This is the eighth in our 2024 Year in Preview series examining important trends in white collar law and investigations in the coming year. Our previous post, "Anticorruption Enforcement and the Foreign Corrupt Practices Act: Trends to Track in 2024," can be found here.
It is not often that we can say that a federal fraud statute had a blockbuster year. However, 2023 was exactly that for the False Claims Act (“FCA”). Not only did enforcement activity by the Department of Justice reach record-breaking numbers, but we also received long-awaited decisions from the Supreme Court in United States, ex rel. Polansky v. Executive Health Resources, Inc. and consolidated cases, United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway, Inc.
2023 By the Numbers
Overall, the government’s recoveries in fiscal year 2023 were up compared to 2022, with total dollar recoveries in 2023 increasing to $2.68 billion compared to $2.2 billion in 2022. Nevertheless, these numbers are down significantly from 2021, which saw False Claims Act recoveries totaling $5.6 billion.
The total dollars recovered belies, however, the record-breaking number of FCA matters that were resolved in 2023. The government and whistleblowers resolved 543 matters through settlements and judgments, the highest number of resolutions in a single year. This is a substantial increase over the 351 resolutions in 2022. Additionally, there was a steady increase in whistleblower actions, with 712 qui tam actions filed in 2023, averaging more than 13 new cases every week.
Healthcare Still Driving FCA Enforcement, But Trending in Other Sectors Continues
While the healthcare industry remained the predominate area of FCA enforcement with more than $1.8 billion in total dollars recovered, other sectors, in particular, cybersecurity, COVID-related fraud, customs and tariffs, small business contracting, and telecommunications saw increased enforcement activity in 2023, as we had suggested may be the case last year.
Under the Civil Cyber-Fraud Initiative, the government settled two additional matters in 2023 for roughly $4.3 million. In both cases, the government alleged that the corporate entities failed to provide adequate cybersecurity protections in violation of their contract or contrary to the representations made in receipt of federal funds. In one of those matters, involving Verizon Business Network Services’ $4 million settlement, the government credited the company for taking significant steps to cooperate with the government, including providing a written self-disclosure to the government and several supplemental disclosures, initiating and conducting an independent investigation, and conducting a compliance review of the alleged issues.
Moreover, in 2023, the government resolved approximately 270 matters and recovered over $48.3 million related to improper COVID-19 Paycheck Protection Program loan payouts. The government pursued recoveries for additional COVID-related fraud schemes, including schemes by healthcare providers to bill for unnecessary tests and services. As part of its stated commitment to hold individuals responsible as well as their companies, the government alleged that Patrick Britton-Harr and his lab companies offered COVID-19 tests to nursing homes as part of a scheme to bill Medicare for medically unnecessary respiratory pathogen panel tests that were not ordered by a treating physician.
As part of the same commitment to hold individuals accountable, Margarita Howard and her company HX5 LLC paid approximately $7.8 million to resolve allegations of a small business fraud scheme. The government alleged that Ms. Howard knowingly provided false information to the Small Business Administration regarding HX5’s eligibility for federal set-aside contracts meant to go to small businesses owned and controlled by socially and economically disadvantaged individuals.
The government also settled a matter with the International Vitamins Corporation for $22.8 million for an alleged scheme of misclassifying certain vitamin and nutritional supplements to avoid paying customs tariffs and duties. As part of the settlement, IVC admitted that it did not correct the classifications for over nine months and did not remit the duties to the United States after being informed by its hired consultant that it was engaged in wrongful conduct. Finally, the GCI Communications Corporation paid $40 million after the government alleged that it received excess subsidies in connection with the Federal Communications Commission’s Rural Health Care Program after it inflated its prices and violated the FCC’s competitive bidding regulations.
Throughout 2024, we expect to see growth consistent with historical trends for recoveries, settlements, judgments, and new qui tam actions. We also expect to see continued enforcement in the government’s recent areas of interest.
Key Decisions: Polansky and SuperValu / Safeway
Last year at this time, we previewed two highly anticipated sets of decisions from the U.S. Supreme Court: United States, ex rel. Polansky v. Executive Health Resources, Inc., concerning the government’s ability to dismiss over the relator’s objection, after declining to intervene, and the consolidated cases, United States ex rel. Schutte v. SuperValu Inc., and United States ex rel. Proctor v. Safeway, Inc., concerning the scienter requirement, namely whether a defendant acts knowingly when the defendant proffers an objectively reasonable interpretation of regulations, notwithstanding the defendant’s subjective belief.
The Court’s decisions in June 2023 resolved the questions presented: In United States ex rel. Polansky v. Exec. Health Res., Inc., 599 U.S. 419 (2023), the Court held that the “Government may seek dismissal of an FCA action over a relator’s objection so long as it intervened sometime in the litigation” and that such motions will be decided pursuant to Federal Rule of Civil Procedure 41(a) regarding voluntary dismissals. In addressing the latter question concerning the standard for dismissal, the Court was clear that while the False Claims Act requires notice and opportunity for a hearing before dismissal, “the Government’s views are entitled to substantial deference” and that “[i]f the Government offers a reasonable argument for why the burdens of continued litigation outweigh its benefits, the court should grant the motion. And that is so even if the relator presents a credible assessment to the contrary.”
In the consolidated cases, United States ex rel. Schutte v. SuperValu Inc., United States ex rel. Proctor v. Safeway, Inc., 598 U.S. 739 (2023), the Supreme Court held that the FCA’s scienter element “refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.” Thus, even when faced with an ambiguous statute or regulation, “such facial ambiguity is not sufficient to preclude a finding that respondents knew that their claims were false.” Rather, scienter is based on what the defendant thought when submitting the allegedly false claim.
Application of Polansky and SuperValu / Safeway
Since the Supreme Court’s decision, each case applying Polansky’s holding has confirmed the government’s dismissal authority. Among the small handful of cases decided in the 10 months since Polansky, the question of the standard has garnered some attention. In Brutus Trading, LLC v. Std. Chtd. Bank, the Second Circuit affirmed the district court’s dismissal and interpreted what was required to satisfy the False Claims Act’s hearing requirement. The Second Circuit found that “the district court met the hearing requirement by carefully considering the parties' written submissions” and that there was no due process violation because the relator did not show that the government’s decision to dismiss was unreasonable or arbitrary. Other courts assessing the government’s interests have likewise given deference to those interests, as required under Polansky. Thus, in United States ex. rel. Erik K. Sargent v. McDonough, No. 23-cv-328, 2024 U.S. Dist. LEXIS 32973 (D. Me. Feb. 26, 2024), the district court credited the government’s argument that the burdens outweighed the benefits of litigation, especially where the government would be pursuing a $95,000 claim against a government agency (the Department of Veteran Affairs). And in United States ex rel. USN4U, LLC v. Wolf Creek Fed. Servs., No. 17-cv-558, 2023 U.S. Dist. LEXIS 217620 (N.D. Oh. Dec. 7, 2023), the district court likewise found that dismissal was proper based on the government’s arguments concerning the lack of evidence, unlikelihood of success, and burden even in monitoring the case.
As Polansky signaled and the cases decided since then have made clear, it will only be in the exceptional case that the government’s motion to dismiss after intervention will be denied. We’ve yet to see that case.
Recent cases applying the holding in SuperValu and Safeway have also provided more color regarding the subjective belief scienter standard, including areas not covered by the Supreme Court’s most recent holding. To that end, in United States v. Peripheral Vascular Assocs., P.A., No. 17-cv-317, 2024 U.S. Dist. LEXIS 16689 (W.D. Tex. Jan. 30, 2024), the court held that the Supreme Court’s decision did not fully dispose of an objective application in cases where the recklessness standard of scienter is applicable. The court, citing to language in the footnotes of SuperValu, maintained that the objective standard may be utilized “[i]n some civil contexts” such as when “a defendant may be called ‘reckless’ for acting in the face of an unjustifiably high risk of illegality that was so obvious that it should have been known, even if the defendant was not conscious of that risk.” Moreover, a handful of other cases have applied the Supreme Court’s holding such that the petitioner does not have to present evidence of the respondent’s actual, subjective knowledge that they were submitting a false claim, but rather evidence sufficient to show an inference that the respondent’s subjectively knew that they were submitting a false claim. See United States v. McComber, No. 21-cr-36, 2024 U.S. Dist. LEXIS 50974 (D. Md. Mar. 22, 2024) (noting that “nothing in SuperValu suggests that a defendant can bury its head in the sand and avoid FCA liability in the face of overwhelming evidence that its submissions to the Government contained false statements.”). Finally, at least one court has refused to extend the holding to eliminate an objective scienter standard in other provisions of the FCA, such as § 3730 which governs protected activities such as retaliation. Hennessey v. Mid-Michigan Ear, Nose & Throat P.C., No. 21-cv-301, 2023 U.S. Dist. LEXIS 125639 (W.D. Mich. July 21, 2023).
We will continue to follow developments in these areas.
For the full series, please see: White Collar Year in Preview
