Proposed FCA Changes Would Muddy Materiality Defense and Create Retaliation Remedy for Former Employees

For the second time in three years, amendments to the False Claims Act have been proposed in the U.S. Senate. If enacted, the amendments would create uncertainty for FCA defendants and expand the scope of the FCA’s anti-retaliation provision to cover post-employment retaliation.

In late July, a group of senators proposed the False Claims Amendments Act of 2023.[1] Championed by Sen. Charles Grassley, the self-proclaimed “father” of the modern FCA due to his authorship of the 1986 FCA Amendments,[2] the current amendments are the second attempt in three years to introduce relator-friendly revisions to the FCA.

Senator Grassley had most recently proposed similar FCA amendments in 2021.[3] That proposal died without going to a vote, and it is not apparent that the need—or support—for revising the FCA is any greater now. The 2023 version includes some noteworthy differences, although (unsurprisingly) again has relator-favoring aspects. Most notably, the proposed amendments could weaken a FCA defendants’ ability to negate the materiality element through evidence of government knowledge, and would resolve the current circuit split over the anti-retaliation provision by making post-employment retaliation actionable.

Materiality

Likely the most significant of the proposed amendments concerns the materiality element—a crucial statutory guardrail against “onerous and unforeseen” liability [4] for “minor or insubstantial” noncompliance with law or regulation,[5] or other infractions not meriting the FCA’s “essentially punitive” treatment.[6] The bill would create a new subsection, § 3729(e), under which the government’s decision “to forego a refund or to pay a claim despite actual knowledge of fraud or falsity shall not be considered dispositive if other reasons exist” for the government’s decision.[7]

This plaintiff-favoring provision seems aimed at limiting the Supreme Court’s observation that such government payment decisions are “very strong evidence” of immateriality.[8] Some courts have already noted that the “strong evidence” test is not dispositive,[9]  but they have largely done so in the context of the Twombly/Iqbal pleading standard.[10] The proposed amendment seems calculated to undermine the strength of evidence defendants may marshal showing that the government paid with knowledge of the alleged false statements. Courts would presumably be free to weigh the government’s proffered “other reasons” against the fact of its continuing payments, but that approach would seemingly make it more likely for courts to find factual disputes exist, necessitating trial on the materiality element. 

The materiality provision of the 2021 version as originally introduced did not include this language. Instead, it proposed a burden-shifting test skewed towards plaintiffs, who could establish materiality by a preponderance of the evidence, while defendants would have to marshal clear and convincing evidence in rebuttal.[11] The 2021 proposal also provided for cost-shifting of discovery requests served on the government in non-intervened cases unless the requesting party could satisfy an exacting three-part test.[12] It is not yet clear why the drafters of the 2023 bill decided to take a different approach.

Retaliation

The other significant proposal would insert “current or former” after “Any” at the beginning of the statute’s anti-retaliation provision,[13] establishing entitlement to relief for “[any] current or former employee . . . .”[14] Courts have diverged on whether the existing FCA reference to “[a]ny employee” encompasses retaliation against former employees.[15] The amendment—as with its 2021 counterpart—would resolve the issue in favor of the broader interpretation.[16]

Miscellaneous

The proposed amendments would create a one-off requirement for the Comptroller General to report to Congress within 18 months of enactment of the amendments.[17] The document would inform lawmakers about “the effectiveness” of the FCA, including benefits and challenges of enforcement, and amounts recovered under the statute.[18] This requirement is unchanged from the 2021 proposal.

One proposed change that would be limiting on the scope of potential FCA actions is the provision on the applicability of the amendments as a whole.[19] Under its terms, the amendments would be applicable to cases newly filed on or after the date of the amendments’ enactment.[20] This represents a narrowing from the 2021 proposal, which would have also applied the amendments to all FCA cases pending on the date of enactment.[21]

Finally, the 2023 proposal does not address the government’s power to dismiss non-intervened cases. The 2021 bill would have required the Department of Justice (DOJ) to “demonstrate reasons for dismissal” and given the relator an opportunity to show that “the reasons are fraudulent, arbitrary and capricious, or illegal.”[22] That provision is likely a casualty of the Supreme Court’s intervening decision in U.S. ex rel. Polansky v. Executive Health Resources, Inc., validating the DOJ’s right to move to dismiss an FCA action even after declination, so long as it intervened at some subsequent point in the litigation, and mandating deferential adjudication of such motions under the federal rule governing voluntary dismissals, Fed. R. Civ. P. 41(a).[23]

Conclusion

Major Supreme Court decisions this summer have been both heartening[24] and challenging[25] for FCA defendants. If enacted, the proposed amendments would create additional uncertainty as lower courts would be forced to resolve the meaning of the new materiality subsection and address what constitutes post-employment retaliation. It remains to be seen whether the bill gains any traction in the Senate and beyond. Dinsmore’s FCA Team will keep a close eye on its progress and report on key developments.