The COVID-19 pandemic has led to unprecedented levels of government spending and with it, an increased risk that taxpayers will be defrauded.    The federal government has spent, and will continue to spend, trillions in taxpayer dollars attempting to contain the spread of the disease, treat those who have been infected, stabilize and stimulate the economy, and develop and distribute a potential vaccination.  Trillions of dollars will be spent not only on direct COVID-19 authorizations, but also as part of ongoing federal and state programs, such as Medicare and Medicaid.

History has taught us that expansive government spending attracts fraudsters who hatch schemes to line their pockets at the expense of taxpayers and public health.  The False Claims Act (“FCA”) was born just in such an emergency.  During the Civil War corrupt contractors were undermining the Union armies by selling defective food, gunpowder, and supplies.   Rigorous oversight is vital to ensure that these fraudulent actions are exposed and those responsible are punished accordingly.  The FCA is the key coronavirus anti-fraud law.  It is imperative that Congress fix two problems with the current interpretation of the law in order to make sure that the public and taxpayers are protected. 

Time has shown that the most effective weapons the federal government can employ to detect or stop frauds are whistleblowers, specifically those who use the qui tam provisions of the FCA to report frauds to the Department of Justice (“DOJ”).  The FCA holds accountable those who knowingly present false or fraudulent claims for payment to the United States by allowing the government to recover treble damages for such actions.  Importantly, the FCA through its qui tam provisions, empowers private citizens, known as “relators,” to initiate FCA actions on behalf of the government when they possess inside knowledge of fraud.  Through this mechanism, citizens are able to expose vast amounts of fraud perpetrated against the United States which otherwise would have gone unchecked.    The efficacy of the FCA is undisputed, with recoveries of over $60 billion in taxpayer dollars in the past 30 years, with the majority of those recoveries involving fraud in federally funded healthcare programs., including $10.5 billion in the last five years.

The FCA is the most powerful federal law ensuring that monies spent fighting COVID-19 are lawfully spent.  The FCA is the law that not only is best positioned to protect the trillions of dollars being spent on the COVID-19 crisis, but also can provide remedies when the health care providers fail to protect patients or the public health as required under federally sponsored healthcare programs. 

For example, a hospital that intentionally falsifies billing records for its treatment of COVID-19 patients in order to receive higher Medicare or Medicaid reimbursements would be liable for three times the amount it was fraudulently reimbursed.  Further, any contractor who knowingly sells defective personal protective equipment to the United States would likewise be liable under the FCA.  Such liability should act as both a powerful deterrent against future fraud and an effective means of punishing past fraud.  However, despite the FCA’s success and potential to provide the necessary oversight for federal COVID-19 spending, recent federal court rulings and DOJ policies threaten the law’s effectiveness.   These impediments will easily allow opportunistic crooks to escape liability for COVID-19-related fraud, costing the taxpayers untold billions, threatening patient health, and stalling economic recovery.

The first issue that has plagued recent FCA case law, and which has the potential to derail COVID-19 FCA cases, is the FCA’s “materiality” standard.  This standard is easy to understand.  Not every act of negligence or failure to comply with a contract necessarily results in liability under the FCA.  A violation has to be “material.”  To prevail under the FCA, it must be shown that a fraud has “a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property” by the United States.  If “materiality” is difficult to prove, corrupt contractors will be able to make billions in profits, even if they violate public health or fail to deliver the necessary goods and services.  Cheaters will walk away with billions, without accountability.

The issue of the FCA materiality was the subject of a recent Supreme Court decision in the case Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).  In the Escobar case, the Supreme Court provided numerous factors that a court could consider for when determining whether fraud was material to the United States decision to pay a claim.  One such factor, government knowledge of the fraud, has since repeatedly been used by defendants and courts alike as a justification for dismissing FCA cases.  Regarding government knowledge, the Supreme Court wrote in Escobar:

[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.

Lower federal courts have greatly expanded this government knowledge factor.  Specifically, even though the Supreme Court only discussed “actual knowledge” of the fraud, many courts have used “government knowledge” of mere allegations of fraudulent conduct as grounds to dismiss FCA cases.

Specifically, a recent Tenth Circuit FCA opinion relied on the fact that the government was aware only of “detailed allegations” of fraud while admitting the government “may not have obtained ‘actual knowledge’ of the alleged infractions,” as grounds to dismiss a FCA case.

In the context of combating COVID-19 frauds this interpretation will have disastrous impact.  The government may continue to pay a contractor that is committing fraud due to the health care and financial emergencies triggered by the COVID-19 pandemic.  The government will not have enough personnel to properly investigate every allegation of fraud, and most likely will continuing paying under various contracts or agreements.  To permit corrupt contractors to use the current emergency to illegally profit would completely undermine the intent of the FCA, let alone public health and financial recovery.

Worse still, although government knowledge was described by the Supreme Court as only being “strong evidence” of immateriality, at least one court has made the government knowledge factor dispositive stating that the government or a relator “must prove that had the government known the facts the government would have refused to pay.”[1]  This logic essentially leaves no room for the government to pay a claim and later bring an FCA case.

Even if courts properly read the Supreme Court’s language in Escobar, the issue of government knowledge is still incredibly nuanced and courts risk dismissing valid FCA claims for invalid reasons.  Specifically, courts need to consider the level of “actual knowledge” by the government is sufficient to defeat materiality.  If one low-level government official, who has no authority to stop payment on a claim, becomes aware of fraud, does that translate into sufficient actual knowledge by the government to defeat materiality?  By the plain language of the Supreme Court, it appears that it might but such a conclusion would plainly be an absurdity.  Further, what if the contracting officer in charge of paying a claim for the government is a co-conspirator of the scheme?  Again, in that situation, the knowledge of the corrupt government official seemingly provides actual knowledge to the government but to allow that fact to let defendants escape FCA liability would eviscerate the purpose of the FCA.

These types of scenarios are not far-fetched.  Experienced FCA attorneys see these types of cases every day.

Most importantly, because of the COVID-19 emergency, there will be many instances where it is absolutely necessary for the government to pay a claim despite possessing information related to a potential fraud.  Such necessity arises when it is vital that the government obtain goods or services immediately and has no other procurement options but to deal with a fraudulent contractor who is overcharging the government.  It is easy to imagine a scenario in which vital COVID-19 treatment, vaccinations, or other equipment is presented to the government but for some reason, the price of these goods or services was knowingly inflated due to fraud.  If the government has no other means to secure these items, and lives are at stake, it would be a terrible mistake to permit the fraudulent contractor to escape FCA liability simply because the government chose to prioritize human life over money.

In order for the FCA to properly protect COVID-19 spending, it is vital that Congress clarify the meaning of materiality under the FCA.  Given the COVID-19 pandemic, it could take decades for the courts to resolve this issue.  But trillions are being spent today, lives are at risk, and the economy needs to restart. 

The second issue which could prevent proper FCA enforcement for COVID-19 fraud is a recent DOJ policy permitting, and encouraging, the government to unilaterally dismiss FCA cases.  On January 10, 2018, a memo was issued by Michael D Granston, Director of the Commercial Litigation Branch at DOJ.  The so-called “Granston memo” contained new guidance instructing DOJ attorneys to more aggressively dismiss FCA cases brought by qui tam whistleblowers.    Prior to the Granston memo, DOJ rarely sought such dismissals but rather allowed relators to pursue the FCA cases on their own.  Over the past five years, whistleblowers (without the DOJ’s help) recovered $1.65 billion from fraudsters.  For years the Chamber of Commerce and other anti-whistleblower organizations have sought to shut-down whistleblower-driven lawsuits.  The Granston memo, and its aggressive implementation, is a fraudster’s dream come true.

The Granston memo is extremely troubling insomuch as it permits DOJ attorneys to seek dismissals in FCA cases which may be meritorious (i.e., contain valid allegations that the United States was defrauded).  This policy allows corrupt contractors to defraud the government with impunity.

Permitting the DOJ to unilaterally dismiss whistleblower qui tam cases also raises the specter of political and corrupt interference with the justice system.  The right of whistleblowers to pursue corruption cases under the FCA was born during the Civil War, when some in the federal government were siding with the Confederacy and undermining the war effort.  Corruption in government contracting goes both ways.  Contractors can be corrupt, but so can government officials who collude with them.  

With trillions of dollars in spending, it is all but guaranteed that many private citizens will witness fraudulent attempts to receive COVID-19 related payments and file qui tam FCA cases in order to expose the fraud.  It is only logical that because so much money is at issue, the number of qui tam cases being brought will correspondingly surge.    If the Granston memo is adhered to, it is highly likely that numerous meritorious FCA cases will be dismissed.  The end result would be allowing COVID-19 fraudsters a free pass.

The FCA was designed to protect taxpayers and the public during a crisis such as the COVID-19 pandemic.  Congress must act immediately to ensure that the FCA will work in this crisis.  Whistleblowers will do their job, if the law will permit them.

[1] While the decision by the District Court of the Middle District of Florida was just recently overturned for other reasons, that case shows that courts are willing to stretch the Escobar language beyond its actual meaning.