FCA in the Courts: Late-2022 Developments

Significant False Claims Act (FCA) developments in the courts during the latter part of 2022 have included the Supreme Court’s declining to take up one issue involving FCA qui tam actions (what level of pleading particularity Rule 9(b) requires) while holding argument on another (the scope of the government’s dismissal power following declination), and the D.C. Circuit’s adoption of the pro tanto rule in computing settlement offsets in multiple-defendant cases.

The  False Claims Act (FCA) continues to keep the courts busy with issues of interpretation and consistency. Developments of note in the later months of 2022 include opposite outcomes regarding certiorari, with the Supreme Court denying cert in United States ex rel. Prose v. Molina Healthcare of Illinois, Inc.[1] and two other cases[2] involving the circuit split over what degree of pleading particularity Rule 9(b) imposes on FCA plaintiffs; a grant of cert in Polansky v. Executive Health Resources, Inc.,[3] concerning the scope of DOJ’s dismissal power over non-intervened qui tams; and a notable opinion out of the D.C. Circuit in United States v. Honeywell International, Inc.[4] establishing, as a federal common law rule, the pro tanto principle in determining settlement credit in FCA actions.

Rule 9(b) pleading standard in FCA cases

Despite considerable expectation that the Supreme Court would finally take up the controversy over Rule 9(b)’s application in the FCA context, the Court denied cert in Johnson v. Bethany Hospice,[5] United States ex rel. Owsley v. Fazzi Associates, Inc.,[6] and Molina Healthcare.[7] This came after the Court had asked the Solicitor General to brief two of the cases, and marked at least the third time in a little over a decade that the Court had elected to pass on the issue.[8]

Because they allege fraud, FCA complaints must satisfy Rule 12(b)(6) and Rule 9(b)’s heightened “particularity” standard,[9] designed to “protect defendants from baseless accusations of fraud.”[10] How much particularity 9(b) demands of FCA plaintiffs, though, is unclear, and courts have been divided in applying the rule. The issue is particularly relevant to qui tams, given whistleblowers’ strong financial incentives to bring such actions, coupled with their often limited access to documentation of alleged fraud.

The major dividing line concerns presentment: some circuits require an FCA plaintiff to plead particulars of at least one “representative claim . . . actually submitted to the government for payment,”[11] while authors allow pleading of details of the alleged fraudulent scheme “paired with reliable indicia” supporting “a strong inference that claims were actually submitted.”[12]

Given the differing Rule 9(b) based requirements relators face in different circuits, the existence of a full-blown split seems undeniable. Courts on both sides of the divide have recognized the disparities,[13] despite the application of exceptions in some cases.[14] Yet the Solicitor General contended the courts of appeals “have largely converged on a . . . flexible standard” allowing relators “either to identify specific false claims or to plead other sufficiently reliable indicia supporting a strong inference that false claims were submitted to the government.”[15] This argument, collapsing the two opposing stances on 9(b) into a purported consensus, has drawn scathing comment from relator and defense sides alike.[16]

On October 17 the Supreme Court denied cert in all three cases.  As per custom, the Court gave no reasoning for its decision. Possibly the Court was persuaded by the government’s contention regarding convergence. Even if it was not, the existence of a circuit split— while an important factor considered by the Court[17]—is no guarantee cert will be granted.

Where does this leave FCA defendants? The words of Molina Healthcare seem fair: “Under [the] mature and widely acknowledged split” (still left unresolved by the Court), “the viability of a frequently invoked federal cause of action depends largely on the circuit in which it is brought.”[18] To the extent this is true, or even perceived to be true by relators, relator gamesmanship regarding venue will continue to be fostered. Defendants need to be attentive to the considerable differences between circuits regarding 9(b) and the FCA, and utilize the rule’s gatekeeping function to the maximum extent possible. Even in those circuits applying a more relaxed 9(b) standard, defendants must be prepared to aggressively challenge the “reliab[ility]” of the “indicia” that false claims were actually submitted.

High Court Takes Up DOJ’s Dismissal Power

In contrast, the Supreme Court granted cert—and, earlier this month, heard oral argument—to address another issue where the circuits are not aligned: the extent of the government’s dismissal power over qui tam actions where it initially declined intervention. The case is United States ex rel. Polansky v. Executive Health Resources, Inc., a qui tam alleging Medicare billing fraud brought in the Eastern District of Pennsylvania, whose dismissal of the complaint was affirmed by the Third Circuit.[19]

The FCA authorizes private individuals (“relators”) to bring lawsuits on the government’s behalf to recover moneys fraudulently claimed or withheld from the government.[20]  This statutory grant overcomes the lack of standing that would otherwise doom the ability of such individuals—who have suffered no injury from the alleged fraud against the government—to bring the lawsuits.[21]

Qui tam(relator-brought) actions are filed under seal and kept there for 60 days (renewable on motion and with the court’s leave), while the government “diligently [] investigate[s]”[22] the relator’s allegations, leading to a decision whether or not to intervene and take over prosecution of the action.[23] Even where the government declines intervention, however, it always remains the “real party in interest” in an FCA case.[24]

The government has the power to dismiss qui tams—even over a relator’s objections—provided it notifies the relator of the motion to dismiss, and the court gives the relator “an opportunity for a hearing on the motion.” See§ 3730(c)(2)(A). Although the statute provides no yardstick for adjudicating government dismissal motions, courts have interpreted the dismissal power broadly; indeed, until a pair of recent cases,[25] no district court had ever denied a government motion to dismiss an FCA qui tam.

However, the upsurge in such dismissal motions in recent years[26] has been met with varied scrutiny by the courts and opened up a circuit split on the issue.[27] Most deferentially to the government, the D.C. Circuit held in Swift v. United States that the government has “an unfettered right to dismiss” qui tam actions.[28] At the opposite extreme, the Ninth Circuit in United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp. required that, “to dismiss a meritorious qui tam action over a relator’s objections,” the government “offer[] reasons for dismissal that are rationally related to a legitimate government interest.”[29]

In briefing and at oral argument, the relator took an extreme position not previously adopted by any court, arguing that, where the government declines intervention, “the FCA vests the relator with ‘the right to conduct the action’”[30]—and to do so “exclusive[ly].”[31] After declination, the relator noted, the government can change its mind and intervene later only by “establishing ‘good cause’ and ‘without limiting the [relator’s] status and rights.”[32] Allowing the government “to unilaterally dismiss the relator’s action after the fact,” he argued, runs afoul of the statute because such an outcome “undoubtedly ‘limits’ the relator’s ‘status and rights.’”[33] The relator further argued it was irrational to interpret Congress as having intended to subject the government’s proposed settlements in FCA cases to a hearing and court determination of fairness, adequacy, and reasonableness,[34] but yet “permitt[ing] an outright dismissal for no reason at all.”[35]

The government, in contrast, made the straight textual argument that “nothing in [§] 3730(c)(2)(A)” makes the government’s dismissal power “contingent on an initial decision to intervene . . . during the seal period.”[36] Instead, the statute sets just two conditions for dismissal: (i) the government must notify the relator of the motion to dismiss, and (ii) the court must give the relator “an opportunity for a hearing on the motion.”[37] Because certain FCA provisions expressly require a particular showing (such as “good cause shown” by the government for the court to extend the seal period),[38] the government argued, the absence of any such standard in the dismissal provision[39] demonstrates that the dismissal power is not statutorily restricted.[40] Rather, the only limit on government dismissal of qui tams is a constitutional one.[41]

In a rare convergence of views, the FCA defendant supported the government’s position, arguing that no circuit court authority supports deeming the government’s initial declination in a qui tam as “irrevocably waiv[ing]” the government’s dismissal authority.[42] To interpret the FCA in this way “would raise serious doubts about the statute’s constitutionality” because it would “seriously risk depriving the Executive [] of the ability to ensure faithful execution of the laws.”[43] 

At oral argument before the Supreme Court on December 6, a remarkable cross-section of justices subjected relator’s counsel to rigorous questioning. Several justices raised Article II concerns, including Justice Kavanaugh who questioned relator’s counsel on how “requiring the government to prove to a court that it has some basis for dismissing the government’s own case” can be squared with the Article II foundation, on which “[t]he government controls the litigation.”[44] Justice Jackson, who conducted considerable questioning, voiced the worry—seconded by Justice Barrett—that relator’s position would limit the government’s ability to change its mind and move to intervene based on changed circumstances.[45]

How the outcome can affect FCA defendants: If the Supreme Court resolves the circuit split in the direction of Swift or CIMZNHCA, the government’s discretion to dismiss non-intervened qui tams will be bolstered—a welcome development for many FCA defendants. A decision more along Ninth Circuit lines would constrain the government’s dismissal power. In either case, at a minimum the current uncertainty will likely be reduced or eliminated.

Pro Tanto Rule Adopted for FCA Settlement Offsets

In United States v. Honeywell International, Inc.,[46] an interlocutory appeal, the D.C. Circuit resolved a question of first impression with potentially far-reaching implications: how a prior settlement with fewer than all of the defendants in an FCA case should affect the liability of a non-settling defendant. In deciding the appeal, the panel established a federal common law rule that, in determining such offsets, a court must credit the full amount of any settlements reached by the government with other defendants for common damages—the pro tanto[47] approach. In so doing, the court rejected the proportionate share approach adopted by the district court[48] and urged by the government.

In Honeywell, the government brought an FCA action against several defendants for providing allegedly defective ballistics-resistant material (purchased from third parties) to a manufacturer, which used the material in bullet-proof vests subsequently sold to the government, and to state and local law enforcement agencies that purchased the vests using Government funds.[49]

The government claimed some $11.5 million in damages—the full amount it paid for the vests[50]; under the FCA’s trebling provision,[51] alleged total damages came to around $35 million.[52] Subsequently, while the suit was ongoing, the government settled with the manufacturer and with third-party suppliers for a total of $36 million.[53]

The remaining defendant then moved for summary judgment on damages,[54] seeking a reduction pro tanto, i.e., by the full amount of the settlements.[55] Because the settlements exceeded defendant’s total liability, under this approach, the last remaining defendant would pay no damages.[56] The government urged the district court to use the proportionate share method; under that approach, defendant’s credit “would be limited by the other parties’ proportion of fault, meaning [defendant] would still be responsible for its proportionate share” of the total common damages.[57] Relying on the Supreme Court’s holding in the admiralty case of McDermott, Inc. v. AmClyde, the district court found the proportionate share approach more equitable and applied it.[58]

The appellate panel reversed, finding the pro tanto rule a better fit with the statute and relevant precedent. The court stressed that the FCA “has been consistently interpreted to impose joint and several liability without a right to contribution,” meaning courts do not determine the equitable assignment of damages.[59] Using the proportionate share rule for offsets, the court reasoned, would yield two anomalies. First, where all parties litigate, liability would be joint and several; but in cases of partial settlement, the court would have to apportion relative culpability among defendants.[60] Second, under the rule the government could potentially recover more than its total damages,[61] contravening the equitable “one satisfaction” principle.[62] The policy underlying this rule is to prevent “windfalls”[63] unjustly enriching plaintiffs.[64]

The Honeywell court acknowledged that, because settlements had already made the government whole, the remaining defendant would pay no damages—arguably a different sort of windfall.[65] However, the court noted that, “consistent with the FCA, the pro tanto rule leaves the government in the driver’s seat to pursue and punish false claims according to its priorities,” including pursuing settlement or seeking damages against each defendant “in line with its assessment of relative fault.”[66] The court also pointed out that, where parties settled for less than their share of liability, under pro tanto a “non-settling defendant will be liable for more than its proportionate share of the harm.”[67] The court also stressed that the rule does not reach the FCA’s civil penalties.[68]

Implications for defendants: Honeywell is significant as the first fashioning of a federal common law rule for FCA settlement offsets. Whether other circuits will follow suit bears watching. In the meantime, defendants in multi-defendant cases in other jurisdictions will need to be cognizant of the D.C. Circuit’s landmark holding. While the particular facts of the case favored the non-settling defendant, a careful reading of Honeywell underscores that the pro tanto rule will not always lead to a similar outcome.