A Fair Competition Teory of the Civil False Claims Act

• Publication year: 2021

94 Nebraska L. Rev. 355. A Fair Competition Teory of the Civil False Claims Act

A Fair Competition Teory of the Civil False Claims Act

David Kwok

TABLE OF CONTENTS

I. Introduction .......................................... 356

II. Background on the False Claims Act .................. 359

III. The Problem of "Technical" Contract Violations ........ 361

A. Pre-Contract Formation Fraud ..................... 362

B. Post-Contract Formation Fraud .................... 363

1. Express False Certification .................... 364

2. Implied False Certification ..................... 365

3. Condition of Payment vs. Participation ......... 365

4. Materiality .................................... 367

IV. The Failure of Implied False Certification Doctrine . . . . 368

A. Implied Certification Lacks Transparency .......... 368

B. Limiting Implied Certification Lacks Statutory and Legislative Support ................................ 369

C. Limited FCA Liability Leads to Underenforcement . 370

1. Low Direct Harm and Constrained Enforcement Resources ..................................... 370

2. Costs of Detecting and Sanctioning Non-Compliance .................................... 371

3. Regulatory Capture ............................ 372

4. Failure to Prioritize Incapacitation ............. 373

5. Failure to Consider Competitive Harm ......... 374

D. Unnecessary Risks for Whistleblowers ............. 376

V. Proposal: The Fair Competition Theory of the FCA . . . . 376

A. An Instrumental View of Hobbs ................... 376

B. A Fair Competition Approach to the FCA .......... 378

1. Cost of Compliance as a Sanction .............. 379

2. Limited Defenses Regarding No Competitive Harm ......................................... 381

a. Competitive Market with No One in Compliance ................................ 381

b. De Minimis ................................ 381

c. Government Knowledge .................... 382

3. Defenses that Courts Should Not Consider ..... 383

a. Actual Market Competitiveness ............ 383

b. Lack of Gains or Payment .................. 384

C. Two Alternatives to the Fair Competition Proposal .......................................... 384

1. Judicial Deference for Intervened Cases ........ 384

2. Express Adoption of Cost-Benefit Analysis ..... 385

VI. Fair Competition's Superiority Over the Status Quo . . . 386

A. Transparency and Predictability ................... 386

B. Closer to Statutory and Legislative Intent ......... 387

C. Improved Regulatory Enforcement ................. 388

1. Private Enforcers Care About Competitive Markets ....................................... 389

2. The Contracting Agency Has Some Comparative Concern for Competitive Markets .............. 389

3. Fair, Competitive Markets Are Part of the Underlying Premise of the FCA ................ 390

4. Government Control of Litigation Limits the Downside of Private Enforcement .............. 391

VII. Concerns ............................................. 391

A. Materiality ........................................ 391

B. Overcriminalization ............................... 393

C. Excessive Compliance Costs ....................... 396

D. Stigmatic Concerns in Incorporating Technical Violations ......................................... 396

E. Increased Liability Only for Those with Government Contracts ......................................... 397

F. Potentially Anti-Competitive Application of FCA Liability .......................................... 398

VIII. Conclusion ............................................ 400

I. INTRODUCTION

Whistleblowers are helping recover over $5 billion a year of fraud against the federal government under the False Claims Act,(fn1) but reliance on whistleblowers and prosecutorial discretion raises challenges when fraud allegations incorporate knowingly undisclosed regulatory violations.(fn2) On the spectrum of fraud charges, criminal charges fit the cases with the worst behavior: a healthcare provider billing Medicare for a service that is never actually provided.(fn3) Such behavior establishes clear losses for the government. More difficult, and the focus of this Article, is the distinction between civil fraud and non-culpable behavior under the civil False Claims Act (FCA). Does failure to disclose a known regulatory violation constitute civil liability under the FCA? Given the common difficulty in measuring the resultant harm, courts have struggled to articulate a cohesive regime of civil FCA liability for such clear regulatory violations.

For example, what if a provider billing Medicare knowingly identifies the wrong physician associated with an otherwise legitimate, effective healthcare service? Under existing case law, knowingly identifying the wrong physician supervisor does not generate civil liability under the FCA, but knowingly identifying the wrong physician provider does generate civil liability.(fn4) Courts use formalistic doctrines to find that some companies "implicitly" certify false compliance with regulations and thus are liable,(fn5) while others do not implicitly certify compliance and thus are not liable.(fn6) This erratic civil liability creates problems for all involved parties. Companies doing business with the government face uncertain liability in addressing regulatory compliance, as they may encounter dramatically different sanctions for similar regulatory violations. The government and society likely suffer underenforcement of regulatory violations, resulting in unnecessary risks from excess violations and misuse of government funds. Whistleblowers helping expose violations under the FCA may be less likely to come forward, wary of the risk that some clear, knowing regulatory violations are not legally actionable.

In this Article, I propose a new reading of the civil False Claims Act that is anchored on the principle of fair competition among those doing business with the government. Instead of focusing solely on punishment for the deception and immediate loss caused by a potential defendant, the FCA should be read as a solution to the problem that falsity and violations will occur in the government contracting process. A focus on fair competition comports with the FCA's goal of providing a level playing field for government business.

This reading flows naturally from the history of the FCA. The federal government does not itself produce all of the goods and services it uses, but it instead contracts with the private sector for certain needs.(fn7) The private sector ostensibly is superior to direct government production in providing those needs, due in part to competition and specialization. If, however, some private companies are more successful by secretly violating contracts in their government business without repercussions, then reliance on the private contracts becomes troubling.(fn8) By paying whistleblowers for information, the FCA further leverages the private sector to help detect and combat fraud.(fn9) Private entities can thus help the government through two distinct paths: by (1) producing goods and services per government contracts, and (2) revealing contractual breaches in existing government contracts.

The result of this competitive marketplace focus is that clear technical violations should normally be subject to FCA liability. Compliance with technical elements of contracts and regulatory schemes is costly; allowing a government contractor to avoid compliance costs may grant it a competitive advantage over other entities. In the long run, such a contractor may be able to push out competitors and obtain market power. Without competitors, the lone contractor may face little incentive to improve on pricing or services. The government then may pay more for inferior services, and this is the harm the FCA is well-equipped to address. Even though the precise level of competitive, long-term harm is difficult to measure, the underlying compliance costs are more easily measurable. Correcting inequities regarding non-compliance should help ameliorate the long-term competitive harms.

Courts can facilitate this application of the FCA by moving away from the excessively formalistic false certification doctrines and instead adopting a fair competition approach. Under this fair competition approach, if a defendant knows that it has committed a clear regulatory violation and bills the government without disclosing the violation, courts should presume the existence of competitive harm. The cost of compliance is a rough, low-end estimate for the sanction. This approach allows courts to focus upon their core competencies: identifying clear regulatory violations and determining the defendant's mens rea. The FCA's statutory procedures require extensive Department of Justice (DOJ) participation in the litigation process. Courts should rely on the DOJ and the contracting government agencies to evaluate the precise impact of violations on competitive markets. Since the DOJ can unilaterally dismiss any case over the objection of the whistleblowers, courts can set a bright-line rule regarding competitive harm without fear of abusive private litigation. If the DOJ allows the litigation to proceed, courts should presume that clear regulatory violations cause competitive harms. This broad presumption of FCA...