In two recent cases, United States v. American Health Foundation Inc., in the Eastern District of Pennsylvania, and Osinek v. Permanente Medical Group Inc., in the Northern District of California, courts held that the government's failure to mitigate damages is not a viable affirmative defense in False Claims Act (FCA) actions.
American Health Foundation involved allegations of sub-standard care provided to Medicaid and Medicare beneficiaries. The government claimed that defendants violated the FCA by submitting claims for payment where the underlying services were deficient and/or provided in violation of the Nursing Home Reform Act. Defendants argued that the government was barred from recovery under the FCA because it failed to mitigate its damages. Specifically, they argued that the government was aware of defendants' allegedly unlawful conduct based on publicly available Centers for Medicare & Medicaid Services surveys, and "[h]ad the United States communicated to [them] that it would not pay for certain allegedly deficient services, Defendants would not have continued to submit such claims, and the United States would not have suffered ... its claimed damages."
The court rejected defendants' argument, holding that the government does not have a duty to mitigate damages in FCA actions. Although the court found no controlling authority, it noted that every district court to consider the issue had reached the same conclusion.
The Osinek case presented the same issue. Defendant argued that the government essentially ratified defendant's conduct since the government was aware of defendant's interpretation of the applicable legal requirements and raised no concerns. Defendant argued that even if its interpretation was incorrect, the government knew about it but failed to take adequate measures to mitigate its damages. Failure to mitigate damages, defendant argued, should therefore operate as an affirmative defense.
The court disagreed, largely relying on Office of Personnel Management v. Richmond, a Supreme Court case from 1990. In Richmond, the Supreme Court held that the Appropriations Clause of the Constitution foreclosed the equitable defense of estoppel because it prohibits the payment of money from the Department of the Treasury absent a congressional appropriation. While failure-to-mitigate is different from estoppel, the Osinek court saw "no material reason" why the defenses should be treated differently under Richmond. Osinek also rejected the defendant's argument that Richmond does not apply to claims where an equitable defense is being used defensively to prevent collection by the government, reasoning that it is immaterial "[w]hether a person is seeking money from the Treasury or trying to keep money from going back to the Treasury."
Although one could quarrel with the courts' reasoning in American Health Foundation and Osinek, at the end of the day, whether failure to mitigate damages can be asserted as an affirmative defense in FCA actions does not change the fact that the government's conduct remains critical to the government's case-in-chief. As the Supreme Court held in Escobar, the government's continued payment, despite knowledge of the defendant's conduct, is strong evidence that such conduct was immaterial. And as the Osinek court recognized, the government's inaction upon learning of alleged fraud may also negate the element of scienter. Therefore, while the failure-to-mitigate issue will be one to watch, it may not have a significant effect on the ultimate disposition of FCA cases.
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