by Brian R. Holman & Dennis H. Stefanowicz, Jr.

Transcription

1 Understanding Damages Calculations in Promissory Fraud False Claims Act Cases (Qui Tam Cases): A Primer for Relator s Counsel Practicing in the Seventh Circuit after U.S. vs. Anchor Mortgage by Brian R. Holman & Dennis H. Stefanowicz, Jr. Introduction Through the False Claims Act ( FCA ) private citizens are entitled to bring actions on behalf of themselves and the United States Government known as qui tam cases. 1 The FCA empowers any private individual, who has some personal knowledge of any person or entity that has knowingly submitted false claims to the federal government to file an action in the name of and for the benefit of the United States. 2 The private individual bringing the action is known as a relator. Attorneys representing a potential relator should engage in extensive pre-filing assessment into their ability to establish not only liability, but the damages associated with the defendant s fraud. FCA cases involve lengthy and expensive litigation, and through creative argument, defense counsel will fiercely contest damages. The calculation of damages under the FCA has emerged as an issue of contention because of the uncertain meaning of the seemingly simple phrase three times the amount of damages which the government sustains because of the act of that person... 3 The FCA is silent on what is the proper meaning of damages and on the appropriate trebling method. Taking advantage of this ambiguity, defendants argue that since the U.S. Court of Appeals for the Seventh Circuit endorses a net trebling method over the gross trebling method, the net trebling method is the required method for calculating damages under the FCA. 4 However, the appropriate trebling method is separate and distinct from the calculation of damages under the FCA. This article provides some insight on how to contest the defense tactic of arguing that the proper damage calculation is analogous to the seventh circuit s net trebling method. This article will examine this issue in the context of determining damages in fraud in the inducement aka promissory fraud FCA cases. The Promissory Fraud Theory There is nothing radical about recognizing a claim for fraudulent inducement, also known as promissory fraud in the FCA setting. In fact, recognition of this theory goes back to the seminal Supreme Court FCA opinion in U.S. ex rel. Marcus v. Hess. 5 In a promissory fraud FCA case, the defendant has no right to perform the contract obtained from the government and the government would never have agreed to the contract but for the defendant s fraud. The seventh circuit adopted the promissory fraud theory, stating that where a person procures a contract by fraud, all claims under the contract are false for purposes of the FCA. 6 In U.S. ex rel. Sharp v. Consolidated Medical Transport, 7 Judge Andersen explained: The FCA was intended to cover each and every claim submitted under a contract, loan guarantee, or other agreement which was originally obtained by means of false statements or other corrupt or fraudulent conduct, or in violation of any statute or applicable regulation. In addition, the legislative history states that claims may be false even though the services are provided as claimed if, for example, the claimant is ineligible to participate in the program... Under the promissory fraud theory, the defendant fraudulently induces the government into entering into a contract to provide goods or services that the defendant was otherwise not entitled to or qualified to provide. As a result, each claim by the defendant to the government under the fraudulently obtained contract is a false claim under the FCA. 8 The Seventh Circuit s FCA Promissory Fraud Damage Calculation In U.S. v. Rogan, Rogan, the principal manager and financial beneficiary of the Edgewater Medical Center conspired with four physicians to defraud the United States by concealing the fact that many patients came to Edgewater only because of referrals that violated the Stark Amendment to the Medicare Act 9 and the Anti-Kickback Act. 10 The Stark Amendment (and Anti-Kickback Act) prohibits Medicare reimbursement for medical services that are a result of compensated referrals. At trial, it was determined that Edgewater made 1,812 Medicare reimbursement requests for patients improperly referred by the physicians and received approximately $16.5 million in medical care reimbursements for services provided to these patients. The district court in U.S. v. Rogan understanding damages continued on page Trial Journal Volume 18, Number 2 l Summer 2016

2 understanding damages continued from page 16 concluded that the United States was entitled to recover all damages that were caused by or would not have occurred but for the false claims and false statements. 11 The court reasoned, the United States would have paid Edgewater nothing for hospital claims related to patients referred to Edgewater by physicians with a prohibited financial relationship 12, 13 with the hospital. In U.S. v. Rogan, the total amount paid by Medicare for the medical services in question totaled $16.5 million, which was trebled, resulting in a damages award of over $50 million. 14 There were no findings that the medical services were not actually provided, or were medically unnecessary, or of poor quality. Thus, the government received the value of $16.5 million of medical care that was reasonable and necessary for Medicare patients, and for which it would have paid another provider had it discovered the FCA violations at the time. 15 The seventh circuit in U.S. v. Rogan 16 held: [T]he challenge to the $64 million award repeats contentions already addressed; we need not recover that ground. Nor do we think it important that most of its patients for which claims were submitted received some medical care perhaps all the care reflected in the claim forms... The government offers a subsidy (from the patients perspective, a form of insurance), with conditions. When the conditions are not satisfied, nothing is due. Thus the entire amount that Edgewater received on these 1,812 claims must be paid back. Now it may be that, if the patients had gone elsewhere, the United States would have paid for their care. Or perhaps the patients, or a private insurer, would have paid for care at Edgewater had it refrained from billing the United States. But neither possibility allows Rogan to keep money obtained from the Treasury by false pretenses, or avoid the penalty for deceit. Accordingly, under U.S. v. Rogan, the seventh circuit s FCA promissory fraud theory damage calculation equates to the total amount paid by the government under the fraudulently obtained contract. 17 The Seventh Circuit Adopts the Net Trebling Approach In U.S. v. Anchor Mortgage, the trial court found the defendants liable under the FCA for lying in connection with applying for federal guarantees of home mortgage loans and paying improper kickbacks for client referrals. 18 The primary issue before the seventh circuit was which trebling approach net or gross was appropriate under the FCA. 19 The district court used the gross trebling approach added all the amounts the United States paid to lenders under the guarantees and trebled this total, then subtracted any amounts that had been realized by the 18 Trial Journal Volume 18, Number 2 l Summer 2016

3 government from selling the properties that secured the loans. 20 The seventh circuit rejected the gross trebling approach in favor of a net trebling approach in situations in which the United States received monetary third-party payments. 21 In support of the gross trebling approach, the Department of Justice relied on the holding in U.S. v. Bornstein, 22 which states that third-party payments are subtracted after doubling [now trebling], rather than before. 23 However, the seventh circuit did not follow the holding in Bornstein; instead, it concluded [f]ootnote 13 in Bornstein unambiguously uses the contract measure of loss, supporting a net trebling approach. 24 Interestingly, the seventh circuit concedes that footnote 13 may be dictum, and recites the question presented in Bornstein [t]he question presented was whether thirdparty payments should be subtracted before doubling, not whether the market price should be subtracted from the contract price before doubling. 25 Confusingly, the seventh circuit cites U.S. ex rel. Feldman v. Gorp, 26 in support of the net trebling approach it adopted in U.S. v. Anchor Mortgage. 27 However, the second circuit in Feldman, in a case of first impression, cites U.S. v. Rogan, 28 as a sister circuit that supports the conclusion that they reached. 29 The second circuit, citing U.S. v. Rogan, concluded that in a fraudulent inducement case [a/k/a promissory fraud theory], because the defendant would not be eligible for any funding received after the initial false claim, a court in such a case could properly conclude that the defendant is liable for the entire amount that the government paid. 30 (Emphasis added.) The Feldman court held, [w]e conclude that in the case before us, inasmuch as the damages equal the full amount that the government paid and that amount is not in dispute, they were properly determined by the district court as a matter of law. 31 Clearly, the second circuit supports the conclusion that U.S. v. Rogan is the proper damage calculation in a promissory fraud case, and does not confuse the net trebling approach with the promissory fraud damage calculation. The Seventh Circuit s Net Trebling Approach is Separate and Distinct from the Seventh Circuit s Promissory Fraud Damage Calculation Following the U.S. v. Anchor Mortgage decision, defendants have attempted to expand the holding to replace the U.S. v. Rogan decision when calculating FCA promissory fraud damages. The defense argued that U.S. v. Anchor Mortgage requires that any value received by the government must be subtracted from the total contract amount. If this argument were applied to the U.S. v. Rogan fact pattern, that amount would be subtracted from the total contract amount. The defense contended this set off was required despite the fact that Medicare prohibited reimbursement for medical services that are a result of compensated referrals, because the Medicare patients actually received understanding damages continued on page 20 Volume 18, Number 2 l Summer 2016 Trial Journal 19

4 understanding damages continued from page 19 $16.5 million of necessary medical treatment. The result would be zero damages. However, U.S. v. Anchor Mortgage does not support this zero damage theory. The key distinction that the defense argument ignores is that U.S. v. Anchor Mortgage endorses the net trebling approach, which requires the deduction of the amount received by the government for any third-party monetary payments received by the government. In U.S. v. Anchor Mortgage, where the U.S. sold the real estate that it received as collateral to a third-party, it may make sense that the damage calculation should include subtracting those third-party monetary payments before trebling. However, this does not equate to the requirement that any value the government received from the defendant s goods or services needs to be subtracted from the total contract How can YOU GET INVOLVED in ITLA? Take advantage of the many bene ts included with your ITLA membership. You asked us to engage in social media, and we have. In addition to ITLA news, we post news and stories that affect your practice. Follow us on social media so you can share this information with your friends and clients. Follow ITLA on Facebook and Twitter amount. In U.S. v. Rogan, the market value of the medical services that the government reimbursed was $16.5 million; however, if the government had known about the defendants improper monetary referral scheme, the government would have paid zero. The defendants should not be entitled to argue that although the defendants fraudulently obtained the government contract they were not entitled to, the government has not sustained any damages because they received the market value of the services that were provided. Try as they may, U.S. v. Anchor Mortgage does not support this approach in FCA promissory fraud damage calculations. Conclusion Damages in FCA cases can be enormous, especially considering the trebling component of the FCA. The FCA is not clear on how damages should be calculated, and on the appropriate trebling method. The seventh circuit s decision in U.S. v. Anchor Mortgage, has added to this confusion by commingling the damage calculation with the trebling method. As a result, in their efforts to avoid damages, defendants are now contending that in promissory fraud FCA cases the market value of the services and goods received by the government must be subtracted from the total contract price in calculating damages. This approach is improper and not supported by a proper application of the U.S. v. Anchor Mortgage decision. The U.S. v. Rogan decision, which held that the FCA promissory fraud theory damage calculation equates to the total amount paid by the government under the fraudulently obtained contract, remains the proper FCA promissory fraud damage calculation. U.S. v. Anchor Mortgage merely supports the net trebling method. Endnotes 1 31 U.S.C U.S.C. 3729, U.S.C. 3729(a). 4 United States v. Anchor Mortgage Corp., 711 F.3d 745 (7 th Cir. 2013) U.S. 537 (1943). 6 U.S. ex rel. Main v. Oakland City University, 426 F.3d 914, 916 (7 th Cir. 2005); see also, U.S. ex rel. McCarthy v. Marathon Technologies, Inc., 2014 U.S. Dist. LEXIS *13 (N.D.Ill., 2014) U.S. Dist. LEXIS *13-14 (N.D.Ill., 2001) U.S.C. 3729(a)(1)(A), which provides that a person is liable for each instance in which the person knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval U.S.C. 1395nn U.S.C. 1320a-7b. 11 U.S. v. Rogan, 459 F.Supp.2d 692, 726 (N.D.Ill. 2006). 12 Id. at U.S. ex rel. Bidani v. Lewis, 264 F.Supp.2d 612, 616 (N.D.Ill. 2003). ( Compliance with the AKS is thus central to the reimbursement plan of Medicare. To state otherwise would be to allow participation and reimbursement for supplies purchased illegally only because the claimant had the luck of not being caught and convicted in the first place. Reimbursing a claimant for the supplies would put the government in the position of funding illegal kickbacks after the fact. ) 14 U.S. v. Rogan, 459 F.Supp.2d at Id. at F.3d 449, 453 (7 th Cir. 2008). 17 Id. at 727. This calculation of damages was adopted by Congress in its amendment of the Small Business Act: 13 CFR (a) Presumption of Loss Based on the Total Amount Expended. In every contract, subcontract, cooperative agreement, cooperative research and development agreement, or grant which is set aside, reserved, or otherwise classified as intended for award to HUBZone SBCs, there 20 Trial Journal Volume 18, Number 2 l Summer 2016

5 shall be a presumption of loss to the United States based on the total amount expended on the contract, subcontract, cooperative agreement, cooperative research and development agreement, or grant whenever it is established that a business concern other than a HUBZone SBC willfully sought and received the award by misrepresentation. 18 U.S. v. Anchor Mortgage, 711 F.3d 745 (7 th Cir. 2013). 19 Id. at Id. at F.3d at U.S. 303 (1976) F.3d at Id. at Id. 26 U.S. ex rel. Feldman v. Gorp, 697 F.3d 78 (2d Cir. 2012) F.3d at F.3d 449 (7 th Cir. 2008). 29 Feldman, 697 F.3d at Id. at Id. at 92. Brian Holman and Dennis Stefanowicz are named partners in the Chicago law rm of Holman & Stefanowicz, LLC, a rm dedicated to trial advocacy on behalf of injured persons and their families including cases involving personal injury, professional negligence, motor vehicle, product liability, employment/ discrimination claims and whistleblower and False Claim Act cases. Mr. Holman graduated from Drake University in 1989 with a Bachelor of Science in Business Administration degree ( nance) and received his Juris Doctorate from the Kent College of Law, Illinois Institute of Technology in Mr. Stefanowicz graduated from DePaul University in 1989 with a Bachelor of Arts degree and received his Juris Doctorate degree in 1992 from DePaul University after completing his legal studies at DePaul and the University of Innsbruck, Austria, where he studied under William Rehnquist, Chief Judge of the United States Supreme Court. Take advantage of the many bene ts included with your ITLA membership. One of the most sought after ITLA bene ts is the ITLA Listserv. Over 1,000 members network using this discussion group almost any time of day. If you have a question about a matter of law, an expert or you are seeking a referral, there is probably a member ready to offer their advice. Encourage a colleague to join ITLA today! Volume 18, Number 2 l Summer 2016 Trial Journal 21