Recent Trio of Eighth Amendment Challenges to FCA Judgments Includes Two Successes; Lack of Uniformity Across Courts Remains
September 19, 2024 – Articles
So far this year, three False Claims Act defendants have challenged judgments against them based on the Excessive Fines Clause of the Eighth Amendment. Remarkably, two were successful, as the District of Minnesota more than halved a large award, and the Eighth Circuit vacated and remanded a much smaller award in which the penalties substantially outpaced the actual damages. In contrast, the Seventh Circuit rejected a similar challenge and questioned whether the Eighth Amendment even applies to the FCA. Together, these decisions illustrate how the Excessive Fines Clause can be an uncertain, but potentially helpful, last line of defense for FCA defendants.
Treble damages and statutory per-false-claim penalties make the False Claims Act (FCA) a formidable government weapon against fraud—and one potential defendants must take extremely seriously. Challenging the amount of an FCA judgment based on the Eighth Amendment’s Excessive Fines Clause is an unenviable and difficult task, but so far in 2024, three defendants have tried it—and in the space of six months, two have succeeded.
In February, the district court more than halved the nearly half-billion dollar judgment in U.S. ex rel. Fesenmaier v. Cameron-Ehlen Group,[1] determining that the unusually large statutory penalties in the case far exceeded the Eighth Amendment’s limit. In July, the Eighth Circuit vacated the judgment in Grant ex rel. U.S. v. Zorn[2] on Eighth Amendment grounds because the district court had conflated compensatory and punitive damages and then awarded excessive penalties. Sandwiched between these two positive decisions was the Seventh Circuit’s May 2024 decision in Stop Illinois Health Care Fraud, LLC v. Sayeed[3] questioning whether the Eighth Amendment applies to FCA cases while finding that, in any event, the district court’s award easily passed Constitutional muster. Together, these cases show that Eighth Amendment analysis can be fact-specific and subjective.
Fesenmaier
In Fesenmaier the jury found travel, meals, and other gifts made to physicians over the course of a decade by defendants, an ophthalmological supply company and its co-founder, violated the Anti-Kickback Statute (AKS) and triggered FCA liability,[4] as the physicians subsequently purchased medical supplies and equipment from the company, performed procedures using those items, and later sought reimbursement from Medicare for the procedures.[5]
The jury determined the value of the false claims submitted resulting from defendants’ conduct totaled $43.7 million. Trebling of these “single damages”[6] added $87.4 million, for a grand total of just over $131 million in treble damages.[7] However, the way the defendants conducted the relevant Medicare billing—via a very large number of relatively low dollar amount claims[8]—led to a massive additional increase in defendants’ liability: the jury determined defendants’ conduct caused submission of nearly 65,000 false reimbursement claims[9] (averaging $677 per claim). Assessing a mandatory $5,500 statutory penalty per false claim added some $358 million in penalties, bringing total liability to a staggering $482.5 million.[10]
The court agreed with defendants that “the Excessive Fines Clause of the Eighth Amendment precludes the imposition of such massive penalties.”[11] As basic principles, the court enunciated that the Excessive Fines Clause “applies to civil penalties that are punitive in nature,”[12] and a punitive sanction violates the Excessive Fines Clause “if it is ‘grossly disproportional to the gravity of a defendant’s offense.’”[13]
As a further “guidepost” regarding proportionality, the court noted the Supreme Court’s focus on the punitive-to-compensatory ratio and its suggestion of a four-to-one ratio as an approximate boundary.[14] The court also emphasized that its review of the district court’s judgment was “not a sentencing”—it was determining, not “the appropriate punishment for defendants” but rather the ceiling on constitutionally “permissible punishment.”[15]
The analysis prioritized the reprehensibility of defendants’ conduct and the punitive-to-compensatory ratio. On reprehensibility, the court found it somewhat less than in typical AKS cases, as defendants’ profit on the products in question was a very small percentage of the Medicare reimbursements sought, and there was validity in defendants’ argument that an “accounting fluke” approximately doubled the statutory penalties; the court also noted there were no allegations of patient procedures carried out that otherwise would not have occurred, nor any of the products at issue being defective.[16]
The compensatory/punitive distinction received substantial attention; the court determined that single damages were plainly compensatory, the statutory penalties were plainly punitive, and the increment in damages resulting from trebling was a hybrid.[17] Counting the delta between single and treble damages as purely punitive would yield a punitive-to-compensatory ratio of over 10:1, while regarding that delta as purely compensatory would put the ratio just below 3:1.[18] The true ratio lay “somewhere between these two figures.”[19]
The court concluded the Excessive Fines Clause permitted a maximum recovery of $216.7 million in the case—$43.3 million of actual damages, $86.7 million in trebled damages, and penalties equal to the $86.7 million in trebled damages.[20] Assuming only actual damages were compensatory and the “trebling delta” were entirely punitive, this signified a 4:1 punitive-to-actual damages ratio.[21] The Court was “mindful . . . that an amount greater than the amount imposed here threatens to become grossly disproportional to the gravity of the offense.”[22]
Sayeed
Sayeed, like Fesenmaier also involving AKS kickbacks as the predicate for FCA liability, came before the Seventh Circuit for the second time after a $6 million judgment on remand.[23] The underlying conduct involved payments of gift cards to a state government contractor by defendant providers of services for low-income seniors, in return for defendants’ obtaining access to health information of seniors that defendants used to contact seniors and offer services.[24]
The appellate panel began by articulating a doubt: while recognizing that “civil sanctions can constitute punishment and therefore are subject to . . . the Excessive Fines Clause” if their purpose is at least partly retributive or deterrent,[25] it noted the Seventh Circuit has yet to resolve whether the Eighth Amendment applies specifically to FCA civil penalties.[26] The panel pointed to the Seventh Circuit’s “skepticism” on this point in United States v. Rogan.[27] There, the court observed that the FCA’s trebling provision is often equated with punitive damages—which “are not ‘fines’ under the Eighth Amendment”—and that “FCA liability does not constitute criminal punishment for purposes of the Double Jeopardy Clause.”[28]
However, the panel found that deciding the appeal did not require resolving whether FCA civil damages constitute “punishment” for Eighth Amendment purposes, and determined that the district court’s judgment fell well within the applicable proportionality limits.[29] The panel focused on four of the Bajakajian factors: (1) the offense’s characteristics and relation to other criminal activity; (2) whether the defendant fit into the class of persons against whom the statute was aimed, (3) the maximum sentence and fine that could have been imposed, and (4) the nature of the harm defendant’s conduct caused.[30] Most of the court’s analysis dwelt on the seriousness of the conduct at issue and the harm caused, including the fraud’s years-long duration, the extensive and intricately planned nature of the scheme, the government’s investigative costs, the undermining of public faith in the program, and the accessing of private health information of vulnerable senior citizens without consent.[31]
The panel concluded that the challenged fine, though large, fell “squarely within the boundaries set by Congress.”[32] Unlike in Fesenmaier (and in Grant, as noted below), the panel’s opinion reflected no quantitative analysis of the judgment’s compensatory and punitive components; rather, in finding that the judgment fell “within the fine range prescribed by Congress” the panel applied “a strong presumption of constitutionality.”[33]
Grant
The defendants in Grant were a medical practice for patients with sleep disorders and its owner-operator and a medical equipment company; the government asserted claims for an AKS and Stark Act-infringing kickback/self-referral scheme, and for overbilling of patients.[34] Defendants won summary judgment on the AKS and Stark Act counts, and on overbilling of established patients; however, they were found liable for overbilling new patients and judgment was entered for just under $7.6 million.[35]
In an important threshold matter, the panel decided that the Excessive Fines Clause applies in non-intervened qui tam actions—a question the Supreme Court declined to resolve in Browning-Ferris Industries, Inc. v. Kelco Disposal, Inc.,[36] and that the Eighth Circuit had nearly, but not actually, decided in Hays v. Hoffman.[37] The argument against applicability would be that where a relator litigates an FCA case alone, any fine would not be imposed by the government and thus the Constitution would not be implicated.[38] Nevertheless, the panel formally held what, in Hays, it had endorsed in dicta: even after declination the government remains a real party in interest in a qui tam, and any monetary award there is “imposed by the government and payable to it.”[39] The panel therefore proceeded to its Eighth Amendment analysis of the judgment below.[40]
Even though the $7.6 million award in Grant amounted to a mere 1.5 percent of the award in Fesenmaier, the composition of the judgment in Grant was strikingly penalty-heavy: actual damages were only $86,332, which were trebled to $258,996[41]—but, with approximately 1,000 separate false claims involved, and statutory per-claim civil penalties assessed at $5,000 or $12,537 (depending on the date and type of each claim), the total civil penalty came to $7,699,525.[42] Citing the Excessive Fines Clause, the district court then reduced the total civil penalty to $6,474,900.[43]
The panel found the punitive sanction violated the Excessive Fines Clause, for two reasons.[44] First, it found the district court erred in using treble, rather than single, damages as the representative amount of the “gravity of [the defendants’] offense,” because “gravity” is a function solely of the amount of compensatory damages, and excludes any punitive portion.[45] Like the district court in Fesenmaier, the Eighth Circuit noted treble damages are partly punitive,[46] meaning the delta between single and treble damages is a compensatory–punitive “hybrid.”[47] Noting the difficulty of delineating the compensatory and punitive portions of a treble damages award, the panel left that determination to the district court on remand.[48]
The second error was imposition of a punitive sanction “twenty-six times the amount of treble damages and seventy-eight times the amount of actual damages awarded.”[49] However, the drastic disproportion of this ratio to the four-to-one multiplier State Farm indicated as a rough boundary beyond which awards might cross into “constitutional impropriety” was implied[50] but received no express discussion. The panel did emphasize the modest degree of reprehensibility of defendants’ conduct—the “most important indicium of the reasonableness of a punitive damages award.”[51] While billing the government for, and receiving, money to which they were not entitled and damaging government programs, constituted reprehensible conduct, the panel stressed that the amount of economic loss caused was modest[52]—and there was no “tortious conduct [evincing] an indifference to . . . the health or safety of others.”[53] Among exemplars of such heightened reprehensibility, the panel pointed to Grabinski v. Blue Springs Ford Sales,[54] where plaintiff was fraudulently sold a collision-damaged automobile and the Eighth Circuit upheld a 27:1 punitive to actual damages ratio.[55] The panel noted that in extreme cases the Eighth Circuit had “previously upheld double-digit multipliers,” including in Grabinski,[56] and that, in the ordinary case, awards “significant[ly]” exceeding a single-digit ratio are only rarely constitutional.[57]
The panel vacated the punitive sanction and remanded with instructions, in relevant part, to determine the compensatory/punitive composition of the treble damages, and “ensure the punitive sanction falls within an appropriate single-digit multiplier [], and enter judgment accordingly.”[58] The appellate court thus gave the district court a dual directive regarding the judgment: use compensatory damages alone as the basis for computing the punitive sanction, and determine an appropriate multiplier to be applied to that basis.[59]
Conclusions
Defendants’ successful Excessive Fines Clause challenges to the Fesenmaier and Grant judgments burnish the toolkit available to defendants facing FCA monetary awards generally. Grant, in particular, strengthens the position that the Eighth Amendment applies to all FCA actions, even non-intervened qui tams. The different outcome in Sayeed, and the Seventh Circuit’s doubts about the amendment’s applicability under the FCA, add a note of caution about the lack of uniformity across circuits and courts. Taken as a whole, however, this trio of recent cases underscores the powerful potential of Eighth Amendment challenges to FCA judgments.
[1] No. 13-cv-3003, 2024 U.S. Dist. LEXIS 21897 (D. Minn. Feb. 8, 2024).
[2] No. 22-3481, 2024 U.S. App. LEXIS 16414 (8th Cir. July 5, 2024).
[3] 100 F.4th 899 (7th Cir. May 2, 2024).
[4] U.S. ex rel. Fesenmaier v. Cameron-Ehlen Group, No. 13-cv-3003, 2024 U.S. Dist. LEXIS 21897, at *3–4 (D. Minn. Feb. 8, 2024); see also 42 U.S.C. § 1320a-7b(g) (codifying the Medicare and Medicaid Anti-Kickback Statute); 31 U.S.C. § 3729 et seq. (codifying the False Claims Act). The government elected to intervene in Fesenmaier.
[5] Fesenmaier, 2024 U.S. Dist. LEXIS 21897, at *3.
[6] The FCA provides, in addition to per-false-claim civil penalties, that a person found in violation of the statute is liable for “3 times the amount of damages which the Government sustains because of the act of that person.” See 31 U.S.C. § 3729(a)(1).
[7] Fesenmaier, 2024 U.S. Dist. LEXIS 21897, at *4.
[8] Id. at *4. One reason for the atypically large number of individual claims was that the billing of each surgical procedure was divided into two separate invoices, one for Facility Fees and another for Physician Professional Fees, thus roughly doubling the number of claims—and leading to roughly $175 million in additional per-claim statutory penalties. See id. at *4, 47–48.
[9] Id. at *4.
[10] The original grand total of $489.1 million was subject to reductions of approximately $7 million due to settlements received from other parties in relation to the conduct at issue, and the court’s finding that the evidence was insufficient to attribute certain false claims to the underlying conduct. See *4–5, 39–40.
[11] Id. at *43.
[12] Id. at *43 (quoting United States v. Aleff, 772 F.3d 508, 512 (8th Cir. 2014)).
[13] Id. at *44 (quoting Aleff, 772 F.3d at 512) (emphasis added). The use of “gross disproportionality” as a marker of unconstitutional excess in the present context can be traced to United States v. Bajakajian, 524 U.S. 321 (1998), the leading case analyzing the Excessive Fines Clause. See Bajakajian, 524 U.S. at 334, 336 (citing, inter alia, Rummel v. Estelle, 445 U.S. 263, 271 (1980)) (adopting “the standard of gross disproportionality articulated in our Cruel and Unusual Punishments Clause precedents”); cf. United States v. Approx. 1,170 Carats of Rough Diamonds Seized, No. 05-CV-5816, 2008 U.S. Dist. LEXIS 56734, at *35–36 (E.D.N.Y. July 22, 2008) (citing Bajakajian, 524 U.S. at 327).
[14] Id. at *44 (citing State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003)) (emphasis added in Fesenmaier); see also id. (quoting State Farm, 538 U.S. at 425) (noting the State Farm Court’s statement that “an award of more than four times the amount of compensatory damages might be close to the line of constitutional impropriety”) (emphasis added in Fesenmaier); id. (quoting BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 582 (1996)) (“But the Supreme Court also has ‘consistently rejected the notion that the constitutional line is marked by a simple mathematical formula.’”). State Farm broadly referred to “[s]ingle-digit multipliers [as being] more likely to comport with due process, while still achieving the State’s goals of deterrence and retribution, than awards with ratios in range of 500 to 1 [or] 145 to 1.” 538 U.S. 425 (alterations added).
[15] Id. at *45.
[16] Id. at *46–48.
[17] Id. at *49 (citing Cook County, Ill. v. U.S. ex rel. Chandler, 538 U.S. 119, 130 (2003)).
[18] Id.
[19] Id. at *49–50. The court noted little of conclusive value in the congressional intent factor, noting there was a degree of circularity in assuming that statutorily mandated fines are constitutional. See id. at *50 (quoting Yates v. Pinellas Hematol. & Oncol., P.A., 21 F.4th 1288, 1318 (11th Cir. 2021) (Newsom, J., concurring)) (comparing the assumption to “letting the driver set the speed limit”). The court also noted that, had the defendants been charged criminally for every transaction found by the jury to be a kickback, and been found guilty of those violations (overcoming the higher criminal burden of proof), the maximum permissible fines would have been only a small fraction of the liability assessed by the district court—and took this as an indication that the penalties in the case “might be overly severe.” Id. at *50–51.
[20] Id. at *59–60.
[21] Id. at *60.
[22] Id. at *61 (citing Aleff, 722 F.3d at 512). The court also cited the Supreme Court’s caution that “[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit” of what the Constitution permits. Id. at *60–61 (quoting State Farm, 538 U.S. at 425).
[23] Stop Ill. Health Care Fraud, LLC v. Sayeed, 100 F.4th 899, 902 (7th Cir. 2024). The government did not intervene in the action.
[24] Stop Ill. Health Care Fraud, LLC v. Sayeed, 957 F.3d 743, 744–45 (7th Cir. 2020).
[25] Sayeed, 100 F.4th at 906 (quoting Towers v. City of Chicago, 173 F.3d 619, 624 (7th Cir. 1999)).
[26] Id.
[27] Id. at 906–07 (citing United States v. Rogan, 517 F.3d 449, 453–54 (7th Cir. 2008)).
[28] Id. (quoting Rogan, 517 F.3d at 453–54).
[29] Id. at 907.
[30] Id. (citing United States v. Malewicka, 664 F.3d 1099, 1104 (7th Cir. 2011).
[31] Id.
[32] Id.
[33] Id. (citing Malewicka, 664 F.3d at 1106).
[34] Grant ex rel. U.S. v. Zorn, 107 F.4th 782, 788–90 (8th Cir. 2024). As with Sayeed, the government elected not to intervene in Grant. Id. at 790.
[35] Id. at 790–91.
[36] Id. at 797 (citing Browning-Ferris Indus. v. Kelco Disposal, 492 U.S. 257, 275 n.21 (1989)).
[37] Id. (citing Hays v. Hoffman, 325 F.3d 982, 992 (8th Cir. 2003)); Hays, 325 F.3d at 992 (citing United States v. Mackby, 261 F.3d 821, 829–31 (9th Cir. 2001)) (agreeing with Ninth Circuit, in dicta, that “FCA penalties are punitive in nature and therefore fall within the reach of the Excessive Fines Clause” while deciding on other grounds).
[38] Cf. Browning-Ferris, 492 U.S. at 265 (noting that at the time the Eighth Amendment was drafted, “‘fine’ was understood to mean a payment to a sovereign as punishment for some offense” and “[t]hen, as now, fines were assessed in criminal, rather than in private civil, actions”) (alteration added).
[39] Grant, 107 F.4th 782, 797 (citing Yates v. Pinellas Hematol. & Oncol., P.A., 21 F.4th 1288, 1309–10, 1314 (11th Cir. 2021)).
[40] Id. 797–800.
[41] Id. at 791.
[42] Id.
[43] Id. at 792.
[44] Id. at 798–800.
[45] Id. at 798 (citing State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003)).
[46] Id. (citing Cook County, Ill. v. U.S. ex rel. Chandler, 538 U.S. 119, 130 (2003)).
[47] Id. (quoting U.S. ex rel. Drakeford v. Tuomey, 792 F.3d 364, 389 (4th Cir. 2015)).
[48] Id. at 799; see also id. (citing Drakeford, 792 F.3d at 389 (holding to be compensatory at least the portion of the trebled award allocated to relator)).
[49] Id. (emphasis added).
[50] Id.
[51] Id. (quoting State Farm, 538 U.S. at 419).
[52] Id. at 800.
[53] Id. (quoting State Farm, 538 U.S. at 419).
[54] Id. at 799 (citing Grabinski, 203 F.3d 1024 (8th Cir. 2000)).
[55] Grabinski, 203 F.3d at 1026. The 27:1 figure represented the combined, or collective, ratio of punitive to actual damages across all defendants; the ratios imposed on individual defendants ranged widely, from 5:1 for one of defendant dealer’s salesman and 16:1 for the dealer’s business manager, all the way to 55:1 for the dealer and 99:1 for the wholesaler. Id.; see also Grabinski, 136 F.3d 565, 567 (8th Cir. 1998) (identifying roles of individual defendants in the sale of the vehicle to plaintiff).
[56] Grant, 107 F.4th at 799 (citing Grabinski, 203 F.3d 1024).
[57] Id. (quoting State Farm, 538 U.S. at 425) (alteration added).
[58] Id. at 800–01.
[59] Cf. id.