True Facts About False Claims: MoFo's FCA Newsletter

Designed for busy in-house counsel and compliance professionals, this newsletter seeks to bring you up to speed on key federal and state False Claims Act (FCA) developments, with links to primary resources. Each quarter, we will provide key takeaways and discuss some of the most significant false claims topics.

In this fourth newsletter of 2024, we answer five questions: what should you know about a recent decision ruling the FCA’s qui tam provisions unconstitutional, what will the Supreme Court hear during oral arguments in a couple of weeks about “claims” under the FCA, what should defense contractors know about a recent decision on security clearances and their connection to retaliation claims, what should you know about the Department of Justice’s (DOJ) most recent cyber-fraud actions, and what should you know about a recent decision applying the new SuperValu scienter standard? The answers to this quarter’s questions and a discussion of a state settlement are here in our October 2024 FCA Update.

Federal

District Court Finds FCA’s Qui Tam Provisions Unconstitutional. On September 30, 2024, Judge Kathryn Mizelle of the U.S. District Court of the Middle District of Florida, held in Zafirov ex rel. United States v. Florida Medical Associates, LLC, that the FCA’s qui tam procedures violate Article II’s Appointments Clause by permitting “unaccountable, unsworn, private actors to exercise core executive power with substantial consequences to members of the public.”  As we discussed in a prior newsletter and client alert, Justice Thomas’s dissent in United States ex rel. Polansky v. Executive Health Resources, Inc., 599 U.S. 419 (2023) (“Polansky”), resurrected an old debate about whether the FCA’s qui tam procedures violate Article II of the Constitution. In her opinion, Judge Mizelle found that the FCA’s qui tam procedures improperly give a private party—the relator—authority to control litigation on behalf of the United States, a responsibility that the Constitution exclusively vests in the Executive Branch. Indeed, the statue does give relators unfettered discretion to decide whom to investigate, whom to charge in the complaint, which claims to pursue, and which legal theories to employ—until DOJ intervenes, if it ever does. Furthermore, a relator decides whether to appeal and which arguments to preserve, thereby shaping the broader legal landscape for the federal government.  Although Judge Mizelle’s decision is likely to be appealed and is not binding on other courts, it is a welcome development for FCA defendants and defense attorneys. At a minimum, this decision will lead to further litigation regarding the constitutionality of qui tam actions.  While some circuit courts, like the Ninth, have already addressed this argument, there are a number that have not resolved FCA Article II challenges, including the First, Second, Third, Fourth, Seventh, Eleventh, and D.C. Circuits. FCA defendants in these jurisdictions should strongly consider raising a constitutionality defense, citing the Polansky and Zafirov rulings, if DOJ declines to intervene and the qui tam relator continues to pursue the FCA suit.

Supreme Court to Hear Whether Reimbursement Requests are “Claims” under the FCA. On November 4, 2024, the U.S. Supreme Court will hear oral argument in Wisconsin Bell, Inc. v. United States, ex rel. Heath on the question of whether reimbursement requests submitted under the Federal Communications Commission’s (FCC) Schools and Libraries Universal Support program (known as the “E-rate Program”) are claims under the FCA. The E-rate Program was designed to provide discounted telecommunications services to eligible schools and libraries.  The Program is administered by a private, nonprofit corporation and funded entirely by statutorily required contributions from private telecommunications carriers. The E-rate Program is not small; it distributes up to $4.5 billion each year. Wisconsin Bell provides telecommunications services to schools and libraries as part of the E-rate Program, but the relator alleges that Wisconsin Bell charges impermissibly high prices for those services, thereby rendering each reimbursement request a false claim. Wisconsin Bell moved to dismiss on the grounds that the alleged submissions were not actionable “claims” under the FCA because they didn’t involve government funds or requests to government agents.  In the lower courts, the Seventh Circuit held that a jury should decide whether “government funds were involved in the payments.” Notably, the Fifth Circuit has held that false statements in the E-rate Program are not actionable under the FCA because the Program does not receive federal funds and because the relationship between the private, nonprofit corporation administering the Program and the federal government was too tenuous to render the nonprofit a government entity. We will monitor this case to see whether the Supreme Court thinks Wisconsin Bell was making “claims” under the FCA, which will likely have broader impact on comparable quasi-government programs.

Supreme Court Denies Review of Security Clearance Decision in FCA Retaliation Case. On October 7, 2024, the U.S. Supreme Court denied a petition for certiorari in United States ex rel. Johnson v. Raytheon Co., filed by a former Raytheon employee in connection with an FCA retaliation claim he filed when his security clearance was revoked and he was terminated. In 1988, the Supreme Court held in Department of Navy v. Egan that Executive Branch security clearance decisions are protected from review by courts. The district court in Johnson applied the holding in Egan and dismissed the relator’s retaliation claim. The Fifth Circuit affirmed, holding that courts are precluded from examining the government’s decision to revoke the security clearance. Interestingly, a dissenting Fifth Circuit judge wrote separately that he would not have extended the Egan decision to adverse actions taken by government contractors like Raytheon. In his petition for cert., Johnson argued that the Fifth Circuit’s holding was at odds with other circuit courts. The Supreme Court declined to take the case.

DOJ Announces Civil Cyber-Fraud Actions. On August 22, 2024, DOJ intervened in an FCA action against the Georgia Institute of Technology (“Georgia Tech”) and Georgia Tech Research Corp. (GTRC) asserting claims that those defendants knowingly failed to meet cybersecurity requirements in connection with Department of Defense (DoD) contracts. The complaint alleges that Georgia Tech’s Astrolavos Lab failed to develop a required system security plan and failed to use antivirus tools, and that the university submitted a false assessment of its cybersecurity compliance to DoD. The university has filed a motion to dismiss the case asserting that the DoD cybersecurity rules only apply to systems that handle sensitive “covered defense information,” and not to fundamental research into cybersecurity issues. We will continue to monitor this matter.

On October 23, 2024, DOJ announced a $1.25 million settlement with Pennsylvania State University (“Penn State”) for alleged failure to comply with cybersecurity requirements for defense and NASA contracts.  According to the settlement agreement, Penn State allegedly failed to meet the DoD’s cybersecurity requirements for contractor information systems and for the use of external cloud service providers, as well as NASA’s requirements to secure “unclassified information technology resources.” These agencies require compliance with cybersecurity requirements set forth in the National Institute of Standards and Technology’s Special Publication 800-171.

These matters are part of DOJ’s Civil Cyber-Fraud initiative and confirm that the Department remains focused on cyber-fraud and the failure of government contractors to adequately safeguard PII. MoFo regularly assists clients in evaluating their compliance obligations and establishing compliant data security and cybersecurity programs, policies, and practices, as well as developing comprehensive incident response protocols that include necessary government notifications and disclosures.

Maryland Federal Court Dismisses $680 million FCA Action Under New SuperValu Scienter Standard. Last year, the Supreme Court issued a decision in United States ex rel. Schutte v. SuperValu, Inc., clarifying when a defendant “knowingly” submits a false claim for payment under the FCA. Under the FCA, petitioners may establish scienter by showing “actual knowledge,” “deliberate ignorance,” or “reckless disregard” of the truth.  The Supreme Court held that a defendant that submits a false claim does so knowingly when it subjectively believes the claim is false at the time of submission. On July 23, 2024, a Maryland district court dismissed an FCA complaint accusing Allergen of overcharging Medicaid by more than $680 million by failing to aggregate all available discounts in the “best price” it offered the Medicaid program for its drugs. The court held that the Medicaid Drug Rebate Statute and the CMS guidance were ambiguous regarding the calculation of “best price,” and that the relator failed to show the defendant had the requisite scienter: that it subjectively believed the claims were false at the time of submission. The court stated that even under the SuperValu subjective standard for scienter, the relator failed to show that Allergen knowingly overcharged Medicaid.

State

California AG’s Office Settles with Healthcare Clinics over Failures to Return Overpayments to Patients. On September 24, 2024, the California Attorney General’s Office announced a $7.7 million settlement with U.S. Healthworks, a nationwide chain of occupational and urgent care clinics. The clinics are alleged to have knowingly kept millions of dollars in unclaimed property from the state of California, in violation of the Unclaimed Property Law and the California False Claims Act. The unclaimed property in question included patient balances due to overpayment. At times, occupational and urgent care clinics carry patient balances due to overpayment, which typically happens when an insurance payment is more than was anticipated after patients pay out-of-pocket costs. While the urgent care provider is obliged to issue a refund in these situations, sometimes refund checks mailed to patients are returned or are never cashed.

Morrison Foerster

Morrison Foerster has a multidisciplinary team focused on False Claims Act (FCA) matters, which includes former high-ranking U.S. Department of Justice officials, federal and state prosecutors, senior government regulators, and White House and FBI counsel, and government contracts specialists, privacy experts, and veteran defense lawyers, among others.  We focus on counseling clients through all phases of matters related to the FCA, including proactive compliance counseling, due diligence, internal investigations, government investigations, and litigation.  The breadth of our experience allows us to understand how law enforcement agencies choose which FCA cases to pursue, anticipate prosecutors’ and regulators’ next steps, plan and execute efficient and thorough investigations, and quickly pinpoint key issues identifying the best path forward from the outset.