The FCA Insider

The FCA Insider

Insights and updates on False Claims Act Litigation

Uncategorized

Seventh Circuit Looks to “Separate the Wheat from the Chaff” by Adopting a New FCA Causation Test

In United States v. Luce, the Seventh Circuit overturned a two-decade precedent by holding that proximate causation, and not “but for” causation, was the proper standard to employ in FCA cases.  In so holding, the Seventh Circuit undid the 25-year circuit split it had created through use of “but for” causation in FCA cases.

In Luce, the defendant was the founder and president of MDR Mortgage Corp., a mortgage lending business.  MDR sought to participate in the Fair Housing Act (FHA)’s insurance program, which requires mortgagees annually certify that that none of its owners, officers, and/or employees were currently, or had previously been, involved “in a proceeding and/or investigation that could result, or has resulted in a criminal conviction, debarment, limited denial of participation, suspension, or civil money penalty by a federal, state, or local government.”  Luce had been indicted in 2005 for fraud and obstruction of justice, but nevertheless certified on behalf of MDR that it was in compliance with the FHA program requirements.  In 2008, MDR notified the federal government of Luce’s prior indictment.

Pursuant to this finding, the United States brought an FCA action against Luce alleging that he defrauded the federal government by falsely certifying that he had no criminal history so that MDR could participate in the FHA’s insurance program.  As part of his defense to these allegations, Luce argued that the Seventh Circuit should adopt a more rigorous causation standard in accordance with the Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar and other federal circuit case law.

The Seventh Circuit first adopted the “but for” causation standard for FCA cases in United States v. First National Bank of Cicero, 957 F.2d 1362 (7th Cir. 1992).  In Cicero, the court reasoned that 31 U.S.C. § 3729(a)(1)’s language that the government could recover treble the damages it sustained “because of” the defendant’s fraudulent acts justified a broad and inclusive “but-for” causation test.  Luce argued that the court should overrule Cicero and apply common-law fraud principles’ more stringent causation standard to assess a defendant’s liability.

Though the 2016 Escobar opinion does not directly address causation, the opinion does emphasize the importance of applying common-law fraud principles to FCA cases (i.e., the application of the proximate causation test).  The Luce court followed this direction and overruled Cicero.

For 25 years, the Seventh Circuit acted as an outlier in its use of the but-for causation standard for FCA cases.  In overruling this precedent and employing the proximate causation standard for FCA cases, the Seventh Circuit stated:  “The proximate causation standard ‘separates the wheat from the chaff,” allowing FCA claims to proceed against parties who can fairly be said to have caused a claim to be presented to the government, while winnowing out those claims with only attenuated links between the defendants’ specific actions and the presentation of the false claim.”

As new and expansive FCA theories continue to appear, the Luce opinion demonstrates an attempt to keep claims within the FCA’s intended parameters.  Prior to the Luce decision, the Seventh Circuit was an attractive venue for FCA relators given its lenient and broad but-for causation standard. But now, FCA relators will have to allege and set forth enough facts to prove the more stringent proximate causation standard to survive motion practice.  FCA defendants will undoubtedly rely heavily upon Luce to curtail the ever-expanding and novel theories of liability under the FCA.

FCA Litigation

Ninth Circuit Denies Arbitration of a Relator’s FCA Claims

On September 11, 2017, in United States and State of Nevada ex rel. Welch v. My Left Foot Children’s Therapy, LLC, the Ninth Circuit held that an arbitration agreement between an employee-relator and her former employer was not broad enough to cover the Relator’s whistleblower claims under the FCA.  This opinion raises questions as to whether FCA claims can be subject to arbitration agreements to which the government is not a party.

In Welch, the Relator alleged that the Defendant violated the FCA by presenting fraudulent claims to federal health care programs.  The Relator filed suit in the U.S District Court for the District of Nevada, but the Defendant moved to compel arbitration under the Federal Arbitration Act, arguing that the parties had entered into a valid and binding employment contract that included an arbitration provision that would apply to the FCA claims.  Pursuant to the contract, the Relator had agreed to binding arbitration to resolve all claims that the Relator may have against the Defendant or that the Defendant may have against the Relator, including those “arising from, related to, or having any relationship or connection whatsoever  . . . with the [Defendant].”  The Agreement also provided that all disputes based on “any other state or federal law or regulation” were included within the scope of the contract.

Upon hearing the parties’ arguments as to whether arbitration should be compelled, the District Court found that it is the government (regardless of whether it intervenes), and not the whistleblower, who owns the underlying fraud claim in FCA cases. Accordingly, the District Court denied the Defendant’s motion to compel arbitration, reasoning that the Agreement did not extend to the government.  The Defendant appealed that ruling.

On appeal, the Ninth Circuit engaged in a textual analysis of the contract and ultimately upheld the District Court’s decision. In analyzing the contract, the Ninth Circuit explained that the FCA claims did not fall within the scope of the arbitration provision because the FCA claims were neither claims that the Defendant had against the Relator nor claims that the Relator had against the Defendant; rather, the FCA claims belonged to the government.  The Ninth Circuit reasoned that although the FCA grants a whistleblower the right to bring a claim on the government’s behalf, ultimately, the underlying fraud claims that are being asserted belong to the government.

Notably, the Ninth Circuit noted in dicta that the parties could have drafted a broader agreement that would have covered ‘“any lawsuits brought or filed by the employee whatsoever . . . including those brought on behalf of another party.”’  It remains to be seen if such an arbitration provision would be upheld in the context of an FCA action, but, at a minimum, the Ninth Circuit’s opinion did not foreclose that possibility with an appropriately drafted arbitration selection provision.

Uncategorized

Holding Executives Personally Responsible: An Increasing Government Priority

Earlier this month, we covered the Spectocor action which involved an executive and his company’s agreement to pay $10.56M of a $13.45M total settlement to resolve allegations involving medically unnecessary Medicare reimbursements. In another stark reminder that the Department of Justice has increased its focus on individual liability for corporate executives, as per the directive of the Yates Memo, the Government recently entered into to two more significant settlements with individuals accused of violating of the False Claims Act.

The first noteworthy settlement – involving The Hartford Dispensary – involved a total of $627,000 split between a corporation and its former CEO to resolve allegations that the CEO’s substance abuse treatment center made false representations and false certifications to the government that it had a medical director as required by federal and state law.

The second noteworthy settlement – involving Southeast Orthopedic Specialists – was settled by the agreement that a former CFO and COO would be personally accountable in the sum of $100,000 for allegations that he knew or should have known that medically unnecessary and unreasonable services were billed to federal healthcare programs. Commenting on this settlement, an OIG special agent announced that the government will “relentlessly seek to hold corporate officers who defraud the Medicare program personally accountable,” and that it will continue to “pursue company executives who misrepresent services to boost profits.”

The DOJ emphasizes that settlements like these are part of its increasing “focus on identifying specific individuals who participate or further financial fraud” as part of the government’s priority to hold individuals accountable for corporate malfeasance.  We will continue to update this blog as the DOJ announces settlements in which individuals are personally being held financially responsible for alleged violations of the False Claims Act.

Uncategorized

New CMS Guidance on Inpatient Engagement Necessary for Hospital Certification

On Sept. 6, 2017, the Centers for Medicare and Medicaid Services (CMS) issued an advanced copy of guidance to state survey agency directors that is intended to clarify how to determine whether a hospital seeking Medicare certification, or going through a continuing certification survey, is “primarily engaged in providing inpatient services” under the Social Security Act. The following sets forth a brief history of the inpatient engagement issue and key takeaways from the new guidance, which takes effect immediately.

The term “hospital,” for purposes of the Social Security Act, means an institution which, among other things “is primarily engaged in providing, by or under the supervision of physicians, to inpatients (A) diagnostic services and therapeutic services for medical diagnosis, treatment, and care of injured, disabled, or sick persons, or (B) rehabilitation services for the rehabilitation of injured, disabled, or sick persons.” 42 U.S.C. 1398x(e). Historically, CMS has engaged in a series of de-certification actions as a result of a hospital’s alleged failure to be “primarily engaged” in providing services to inpatients, although the manner in which CMS interprets and enforces this requirement has varied. Prior to this new guidance, the only attempt by CMS of which we are aware to formally and publicly identify how the “primarily engaged” requirement would apply, was in the form of a 2008 memo that states, in part:

In the absence of other clearly persuasive data, CMS renders a determination regarding hospital status based on the proportion of inpatient beds to all other beds. At the request of the applicant CMS may examine other factors in addition to bed ratio. The agency recognizes that the “51%” test may not be dispositive in all cases. However, we consider the burden of proof (to demonstrate that inpatient care is the primary health care service) to reside with the applicant, and consider the burden to increase substantially as the ratio of inpatient to other beds decreases.

The CMS memo specifically targeted provider-based off-campus emergency departments and hospitals specializing in the provision of emergency services, but its application has been applied more broadly. Further, CMS has continued to interpret compliance with the “primarily engaged” definition on a case-by-case basis, and not all CMS survey offices have used the 51 percent bed count as the applicable standard. This has led to significant uncertainty in the industry.

The new guidance, which amends Appendix A of the State Operations Manual that survey agencies are instructed to follow when conducting the hospital survey and certification process, provides new insight into CMS’ thinking on inpatient engagement. It identifies two key factors that surveyors should consider: (1) average length of stay (ALOS), and (2) average daily census (ADC). However, much like the CMS memo, there is still significant room for interpretation.

Initially in the new guidance, CMS explained that “generally, a patient is considered an inpatient if formally admitted as an inpatient with the expectation that he or she will require hospital care that is expected to span at least two midnights.” Thus, CMS instructs surveyors that an ALOS of two midnights will be one of the benchmarks considered for hospital certification. Further, because the Social Security Act refers to the provision of care to “inpatients” (plural), CMS stated that “hospitals must have at least two inpatients at the time of the survey in order for surveyors to conduct the survey.” If a hospital does not have at least two inpatients at the time of a survey, a survey will not be conducted at that time, and an initial review of the hospital’s admission data will be performed to determine if the hospital has had an ADC of at least two and an ALOS of at least two midnights over the last 12 months. If such review shows that the ADC and ALOS are each two or more, a second survey will be attempted at a later date. However, if the hospital does not have a minimum ADC of two inpatients and an ALOS of two over the preceding 12 months, “the facility is most likely not primarily engaged in providing care to inpatients and the CMS Regional Office must look at other factors to determine whether a second survey should be attempted.”

Surveyors are further instructed in the new guidance on other factors they should consider in determining whether to (1) conduct a second survey, or (2) recommend denial of an initial applicant or termination of a current provider agreement. These factors include but are not limited to the following:

  • The number of provider-based off-campus emergency departments (EDs). An unusually large number of off-campus EDs may suggest that a facility is not primarily engaged in inpatient care and instead is primarily engaged in providing outpatient emergency services.
  • The number of inpatient beds in relation to the size of the facility and services offered. For example, a facility with only four inpatient beds, but six to eight operating rooms, 20 emergency department bays and a 10-bed ambulatory surgery outpatient department most likely is not primarily engaged in inpatient care.
  • The volume of outpatient surgical procedures, compared to inpatient surgical procedures.
  • If the facility considers itself to be a “surgical” hospital, are procedures mostly outpatient? Does the information indicate that surgeries are routinely scheduled early in the week, and does it appear this admission pattern results in all or most patients being discharged prior to the weekend (i.e., that the facility routinely operates in a manner where its designated “inpatient beds” are not in use on weekends)?
  • Patterns and trends in the ADC by the day of the week. For example, does the ADC consistently drop to zero on Saturdays and Sundays? This would suggest that the facility is not consistently and primarily engaged in providing care to inpatients.
  • Staffing patterns. A review of staffing schedules should demonstrate that nurses, pharmacists, physicians, etc., are scheduled to support 24/7 inpatient care, versus staffing patterns for the support of outpatient operations.
  • How does the facility advertise itself to the community? Is it advertised as a “specialty” hospital or “emergency” hospital? Does the name of the facility include terms like “clinic” or “center,” as opposed to “hospital”?

CMS instructs its surveyors to consider all of the above factors (and potentially others) to determine whether a facility is truly operating as a hospital for Medicare purposes, rather than making a determination “based on a single factor, such as failing to have two inpatients at the time of a survey.” Accordingly, a hospital’s failure to satisfy the ALOS and ADC tests should not necessarily result in the denial of certification or de-certification. However, a hospital with historical ALOS and ADC below two should carefully review the other considerations outlined above, review internal data to ascertain its level of risk based on those considerations, and consider adjusting its operations accordingly. Further, hospitals should monitor the manner in which the new guidance is implemented by the applicable survey agency, given the amount of latitude CMS has provided to surveyors to examine the totality of circumstances when addressing the inpatient engagement issue.

McGuireWoods already helps hospitals both engage in self-analysis to evaluate their performance generally in relation to the “primarily engaged” requirement and to respond to CMS inquiries of compliance on this topic. Moving forward, our lawyers are well-positioned to assist hospitals with the evaluation of their compliance efforts in light of the new guidance and assist should any survey or certification issues arise. If you have any questions regarding the new guidance, please contact Amber Walsh or Jake Cilek.

Uncategorized

The Yates Memo: A Reminder that Executives are Vulnerable Too

The 2015 Yates Memo continues to impact federal prosecutions as the Department of Justice continues to seek accountability from individuals responsible for corporate wrongdoings. As the two year anniversary of the Yates Memo approaches, recent FCA litigation exemplifies the Yates Memo’s intentions.

For example, on June 26, 2017, the DOJ reminded us once again that business executives may be financially responsible for claims made under the False Claims Act (FCA) against their companies. This reminder comes by way of a $13.45M settlement involving cardiac monitoring companies and one of its executives. The case involved AMI Monitoring Inc. aka Spectocor, its owner, Joseph Bogdan, Medi-Lynx Cardiac Monitoring LLC, and Medicalgorithmics SA, the current majority owner of Medi-Lynx Cardiac Monitoring LLC. The settlement’s terms require Spectocor and its owner, Joseph Bogdan, pay $10.56 million and Medi-Lynx and Medicalgorithmics pay $2.89 million. The case is United States ex rel. John Doe v. Spectocor Enterprise Services, LLC, et al., Case No. 14-1387 (KSH) (D. N.J.) (filed under seal).

This settlement is a reminder for business owners and executives: Financial responsibility under the False Claims Act can reach beyond the corporate entity and into an executive’s own pockets.

Initially litigated as a qui tam action until government intervention, Spectocor involved a Pocket ECG capable of performing three types of cardiac monitoring services, each with a different reimbursement rate. Allegedly, the enrollment process—which was purposed to determine the appropriate monitoring service for the patient—prescribed the service that had the highest reimbursement rate covered by the patient’s insurance. The DoJ argued that this led to unnecessary services and thus increased Medicare reimbursements to the defendants. Commenting on this settlement, the Acting U.S. Attorney William E. Fitzpatrick for the District of New Jersey suggested that he will keep a watchful eye for other examples of “[s]ophisticated medical technology” being used to “fraudulently increase medical bills.”

Spectocor is not the first FCA case to require a business executive contribute financially to resolve an FCA action and it certainly will not be the last. The DoJ continues to follow the 2015 Yates Memo’s directive and continues to hold individuals accountable for corporate wrongdoing.  Business executives should heed Spectocor as yet another example of the Yates Memo’s policy in action. Accordingly, business executives have yet another reason to proactively monitor their business’ operations to ensure full compliance with federal laws such as the False Claims Act.

Investigations

Recent Privilege Decision Raises Questions for Internal Investigations

A recent federal district court case raises significant issues regarding privilege that should be on the radar of any in-house or outside counsel conducting an internal investigation with the goal of producing a public report. As discussed in a recent Privilege Points, the investigation at issue was conducted for the Washington Metropolitan Area Transit Authority (WMATA) and focused on evaluating its business practices and the standard of conduct for its directors. As part of the investigation, the law firm conducted more than 30 interviews and created 51 interview memoranda, all of them marked as work product. The law firm created an investigative report of its findings and the WMATA board publically released the report.

In civil litigation related to the investigation, plaintiffs sought production of the interview memoranda. The court’s decision, Banneker Ventures, LLC v. Graham, 2017 U.S. Dist. LEXIS 74155 (D.D.C. May 16, 2017), held that WMATA had waived privilege as to the subject matter of the memoranda by publically releasing the report. A key point of the decision was that the final report had extensively cited to the interview memoranda, referencing many of the memoranda multiple times. The court also focused on the fact that WMATA had tried to use the final report as part of its defense to the civil litigation and that as a matter of fairness it could not then refuse to disclose the underlying memoranda.

The decision, if followed by other courts, raises significant questions regarding internal investigations and suggests several best practices for organizations considering beginning internal investigations:
• Have a clear understanding of the goals of an investigation from the onset including whether a public report will be desirable.
• Generate interview memoranda and other documents with the understanding that they may become public if there is a public report.
• When drafting a public report, consider whether a report with less specific detail or more general statements could accomplish the same goal while being more likely to preserve privilege.
• Consider releasing only an executive summary or a report drafted specifically to be a high-level description of findings.
• Consider avoiding citation to or detailed discussion of confidential underlying documents.

Most importantly, when determining whether to publically release a report of an investigation, any organization should be aware of the likelihood that such a release will waive privilege, and consider the potential implications for civil litigation and government investigations.

Uncategorized

Ninth Circuit Ruling Weakens Materiality Standard under the FCA

Last year in Universal Health Services, Inc. v. United States ex rel. Escobar et al. (discussed on this blog), the Supreme Court reminded litigants that the False Claims Act “is not an all-purpose antifraud statute.” In that case, the Court expanded upon the FCA’s materiality standard, calling it both “rigorous” and “demanding.” How demanding that standard would be in practice, however, depended on the lower courts. Earlier this month, a Ninth Circuit panel issued an opinion that appeared to relax that demanding standard.

In United States ex rel. Campie v. Gilead Sciences, relators alleged that Gilead lied to the FDA to secure approval to manufacture three anti-retroviral drugs using certain facilities in China and Canada. (Relators also alleged that Gilead manufactured the drugs in these facilities before getting FDA approval and falsified records to conceal the fact.) Gilead later submitted requests for payment for these drugs through a number of federal programs, each of which makes FDA approval a precondition for payment. Relators argued that the FDA would not have approved these drugs but for Gilead’s misrepresentations. Thus, they argued that Gilead made false claims when it sought payment for FDA-approved drugs. Gilead countered that, in fact, many of the issues it allegedly misrepresented to secure FDA approval became known to the FDA in the years after approval. Despite this knowledge, the FDA never withdrew its approval.

The Ninth Circuit reiterated Escobar’s materiality standard and observed that “[r]elators thus face an uphill battle in alleging materiality.” Nonetheless, the panel found that standard met. It equated Gilead’s submissions to the FDA seeking approval with actionable false claims. Finding that the misrepresentations to the FDA could have impacted the approval decision, the court concluded that those misrepresentations could therefore have affected the government’s decision to pay. The panel also rejected Gilead’s government knowledge defense of materiality, finding that issue to be a factual one. It observed that there could be many reasons why the FDA declined to withdraw its approval after learning of problems. At its core, the decision’s animating concern is preventing FDA approval from being used “as a shield against liability for fraud.”

This decision reduces the rigor of Escobarmateriality analysis, allowing the relators to claim a more attenuated connection between the materiality of false statements and the government’s decision to pay. As a result, it substantially increases the opportunities to bring FCA claims under a “fraud-on-the-agency” theory. Late last year, the First Circuit rejected this theory of liability, in part because it found that under Escobar, the fraudulent representation must itself be material to the decision to pay. It thus rejected a fraud-on-the-agency theory of liability. Should more courts follow the approach in Gilead, however, FCA defendants in regulated industries may find themselves increasingly re-litigating agency proceedings in FCA cases.

Uncategorized

Appellate Court Holds that the First-to-File Bar is Not Jurisdictional

On April 4, 2017, in United States ex rel. Hayes v. Allstate Ins. Co., 853 F.3d 80 (2nd Cir. 2017), the Second Circuit joined the D.C. Court of Appeals in holding that the first-to-file bar is not jurisdictional, and therefore, that a court is not deprived of subject matter jurisdiction upon a first-to-file bar finding.

Generally speaking, the first-to-file rule, 31 U.S.C. § 3730(b)(5), prohibits an individual from bringing a qui tam action if there is already another pending action based on the same facts.  The courts agree that the first-to-file bar “functions both to eliminate parasitic plaintiffs who piggyback off the claims of a prior relator, and to encourage legitimate relators to file quickly by protecting the spoils of the first to bring a claim.” In re Nat. Gas Royalties Qui Tam Litigation, 566 F.3d 956 (10th Cir. 2009) (citing Grynberg v. Koch Gateway Pipeline Co., 390 F.3d 1276, 1279 (10th Cir.2004); Wisconsin v. Amgen, Inc., 516 F.3d 530, 532 (7th Cir.2008); Campbell v. Redding Med. Center, 421 F.3d 817, 821 (9th Cir.2005)). As the Hayes court recognized, however, courts disagree on whether the first-to-file bar is jurisdictional. Compare United States ex rel. Branch Consultants v. Allstate Ins. Co., 560 F.3d 371 (5th Cir. 2009) (holding that the first-to-file bar is jurisdictional), with United States ex rel. Heath v. AT&T, 791 F.3d 112 (D.C. Cir. 2015) (holding that first-to-file bar is not jurisdictional).

In concluding that the first-to-file bar is not jurisdictional, the Hayes court cited to guidance from the Supreme Court that jurisdictional bars should be employed only where Congress “has clearly stated that the rule is jurisdictional” and that in the absence of such a clear statement, the statutory restrictions should be seen as “nonjurisdictional in nature.”  853 F.3d at 86 (quoting Sebelius v. Auburn Reg’l Med. Ctr., 568 U.S. 145 (2013)).  Relying on this principle, the Hayes court reasoned that 31 U.S.C. § 3730(b)(5) does not reference jurisdiction or speak in jurisdictional terms; instead, it provides only who may bring a qui tam action and when such an action can be brought.  The Hayes court then contrasted the absence of jurisdictional language in Section 3730(b)(5) against the explicit invocations of jurisdiction in Sections 3730(e)(1) and 3730(e)(2)(A) to conclude that the first-to-file bar is not jurisdictional.

While the Hayes court found that the first-to-file bar is not jurisdictional in the Second Circuit, it should be made clear that Hayes does not inhibit or significantly weaken the first-to-file defense.  Instead, it simply means that a first-to-file bar claim goes to the merits of whether the relator stated a claim.  While this impacts how and when the first-to-file bar defense can be raised, it will not change the fact that relators are barred from filing related FCA actions based on the same facts of an already pending case.

Damages, FCA Litigation

Government Increases Civil Monetary Penalties Again

The Department of Justice has announced new, increased civil penalties that are applicable under the False Claims Act (FCA). The new range of FCA penalties is from $10,957 to $21,916.  These increased statutory penalties reflect a continuing, inflation-based increase to the available statutory penalties.

This marks the second year in a row in which the applicable penalties under the FCA have been increased. The statutory penalties under the FCA had long been set in a range between $5,500 and $11,000, in addition to treble damages, attorneys’ fees, and costs.  Last year, the Government increased the statutory penalties to reflect inflation during the time period in which the penalties had remain unchanged.  The 2016 increase saw the range of statutory penalties increase to a range of $10,781 through $21,563.  These statutory penalties remain in addition to, and not instead of, treble damages, attorneys’ fees, and costs.

The new penalties were calculated using an applicable inflation factor of 1.01636. The new penalties are applicable only to violations that took place after November 2, 2015, and where the penalties are incurred after February 3, 2017.

These new penalties reflect the Government’s commitment to increasing the statutory penalties to track inflation. After the many years without increases, the Government is committed to its new trend of annual increases.  These increased penalties demonstrate the continued need to be accurate in submitting claims to the Government and to ensure that compliance is prioritized.

Uncategorized

Successor Liability and the False Claims Act

The Fourth Circuit recently provided guidance on a successor entity’s liability under the False Claims Act in United States ex rel. Bunk v. Government Logistics N.V., 642 F.3d 261 (4th Cir. 2016).  Bunk involved a bid-rigging scheme between freight operators who had submitted inflated bids to the Department of Defense.  The Gosselin Group and its CEO, Marc Smet, were at the center of the scheme.  Starting in 2001, Smet and the Gosselin Group began conspiring with other entities to increase the prices that the DOD paid to the freight operators.

Smet and the Gosselin Group were subsequently indicted, and in 2004, the Gosselin Group pled guilty to conspiracy to defraud the Government and conspiracy to restrain trade.  In 2006, after the criminal proceedings had concluded, the Government informed Smet and the Gosselin Group that two qui tam actions concerning the same bid-rigging scheme had been filed back in 2002.  After learning about the existence of the qui tam actions, the Gosselin Group entered into a series of transactions with the newly created Government Logistics whereby Gosselin Group transferred its business with the DOD to GovLog.  GovLog’s principals were all employees of Gosselin Group or one of its subsidiaries and GovLog paid nothing to the Gosselin Group in exchange for the transfer of business.  Instead, GovLog agreed to transfer a percentage of future net revenues to the Gosselin Group.

After learning of the transfer, the relators amended their complaint to add GovLog as a defendant, alleging that GovLog was liable as the Gosselin Group’s successor because the transaction was a sham and done solely to defraud the relators. GovLog argued that it could not be held liable as a successor under any recognized legal theory and that the relators’ fraudulent transaction allegations were entirely speculative.  The district court agreed with GovLog and entered summary judgment in its favor.

On appeal, the Fourth Circuit first explained the general rule that a corporation that acquires the assets of another corporation does not also acquire its liabilities. The Court went on to explain, however, that there are several well-defined exceptions to this rule, including where the transaction is fraudulent.  In holding that summary judgment was inappropriate, the Fourth Circuit found that the transaction was “adorned with several of the badges of fraud” as there was evidence of inadequate consideration, the transaction allowed for the Gosselin Group to retain benefits as it was to be paid from GovLog’s net revenues, and the transaction was commenced in response to Smet learning about the pending qui tam actions.

The Bunk decision provides an instructive analysis on the contours of successor liability in the FCA context.  As the Bunk court explained, while the default rule remains that an entity acquiring the assets of another company does not also take on the seller company’s liabilities, the transaction must be legitimate and cannot be done in an attempt to escape liability or damages under the FCA.