United States: DOJ Issues Rule Implementing Bipartisan Budget Act And Doubling FCA Civil Penalties

On June 29, 2016, the Department of Justice ("DOJ") issued an interim rule—the Civil Monetary Penalties Inflation Adjustment, 81 Fed. Reg. 42,491 (June 30, 2016)—that will nearly double civil penalties for False Claims Act ("FCA") violations. The rule implements the Bipartisan Budget Act of 2015 ("Budget Act"), a statute that requires federal agencies that impose civil monetary penalties to adjust those penalties to account for inflation. See Pub. L. No. 114-74, § 701, 129 Stat. 584 (2015). DOJ's rule increases the penalty range for FCA violations 96 percent, from $5,500–$11,000 per violation to $10,781–$21,563, and DOJ proposes to apply the increased penalties retroactively under narrow circumstances. This new DOJ rule will become effective August 1, 2016, but DOJ is accepting public comments until August 29, 2016.

History of FCA Civil Penalties

The civil penalties for FCA violations have increased over time. In 1986, statutory penalties increased from $2,000 to the $5,000–$10,000 range. Congress subsequently linked further increases to any adjustments in the Federal Civil Penalties Inflation Adjustment Act of 1990 ("Adjustment Act") and its amendments. 28 U.S.C. § 2461; see also 31 U.S.C. § 3729(a)(1).

In 1996, Congress enacted legislation amending the Adjustment Act. Under the amendments, each affected agency was required to make inflationary adjustments within its jurisdiction every four years; the first adjustment was capped at 10 percent of the existing penalty, and the penalty adjustment applied only to violations that occurred after the date the adjustment took effect. To implement the amendments to the Adjustment Act, in 1999, DOJ published a rule increasing by 10 percent the civil penalties for false claims from the $5,000–$10,000 range to the $5,500–$11,000 range. See 28 C.F.R. § 85.3 (a)(9) (1999). Those penalties remained unchanged until this year, with the passage of the Budget Act.

Background on the Budget Act

DOJ is among the numerous federal agencies that are adjusting civil penalties in response to the Budget Act. The Budget Act requires each affected agency to publish an initial adjustment in civil penalties through an interim final rulemaking by July 1, 2016, and to make the increases effective by August 1, 2016. In addition, the Budget Act requires agencies to adjust civil penalties to account for inflation each year, rather than every four years. The initial civil penalty increase—referred to as a "catch-up" adjustment—applies a cost-of-living adjustment percentage derived from the amount by which the Consumer Price Index ("CPI") in 2015 exceeds the CPI in the year the penalty amount was "most recently established or adjusted under a provision of law other than this Act." See Budget Act § 701(b).

The Budget Act also directed the Office of Management and Budget ("OMB") to issue guidance to federal agencies regarding how to implement the changes, and in February 2016, OMB did so. OMB's guidance indicated that DOJ should ignore the increase in civil penalties in 1999 and instead adjust for inflation from 1986 to 2015. Thus, the increase from $11,000 to $21,563 for an FCA violation is intended to account for inflation over those three decades.

Retroactivity

When DOJ increased civil penalties in 1999 to implement the 1996 amendment, DOJ applied the increase to only "violations occurring on or after" the adjustment took effect. See 28 C.F.R. § 85.3 (a)(9) (1999). By contrast, the 2015 Budget Act amended the Adjustment Act by inserting new language that states: "[a]ny increase in any civil monetary penalty shall apply only to civil monetary penalties, including those whose associated violation predated such increase, which are assessed after the date any such increase takes effect." Budget Act § 701 (emphasis added). DOJ's interim rule seeks to apply this new rule retroactively—although limited in time to nine months—for conduct that occurred between the date of the enactment of the Budget Act (November 2, 2015) and when the increase will take effect (August 1, 2016).

Implications

The increased penalties under the FCA could have significant implications for health care providers and all those who do business with the federal government. The U.S. Supreme Court recently noted that the FCA is "essentially punitive in nature," as it imposes substantial potential liability beyond mere compensatory damages. Universal Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989, 1996 (2016). Each violation carries a civil penalty that can now reach $21,563. And, of course, most providers and government contractors submit numerous claims for payment for their services, which can thus result in multiplied penalties.

To illustrate the increased penalties, consider a hospital that allegedly submits 10 false claims per day over a three-year period (a total of 10,950 false claims). Under the old rule, the hospital's maximum potential civil penalties would have been $120,450,000 (or $11,000 per claim). But under the new rule, the potential penalties will skyrocket to as high as $236,114,850 (or $21,563 per claim).

Ultimately, this increased potential liability for defendants will lead to further litigation, including whether the disproportionality between damages and penalties violates defendants' constitutional rights under the Excessive Fines Clause of the Eighth Amendment.

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