Looking ahead

COVID-19 stimulus spending

First, companies that availed themselves of the largess bestowed by the Federal Government in response to the COVID-19 pandemic should understand that aggressive anti-fraud enforcement by the Department of Justice has always followed hard upon periods of dramatically increased federal spending. DOJ and qui tam relators have always had a knack for knowing how to “follow the money.” Wars, natural catastrophes, and financial crises have often triggered large emergency outlays for defense, disaster relief, or economic stimulus. In the past, such spending has ushered in a period of aggressive prosecution by DOJ and relators of civil suits to recover funds wrongfully obtained from the government by fraud and false claims. The titanic spending bills passed in response to the COVID-19 pandemic create equally enormous opportunities for FCA enforcement. We can expect DOJ to make the investigation and prosecution of fraud schemes related to COVID-19 stimulus bills a high priority in 2021.

At the same time, the manner in which stimulus funding was disbursed may make successful suits more difficult. Vague certification requirements and ambiguous agency guidance promulgated in haste may create insuperable obstacles to demonstrating that beneficiaries of the various stimulus programs knowingly defrauded the government. While we should expect to see active FCA enforcement related to COVID-19 funding, the stimulus legislation and weak implementation guidance can be expected to offer several avenues of defense.

Materiality

In the four years that have passed since the Supreme Court decided Escobar, materiality has become the dominant theme in motions to dismiss and motions for summary judgment. Look for continued development of materiality case law in the lower courts, as they grapple with the Supreme Court’s instruction that the FCA “is not an all-purpose antifraud statute,” or “a vehicle for punishing garden-variety breaches of contract or regulatory violations.”¹ DOJ and relators will seek to frame allegations and develop evidence consistent with what the Supreme Court described as the FCA’s “rigorous” and “demanding” materiality requirement, and defendants will actively seek to discover evidence of government knowledge of, or acquiescence with, the allegedly wrongful conduct.

One thread in the materiality cases warrants especially close study: Whether courts will continue to view inaction by the government after the filing of a qui tam complaint as demonstrating the absence of a materially false claim. This test of materiality was invited by the Supreme Court in Escobar.² But DOJ has objected vociferously to arguments that courts should consider program payments that continue after the commencement of a qui tam suit, or DOJ’s decision to decline to intervene in such a suit, as evidence that the government does not view the alleged misrepresentation as materially false. It will be interesting to see whether defendants are able to persuade more courts that government inaction following the filing of a qui tam complaint should be taken into account in assessing materiality, or whether DOJ ultimately prevails in establishing that continued payment by the government, and DOJ’s decision to decline to intervene in a qui tam suit, are wholly irrelevant to the materiality analysis.

Government motions to dismiss declined qui tam suits

Since the promulgation of the so-called Granston Memorandum, DOJ has taken a somewhat more active posture in seeking to dismiss declined qui tam suits, and the courts have demonstrated that they are not likely to impose significant barriers to dismissal by the government where it seeks to invoke its right to do so under the FCA. The Granston Memorandum provided defendants with a detailed checklist of the factors that DOJ will consider in determining whether to file a motion to dismiss a declined case, and defendants have actively solicited government motions to dismiss in cases of questionable merit. It remains to be seen whether DOJ will increasingly exercise the dismissal power, or whether the change of presidential administration portends a less energetic use of DOJ’s rights under 31 U.S.C. § 3730(c)(2)(A).

In addition, there are now three different approaches to DOJ dismissals under the FCA, and there are additional cases winding their way through the courts that could create additional splits, or prompt Supreme Court review to settle, once-and-for-all, the standard that must be met by the government when it seeks dismissal. The Supreme Court has shown a perennial interest in FCA jurisprudence, and the Circuit split over the dismissal standard is one conflict that could prompt the Court to accept a petition for a writ of certiorari.

Agency subregulatory guidance as the basis for enforcement

One of the hallmarks of the Trump administration was an effort to reduce regulatory burdens on business. That policy was reflected in the enforcement priorities of DOJ. In a memorandum signed by then-Attorney General Jeff Sessions on November 16, 2017, DOJ made a deliberate decision to move away from reliance on Executive Branch agency guidance that is not subjected to the rigors of the notice-and-comment rulemaking process. The memorandum prohibited DOJ components from issuing guidance documents that purport to create rights or obligations binding on persons or entities outside the Executive Branch, and barred line attorneys from using such guidance to coerce “persons or entities outside the federal government into taking any action or refraining from taking any action beyond what is required by the terms of the applicable statute or regulation.”

In January 2018, then-Associate Attorney General Rachel Brand issued a memorandum applying these same principles to affirmative civil enforcement cases. While the Sessions memorandum barred the use of guidance documents promulgated by DOJ, the Brand memorandum extended the prohibitions to all agency guidance documents, barring DOJ from using “its enforcement authority to effectively convert agency guidance documents into binding rules.” These policies were formally adopted as part of the Justice Manual in December 2018.

While the Brand memorandum and the provisions of the Justice Manual include exceptions for use in a number of circumstances (most notably, agency subregulatory guidance can always be used to establish scienter, notice, knowledge and mens rea, and proof of mental state is an element of every FCA case), the decision by DOJ to eschew reliance on such guidance documents reflects a view that Executive Branch agencies promulgate too many informal interpretations of Congressional enactments and regulate excessively through informal means.

The Supreme Court weighed in on this issue in 2019, holding, in Azar v. Allina Health Services,³ that a Medicare policy dictating the manner of making payments to disproportionate share hospitals had to be vacated because it was not promulgated through the notice-and-comment process dictated by law. A district court subsequently applied the same logic to justify dismissal of an FCA complaint. Seizing upon the analysis in Azar v Allina Health Services, the court in Polansky v. Exec. Health Res., Inc.⁴ held that allegations of Medicare fraud based on the failure to comply with informal guidance issued by the Centers for Medicare and Medicaid Services (CMS) about how hospitals may determine inpatient status were untenable as false claims under the FCA because the purported falsity was based on sub-regulatory guidance that CMS had adopted without going through the rigor of a formal rulemaking process.

It will be interesting to see whether DOJ will, under a new presidential administration, retreat from its assault on agency subregulatory guidance, or whether other courts will follow the path laid out in Allina and Polansky to block the use of informal agency policies as the basis for FCA enforcement.

Staying on top of these and other potential developments in FCA enforcement will be critical for businesses moving forward. The FCA practice at Hogan Lovells stands ready to help you with our market-leading lawyers.

Reference

1. Universal Health Services, Inc. v. United S 1 tates ex rel. Escobar, 136 S. Ct. 1989, 2001 (2016).
2. See id. at 2003-04. (“[I]f the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.”).
3. 139 S. Ct. 1804 (2019).
4. 2019 WL 5790061 (E.D. Pa. 2019).