160, 1164 (10th Cir. 2000).

The tough question is the treatment of state agencies that fall somewhere in the middle. The Eleventh Amendment immunizes state agencies that “operate as alter egos or instrumentalities of the states”–so called “arms of the state.” Watson v. University of Utah Med. Ctr., 75 F.3d 569, 574 (10th Cir.1996). And this is where the analysis gets tricky and where categorical classifications breakdown. The question is one of federal law, but depends heavily on how the entity is treated under state law. Sturdevant, at 1164. What’s more, because “[t]he inquiry turns on an analysis of state law and financial arrangements…the answer may well differ from state to state and agency to agency and epoch to epoch.” Ute Indian Tribe of the Uintah and Ouray Reservation v. Utah, 790 F.3d 1000, 1012 (10th Cir. 2015). In other words, a certain type of entity may be an arm of the state in, say, Kansas, but not an arm of the state in Utah, even though the entities are functionally identical.

The United States Supreme Court has suggested a number of factors to decide whether a particular state entity is an arm of the state for Eleventh Amendment purposes. The Tenth Circuit has distilled these into four primary factors: (1) the character of the entity under state law, which requires a “survey of state law to ascertain whether the entity is identified as an agency of the state”; (2) the autonomy given to the entity under state law (i.e., how much control the state exercises over the entity); (3) the amount of state funding the entity receives, including whether the entity has the ability to issue bonds or levy taxes on its own behalf; and (4) whether the entity is primarily concerned with local or state affairs, examining the entity’s function, composition, and purpose. Steadfast Ins. Co. v. Agricultural Ins. Co., 507 F.3d 1250, 1253 (10th Cir. 2007).

A brief review of recent Tenth Circuit cases attempting to apply this analysis reveals a patchwork of coverage under the Eleventh Amendment. For example, state-run universities are generally covered under the Eleventh Amendment.  Watson v. University of Utah Med. Ctr., 75 F.3d 569, 574 (10th Cir.1996) (University of Utah); Brennan v. University of Kan., 451 F.2d 1287, 1290 (10th Cir. 1971) (University of Kansas); Seibert v. State of Okla., 867 F.2d 591, 594 (10th Cir.1989) (University of Oklahoma); Prebble v. Brodrick, 535 F.2d 605, 610 (10th Cir.1976) (University of Wyoming); Brennan v. University of Kan., 451 F.2d 1287, 1290 (10th Cir.1971) (University of Kansas and University of Kansas Press).

The Tenth Circuit has also found that hospitals and medical facilities operated by state-run universities are covered by the Eleventh Amendment by virtue of their close relationship to the universities. Watson (University of Utah Medical Center); Ellis v. University of Kansas Medical Center, 163 F.3d 1186, 1195 (10th Cir. 1998) (University of Kansas Medical Center). Because of the large amount of federal funds flowing to the health care field, medical centers are often targets of FCA cases.

But the Tenth Circuit has not extended Eleventh Amendment immunity to all entities related to universities and their medical centers. For example, in U.S. ex rel. Sikkenga v. Regence BlueCross, the Tenth Circuit reversed the district court’s conclusion that Associated Regional and University Pathologists (“ARUP”) was an arm of the state and immune from an FCA case, despite its close connection to the University of Utah Medical Center, which is an arm of the state.

Even though ARUP is a wholly-owned subsidiary of a company owned the University of Utah, the Tenth Circuit found that on balance, it was not itself an arm of the state. The court pointed out that the state of Utah is not liable for any judgments against ARUP, that ARUP is a separately constituted business entity, that ARUP’s business extends well beyond Utah, that ARUP is allowed to conduct business without substantial state interference, that ARUP can initiate lawsuits and enter into contracts, and that there is little overlap between ARUP’s business and the University Medical Center’s. The court also noted that while there is significant financial interdependence between the Medical Center and ARUP, ARUP is designed to be financially independent and a profit-center for the Medical Center.

While these factors pointed in different directions, the Tenth Circuit was ultimately persuaded that the purpose of the Eleventh Amendment was not advanced by extending protections to what was essentially a profit-seeking corporation that just so happened to be owned by an arm of the state. 

Recently, the District of Kansas applied the same Eleventh Amendment factors in an FCA case to determine whether the University of Kansas Center for Research was an arm of the state. Moore v. University of Kansas, No. 14-2420-SAC (D. Kan. Aug. 21, 2015)In that case, the court carefully analyzed state statutes characterizing the Center for Research and found that it was closely connected to the University of Kansas, which is an arm of the state.

The Court also analyzed the status of the Center as a non-profit corporation associated closely with the University, which carries out important research-related functions for the University. But the court found the Center receives no money from the state of Kansas through budget appropriations. Instead, the bulk of the Center’s funding comes from federal and state research grants given to other executive agencies, which the Center merely administers on their behalf. Additionally, the agreement between the Center and the University provides that the University is not liable for the Center’s debts. While the University remains liable for its own staff working for the Center, the Center also obtains insurance to cover its operations. Finally, the court found that the Center is concerned with state-wide issues, not local issues.

The court believed that these four factors generally weighed in favor of finding the Center to be an arm of the state. Nevertheless, the court concluded that the evidence on the factors was incomplete. It allowed the plaintiff additional discovery to flesh out the issues relevant to the Eleventh Amendment analysis and denied the defendant’s motion to dismiss. The decision highlights the fact-intensive nature of inquiry and complexity of the legal and factual issues that courts must undertake to arrive at the right conclusion. Despite undertaking a thorough analysis of what appeared to be lots of evidence, the court did not yet feel comfortable drawing firm legal conclusions.

In sum, the Eleventh Amendment immunizes some–but not all–state agencies from FCA liability. Whether any given agency will be protected depends on a complex set of factors and the careful development of evidence relating to these factors. Because of the fact-specific nature of the inquiry, agencies in different states that appear to be similar can be treated differently for Eleventh Amendment purposes. In the age of the whistleblower, courts will undoubtedly be asked to decide this difficult question in future cases.

Why Do Certain Companies Routinely Have Problems With Fraud?

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The Washington Post published a recent story about a new working paper from researchers at the Harvard Business School that contained this interesting fact:

At least one previous study has found that unethical workers actually have longer tenures at companies than ethical ones.

Why? Because they tend to be “more productive” by skirting the law. The article gives this example: A firm might be tempted to look away when a rogue trader who is making millions is found to be overstepping legal boundaries. Of course, that “productivity” is not only not real, it is short term. Once the illegality is discovered, that productivity not only vanishes but becomes a huge liability.

It is not hard to think of examples of companies that are particularly susceptible to this type of short-term profit focus at the expense of long-term goals, like avoiding liability. Companies in the financial-services industry, companies looking to inflate their profits for various reasons, and publicly traded companies come to my mind.

The root of the problem is the willingness to “look past” transgressions for short-term financial gain–you know, the “greed is good” mindset. Until that culture is upended in American business, we should expect more fraud, not less.