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Recent S.D.N.Y. Decision Awarding Costs Against False Claim Act Relator Will Likely Not Dissuade Future Whistleblowers Bringing Qui Tam Actions

Under the False Claims Act (31 U.S.C. §§ 3729–3733), private individuals (often called “relators” or “whistleblowers”) may file an action against persons or companies who have defrauded the government.  Last year, the U.S. Department of Justice (“DOJ”) obtained a record $5.69 billion in settlements and judgments from civil cases involving False Claims Act violations.  The DOJ’s record setting recovery in 2014 brings the total recovery in False Claims Act cases from January 2009 through the end of September 2014 to $22.75 billion.

These increased recoveries can be attributed to changes in legislation focused on preventing companies from defrauding the government.  For example, Congress amended the False Claims Act more than 28 years ago to, among other things, increase the monetary incentives for relators to file a lawsuit against individuals or entities for defrauding the federal government.  In subsequent amendments, through the Fraud Enforcement and Recovery Act of 2009 and the Affordable Care Act of 2010, Congress has provided additional inducements and protections to whistleblowers and relators.

Often, a relator will expose fraud and false claims by their employer at great risk to their career.  To incentivize relators, Congress has established a statutory scheme whereby a successful action may entitle a relator to as much as 30% of any recovery.  A recent report, published by the DOJ, details the success of these inducements in that more relators and whistleblowers are commencing more False Claims Act lawsuits; the result of which are more civil fines and penalties awarded to the government and more payments to whistleblowers and relators.  Since Congress amended the False Claims Act, the number of lawsuits filed under the qui tam provisions of the False Claims Act rose from 30 in 1987, to more than 700 for each of the last two years.  As the number of FCA lawsuits increased, so have corresponding whistleblower awards.  From January 2009 to September 2014, the government paid awards exceeding $2.47 billion.  Of the $5.69 billion the government recovered in 2014, the government paid out $435 million to relators.

However, in United States v. Huron Consulting Group, U.S. District Judge Jed S. Rakoff assessed costs totaling $13,726.75 against the relator.  In Huron, Associates Against Outlier Fraud (“Relator” or “Plaintiff”) sought $50 million in damages, alleging that defendants Huron Consulting Group, Inc., Huron Consulting Group LLC, and Huron Consulting Services, LLC (collectively, “Huron”), Empire Health Choice Assurance, Inc., and Empire Medicare Services (collectively, “Empire” and collectively with Huron, “Defendants”) overbilled Medicare and Medicaid while managing a now-defunct and then bankrupt hospital.  Plaintiff alleged a type of “outlier fraud” whereby fraudulent invoices for costs outside of the ordinary course of inpatient care are submitted to Medicare.  In response, Defendants argued that the relator was unable to assert that any Medicare rule, regulation, or manual provision that defines the manner in which hospital charges must relate to costs, and as such, their actions were not fraudulent.  On March 5, 2013, Judge Rakoff granted summary judgment in favor of the Defendants, finding that there was no evidence supporting Plaintiff’s assertion that the Defendants had submitted a factually or legally false claim to the government, engaging its own liability under the FCA.

On May 22, 2014, the Second Circuit Court of Appeals affirmed Judge Rakoff’s decision to grant summary judgment in Defendant’s favor on the grounds that no statute or regulation prohibited defendants’ actions, and that the defendants complied with all the legal requirements of a fiscal intermediary.

The Relator did not seek a writ of certiorari to the United States Supreme Court to challenge the Second Circuit’s Decision.  After the judgment was affirmed by the Second Circuit, Defendants submitted bills of costs in the District Court and the Clerk of Court awarded costs to Huron of $7,886.95 and costs to Empire of $5,839.80.  The Relator challenged this award of costs in the District Court, arguing that the False Claims Act does not permit the award of “reasonable attorneys’ fees and expenses” unless a court finds that the action was frivolous, vexatious, or brought for the purposes of harassment.  Indeed, the Defendants never alleged that the action was frivolous or otherwise.  Next, the Relator argued that the costs Defendants sought pursuant to FRCP 54(d)(1) were synonymous with “expenses,” whose recovery was prohibited under the Federal Claims Act.

Regarding the Plaintiff’s challenge to the award of costs, Judge Rakoff found that “§ 3730(d)(4)’s limitation on the recovery of ‘attorneys’ fees and expenses’ does not bar an award of ‘costs’ under Rule 54 (d) (1).”  Judge Rakoff’s holding found that the statutory language of the False Claims Act allowed this type of recovery by distinguishing costs from expenses.

Judge Rakoff’s opinion highlighted some of the potentially unforeseen financial risks facing whistleblowers and/or relators in that a relator could bring a non-frivolous claim to court, but lose on the merits and subsequently face having to pay the costs to the prevailing party.  However, many whistleblowers are motivated by something more than their own monetary gain.  As such, those who try to blow the whistle on potentially fraudulent behavior may not be discouraged by the Huron ruling and will continue to speak out against persons and corporations that defraud the government.

Lax & Neville LLP has extensive experience representing clients for claims arising under the False Claims Act as well as The Dodd-Frank Wall Street Reform and Consumer Protection Act.  If you have any questions about this article, please contact our team of attorneys for a consultation at (212) 696-1999.