False Claims Act Fraud Liability (Without the Fraud)
The False Claims Act is not just for fraud anymore.
The 2009 amendments to the FCA drastically changed the way liability can be imposed under the reverse false claim provision of the Act. The expected increase in FCA cases and the expanded risk of treble damages and penalties places a heavy burden on any entity doing business with, or receiving funds from, the United States government to identify, quantify, and return overpayments.
In 2009, Congress enacted the Fraud Enforcement and Recovery Act (FERA) containing amendments to the FCA and vastly expanding its reach. Among other things, FERA expanded the so-called reverse false claim provision of the FCA. The reverse false claim provision imposes liability under the FCA where one acts improperly not to get money from the government, but to avoid an obligation to pay money to the government.
The 2009 amendments specified that an entity violates the FCA if it knowingly and improperly avoids or decreases an obligation to pay money to the United Statesincluding an obligation based on an established duty . . . arising from . . . the retention of any overpayment. Though the 2009 amendments do not define any new obligations to return overpayments, the knowing and improper retention of an overpayment now forms the basis of reverse false claim liability, subject to treble damages and penalties.
In 2010, Congress enacted the Patient Protection and Affordable Care Act (PPACA). The PPACA, also commonly referred to as Obamacare, clarified that for purposes of payments made under the Medicare and Medicaid programs, an overpayment must be reported and returned to the government within 60 days after the date on which the overpayment was identified, or the date any corresponding cost report is due, whichever is later.
While the word identified is not defined by the statute, and is likely to be the subject of considerable litigation in the future, the provision explicitly states that if the overpayment is retained beyond the 60-day period, it becomes an obligation sufficient for reverse false claim liability under the FCA, assuming that retention is knowing and improper. Adding further ambiguity to the amendments, the term improper is also left undefined. It is highly likely, however, that the government, whistleblowers, and perhaps even courts will interpret the improper retention of an overpayment as nothing more than knowing about an overpayment and failing to return it.
As a result of these recent amendments, the FCAs reverse false claim provision no longer requires evidence of a false statement or deceptive conduct on the part of the government contractor or recipient of federal funds. Under the prior versions of the FCA, in order for reverse false claim liability to attach, a defendant had to knowingly submit a false record or statement to the government, concealing its obligation to return funds. That requirement is gone.
No longer must a defendant submit a false record or statement to conceal an obligation to return funds. Instead, the government (or private whistleblower) need only demonstrate that the defendants failure to return funds was knowing and improper. Accordingly, the FCAs reverse false claim provision has been fundamentally altered to impose liability, treble damages and penalties in the absence of any fraud or false statement on the part of the entity receiving government funds.
It is important to note that the risk of overpayments is not limited to situations where the government issues a payment in error. Overpayments can result from circumstances that may be difficult to predict. Many government reimbursement policies and regulations are highly complex, ambiguous, and difficult to interpret. Differing and evolving interpretations of these regulatory schemes could lead to overpayment claims by the government or whistleblowers. In addition, the reduction in the scope of a government contract, or a change in a government grant or loan program, could also result in a claim that an entity receiving government funds has retained an overpayment.
Given the passage of time since these amendments were passedand the FCAs unique seal provisions that keep whistleblower complaints confidential while the government conducts its investigationit is likely that cases alleging violations of the amended reverse false claim provision will be filed and/or unsealed in the near future. As a result, entities receiving government funds face increased scrutiny from both the government and whistleblowers seeking a bounty for bringing potential FCA violations to the governments attention.
General counsel of entities doing business with the government should make sure that safeguards and compliance initiatives are in place to track and return overpayments to the appropriate payor source in a timely fashion. General counsel should also have a mechanism in place to document in real time that the entitys retention of overpayments while quantifying and processing them for refund does not reflect any intent to improperly retain the funds.
In addition, all entities receiving government funds pursuant to government contracts are now exposed to FCA liability if they are overpaid under their contracts and fail to return the overpayments. When negotiating contracts with the government, general counsel of government contractors should take affirmative steps to clearly and explicitly define in the contracts the circumstances in which an overpayment would (or would not) arise, and when and how refunds are to be made. Those terms can include:
- Specific provisions regarding changes to the contract and any refunds or repayment to be made as a result of such changes; and
- Provisions stating that the payment/receipt of the contract price (or payments made pursuant to the terms of the contract) shall not be deemed overpayments for FCA purposes in the absence of a written amendment changing the contract price or the payment terms of the contract.
In addition, as amended, FCA liability attaches to funds dispensed by the federal government through intermediaries, which includes funds distributed to and by states, state agencies, and other government contractors and subcontractors that hold and disburse funds derived from the United States.
Accordingly, any system of safeguards or compliance initiatives to identify and return overpayments used in connection with the receipt of government funds should be expanded to include funds received from these secondary sources of government funds. Specific contractual provisions, like those detailed above, should also be included in contracts with government intermediaries distributing or disbursing funds on the governments behalf, or to advance a government program or interest.
The expected increase in FCA cases presents significant challenges to recipients of government funds. It is essential for general counsel to take careful and deliberate action to analyze this enhanced risk, and to identify and return overpayments to prevent allegations that a payment of government funds received in good faith has been knowingly and improperly retained.
Joshua Buchman and Peter Schutzel, partners in the international law firm McDermott Will & Emery, focus their practices on False Claims Act litigation, compliance counseling, white-collar criminal defense, internal investigations, and complex commercial litigation, and can be reached at: JBuchman@mwe.com and PSchutzel@mwe.com.