On May 2, 2016, the Railroad Retirement Board (RRB) issued an interim final rule increasing civil penalties allowable under the False Claims Act (FCA).  The rule will be effective on August 1, 2016.  Public comments may be sent to the RRB by July 1, 2016.  The Bipartisan Budget Act of 2015 requires other agencies, including the U.S. Department of Justice, to issue similar regulations in the coming months.

The 1986 version of the FCA provided that on a finding of liability, the government can recover civil penalties of not less than $5,000 and not more than $10,000 per false claim in addition to treble damages.  The statute was subsequently amended to permit the civil penalties provision to be adjusted through the regulatory process by the Federal Civil Penalties Inflation Adjustment Act of 1990 and the Bipartisan Budget Act of 2015.  Civil penalties currently range from $5,500 to $11,000 per claim.

Under the RRB’s proposed regulation, penalties will increase to a minimum of $10,781 per claim and a maximum of $21,563 per claim, approximately double their current size.

The proposed regulation exacerbates an already alarming trend in the size of FCA damages awards and settlements.  Some commentators have already questioned whether the revised regulations raise constitutional concerns about the total size of a damages award.  In considering whether the size of a damages award violates a defendant’s right to due process, the Supreme Court has looked to the ratio of punitive damages and/or civil penalties and compensatory damages.  In one case, the Court recognized that a 10-to-1 ratio between punitive damages and compensatory damages may be the constitutionally permissible maximum.  See State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003) (noting that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process”).

It is easy to fathom an FCA case in which the ratio of civil penalties to single damages would exceed 10-to-1.  For example, in cases where the government alleges that a health care provider “upcoded” (i.e., assigned an inaccurate billing code to increase reimbursement) charges to a federal payor, the difference in reimbursement between the service for which the provider billed and the service actually performed might only be $100 per treatment (or even less).  In such a case, the $100 per treatment would represent the amount of damages the federal payor suffered.  In the event a court awarded a civil penalty of $21,563 per claim, the ratio of civil penalties to single damages could be over 215-to-1.

Contractors who face the possibility of civil penalties should keep in mind these constitutional considerations, as they may present opportunities for litigants to ask courts to decrease civil penalties or decline to apply them altogether.