Jeffrey S. Bucholtz, Maggie Thomas, Jacqueline Van De Velde, King & Spalding LLP
This week’s top False Claims Act (FCA) developments include: the first court of appeals decision squarely holding that monetary awards in declined qui tam cases qualify as fines imposed by the United States for purposes of the Eighth Amendment’s Excessive Fines Clause; DOJ’s dual criminal and civil pursuit of companies that allegedly defrauded American servicemembers; and a settlement highlighting DOJ’s broad net with respect to opioid-related enforcement efforts.
1. Eleventh Circuit Holds that Eighth Amendment’s Excessive Fines Clause Applies in Declined Qui Tam Actions
Overview: With its December 29 opinionin Yates v. Pinellas Hematology & Oncology, P.A., the Eleventh Circuit became the first court of appeals to squarely hold that monetary awards in declined qui tam cases qualify as fines imposed by the United States for purposes of the Excessive Fines Clause.
Case Background and Appeal: In this non-intervened case (i.e., a case in which the Department of Justice did not elect to intervene on behalf of the United States pursuant to 31 U.S.C. § 3730(b)(2), (c)(3)), the jury determined that a Florida oncology group’s laboratory submitted 214 false claims to Medicare. The jury found that the United States suffered $755.54 in damages. Following the verdict, the district court trebled the damages and imposed statutory minimum penalties that ballooned the overall judgment to $1.177 million.
On appeal, the oncology group argued that the penalties violated the Eighth Amendment’s prohibition of excessive fines because they were disproportionate to the damages verdict. DOJ weighed in as amicus, arguing that the fines should be upheld because they were the statutory minimum, significant penalties are necessary for deterrence, and the government needs to recoup costs spent fighting fraud.
Agreeing with three other courts of appeals, the Eleventh Circuit first determined that an FCA monetary award is a “fine” for purposes of the Eighth Amendment because FCA monetary awards are at least in part punitive.
Next, the Eleventh Circuit concluded that the United States imposes the “fine,” even when it does not intervene, because the United States retains significant authority over declined suits. The court pointed to the government’s statutory right to decide whether and when to intervene, its ability to obtain a stay of discovery if it would interfere with a criminal investigation or prosecution, and its control at the remedy phase of qui tam proceedings. The Eleventh Circuit also relied on the “history and nature of qui tam actions.” The court emphasized that governments have limited resources, that qui tam actions were viewed as a “routine enforcement mechanism in the early Republic,” and that “FCA qui tam actions serve the same enforcement purpose” as government-initiated actions. For these reasons, the Eleventh Circuit held that damages and statutory penalties awarded in non-intervened FCA qui tam cases are subject to the Eighth Amendment’s prohibition on excessive fines.
Yet what the court gave with one hand, it largely took away with the other. Applying the Eighth Amendment, the Eleventh Circuit upheld the $1.177 million penalty notwithstanding its disparity with the damages verdict of only $755.54. It noted that the penalties were below the statutory maximum—and were in fact the statutory minimum. The court further observed that fraud harms the United States “in ways untethered to the value of any ultimate payment,” including by making government systems more difficult to administer and diminishing public trust.
Judge Newsom joined the opinion of the court and added a concurrence raising questions about the extent to which the court deferred to Congress’s setting of the penalty range. He noted that under circuit precedent, “we give great deference to Congress’s judgment about the excessiveness of the fine” in assessing whether a fine within a range set by Congress is unconstitutionally excessive. “As a result,” Judge Newsom observed, “Congress both levies the fine and, at least as a presumptive matter, determines its constitutionality. Seems a bit like letting the driver set the speed limit.” Judge Newsom suggested that the excessiveness inquiry should also take into account the defendant’s ability to pay the fine set by Congress. Judge Jordan, who authored the opinion of the court, joined Judge Newsom’s concurrence. Judge Tjoflat issued an opinion concurring in part and dissenting in part. He agreed that the Excessive Fines Clause applies in declined qui tam actions, but he disagreed with the deferential standard applied by the majority to evaluate excessiveness. Judge Tjoflat suggested that the factors governing criminal sentencing should also guide review of civil fines, and he would have remanded for the district court to take evidence on the characteristics of the offense and the offender.
Our Take: The court’s decision arms defendants with a constitutional defense in declined qui tam cases. But the court’s approval of a more than 1500-to-1 ratio between penalties and actual damages mitigates the defense’s usefulness. At the same time, the separate opinions by Judge Newsom and Judge Tjoflat illustrate that the contours of the excessiveness standard are not yet clear and suggest that further litigation on this issue may well prove helpful, both in the Eleventh Circuit and in other circuits.
2. DOJ Continues Focus on Combatting Fraud Against Servicemembers
Overview: On December 22, DOJ announced settlements of two investigations into Balfour Beatty Communities (BBC), one of the largest providers of privatized military housing to the U.S. Armed Forces. The settlements resolve criminal fraud and civil FCA allegations relating to BBC’s receipt of performance incentives for maintenance and resident satisfaction in servicemember housing communities.
The Settlement: BBC is a real estate services company that operates military housing communities at numerous military bases across the country. As part of its services, BBC received fees for developing and managing each housing community, and servicemembers paid their Basic Allowance for Housing to BBC to live in these communities. BBC’s fees included a monthly base fee and quarterly or semi-annual performance incentive fees. The service branches paid the performance incentive fees upon satisfaction of performance objectives, including goals related to maintenance of the community and resident satisfaction.
DOJ alleged that BBC employees manipulated data and destroyed and falsified resident comment cards to inflate BBC’s metrics relating to its performance objectives. According to DOJ, based on that manipulated data, BBC fraudulently induced the service branches to pay performance incentive fees that BBC failed to earn. Former BBC employees (including a former community manager and a former regional manager) recently pleaded guilty to related criminal charges.
As a result of the settlement, BBC agreed to pay $33.6 million in criminal fines and $31.8 million in restitution, plus $35.2 million in a civil settlement. BBC also agreed to engage an independent compliance monitor for three years.
Our Take: DOJ has long focused on combatting fraud related to servicemembers. This case highlights that DOJ will not hesitate to use criminal and civil weapons alike to pursue companies that it believes have defrauded American servicemembers and the U.S. military.
3. DOJ Continues Opioid-Related Enforcement Efforts Against Pharmacies and Pharmacists
Overview: As we previously reported, DOJ announced in November that it had reached a settlement with Virginia-based pharmaceutical manufacturer kaléo Inc. That settlement resolved FCA and Anti-Kickback Statute (AKS) allegations related to Evzio, a form of naloxone, an overdose-reversal drug. At the time, the agreement specified that certain allegations remained under seal. On December 8, DOJ announced that it had reached separate resolutions with a pharmacist and two specialty pharmacies also involved in the distribution of Evzio.
The Settlement: According to DOJ, Evzio was the highest priced version of naloxone on the market; accordingly, many insurers required prior authorization requests before approving coverage for the drug. DOJ claimed that Plymouth Towne Care (dba People’s Drug Store) and Shaska Pharmacy LLC (dba Ray’s Drugs) submitted false prior authorization requests to Medicare that contained baseless clinical assertions.
Specifically, DOJ alleged as follows: The pharmacies coordinated with kaléo sales representatives to obtain basic information about patients who had been prescribed Evzio. The pharmacies would then use this rudimentary information, often consisting of only basic biographical details, to initiate Evzio prescriptions. The defendants would then complete Evzio prior authorization request forms, incorporating baseless clinical assertions and forged physician signatures, and submit them to insurers, including Medicare drug plans. DOJ also alleged that the pharmacies would dispense the drug without attempting to collect co-payments from government beneficiaries.
Our Take: This case is the most recent in a line of recent resolutions demonstrating DOJ’s use of the FCA and AKS to address perceived misconduct related to opioids and related drugs. This settlement underscores that in the opioid context, DOJ’s enforcement will continue to address all entities in the supply chain, from manufacturer to prescriber to distributor.