Fourth Circuit Permits DOJ to Reject an FCA Settlement, But Punts Decision on Statistical Sampling

In a closely watched False Claims Act (“FCA”) case, the Fourth Circuit Court of Appeals decided that the Department of Justice (“DOJ”) has an unreviewable right to object to a proposed settlement agreement between a relator and a defendant when the Government has declined to intervene in the case. United States ex rel. Michaels v. Agape Senior Community, Inc., No. 15-2145 (4th Cir. Feb 14, 2017).  In addition, as most expected, the court declined to decide the legal issue whether FCA plaintiffs may rely on statistical sampling of claims to prove FCA liability and damages, concluding that it had “improvidently granted” an interlocutory appeal of the lower court’s ruling on the use of statistical sampling.  This decision thus leaves intact the district court’s decision that rejected the relator’s proposed use of statistical sampling to prove FCA liability and damages.  The Fourth Circuit’s decision not to address the use of sampling in FCA cases leaves many open questions.

Case background and the Fourth Circuit’s decision

My colleagues have previously discussed the case background and the district court’s decision as well as the issues presented to the Fourth Circuit. In short, a qui tam realtor alleged that Agape Senior Community and associated entities violated the FCA by submitting false claims to federal health care programs for nursing home related services that were not medically necessary or were not provided.  The United States declined to intervene in the case, and the relator pressed ahead with the lawsuit.

Following pre-trial mediation, the relator agreed to settle with defendants for a payment of $2.5 million. However, the DOJ objected to the proposed settlement under 31 U.S.C. § 3730(b)(1), arguing that the proposed settlement amount was too small because the estimated potential damages, in its view, were around $25 million.

At issue was 31 U.S.C. § 3730(b)(1), which provides that an FCA lawsuit “may be dismissed only if the court and the Attorney General give written consent to the dismissal and their reasons for consenting.” Courts have decided that this provision does not apply to dismissals in response to dispositive motions; it is limited to voluntary dismissals, such as those accompanying settlements.

Although the relator has the right to conduct the lawsuit after the United States declines to intervene, the Fourth Circuit concluded based on the statute that “the Attorney General possesses an absolute veto power over voluntary settlements in FCA qui tam actions.” The court emphasized that the United States is the real party in interest in any FCA suit, as it was damaged by the alleged fraudulent conduct. This decision rejected the Ninth Circuit standard in U.S. ex rel. Killingsworth v. Northrop Corp., which ruled that, after a declination, the United States can object to a proposed settlement for “good cause” and obtain a hearing to determine if the settlement is fair and reasonable. Instead, the Fourth Circuit sided with Fifth and Sixth Circuit decisions holding that the United States has an absolute veto power over settlements in declined FCA cases.

On the sampling issue, the Department of Justice and relators in the last few years have pushed to use statistical sampling to prove liability and damages in FCA cases. They argue that statistical sampling is essential in cases involving large numbers of potentially false claims, so that large-scale frauds do not go unaddressed. On the other side, defendants argue that claim-by-claim proof is required for the United States and relators to meet the burden of proof of falsity, and due process requirements, in FCA matters involving individual patient medical records.

In Agape, the district court determined that sampling was not appropriate because relator’s claims were based on allegations that services to nursing home patients were not medically necessary.  Proof of medical necessity requires a patient-specific, fact-intensive inquiry to determine the necessity of services for each patient based on a review of their medical chart.  This type of inquiry does not lend itself to sampling, and the court held that sampling was not appropriate given the particular facts and evidence in the case. The Fourth Circuit determined that the use of statistical sampling is not a pure question of law that was appropriate for interlocutory review.

Takeaways

The United States’ ability to veto a settlement has several implications for FCA cases. In particular, relators are proceeding with more FCA cases following the United States’ declination. In light of the United States’ ability to veto any settlement between relator and defendant in three circuits, the relator and the defendant have little ability to reach a resolution of a case without close communication and perhaps involvement of the United States. If the United States is likely to veto reasonable settlement options, then both realtors and defendants may be forced to conduct expensive and contentious litigation.

Without clear legal guidance from circuit courts, whether statistical sampling may be used to prove FCA liability will depend on whether, under the circumstances of each case, district courts will permit the use of sampling during the litigation or not. Either way, sooner or later, this issue will percolate to the Courts of Appeals for consideration of this critical issue in FCA litigation.

We will continue to monitor developments on both of these issues.

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