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The False Claims Act requires a penalty for each each violation. The penalty amount also increases with inflation each year. As of 2020, penalties can range as high as $23,330 per violation (technically it is $23,331 for the very pedantic). Moreover, some frauds involve tens of thousands of individual violations. Thus, total penalty assessments can run into the millions or tens of millions of dollars. Unfortunately, whistleblowers and their lawyers fail to understand how large total penalties can be. As a consequence, this leads them to ignore the possibility of penalties when valuing a case. However, understanding the nuances of False Claims Act Penalties is key to properly the impact that penalties may play on a case.
The False Claims Act, 31 U.S.C. §§ 3729, provides that anyone who violates the law is liable for a civil penalty in addition to three times the damages. These penalties are sometimes referred to as statutory penalties or civil penalties. The original version of the False Claims Act also referred to penalties as “forfeitures” and some sources still use that term.
The False Claims Act is intended to reach all fraudulent attempts to cause the Government to pay out sums of money or to deliver property or services. United States v. Neifert-White Co., 390 U.S. 228, 232 (1968). Thus, the key to calculating False Claims Act penalties is to count the number of violations of the statute. The current version of the False Claims Act prohibits seven types of action, any of which is a violation of the False Claims Act:
Within these seven categories of violation, there are many ways to run afoul of the False Claims Act provisions. If you are still curious, check out False Claims Act Violations and Penalties Explained.
Congress made clear that the law imposes a penalty (then they called it a forfeiture) for every violation of the False Claims Act. So in a prosecution for making false claims under 31 U.S.C. §§ 3729(a)(1)(A).
Each separate bill, voucher or other “false payment demand” constitutes a separate claim for which a forfeiture shall be imposed and this is true although many such claims may be submitted to the Government at one time.
S. Rep. No. 99-345, at 9-10, reprinted in 1986 U.S.C.C.A.N. at 5274. Often a single fraudulent scheme will generate many, even thousands of “false claims” and each of these warrants a penalty. For example, in the health care fraud penalties usually follow each individual false form.
a doctor who completes separate Medicare claims for each patient treated will be liable for a forfeiture for each such form that contains false entries even though several such forms may be submitted to the fiscal intermediary at one time.
Id. And when a physician is ineligible to participate in Medicare, “all Medicare claims submitted by or on behalf of a physician who is ineligible to participate in the program” generate a penalty. Id.
The same thing is true when a government contractor obtains a contract by fraud;
each and every claim submitted under a contract, loan guarantee, or other agreement which was originally obtained by means of false statements or other corrupt or fraudulent conduct, or in violation of any statute or applicable regulation, constitutes a false claim. For example, all claims submitted under a contract obtained through collusive bidding are false and actionable under the act.
S. Rep. No. 99-345, at 9-10, reprinted in 1986 U.S.C.C.A.N. at 5274.
In United States v. Bornstein, the government sued Model Engineering, an electron tube producer under the False Claims Act. 423 U.S. 303, 313 (1976). Model sold faulty electron tubes to United, which used them to make radio kits and sold them to the military. The government sued Model for “causing” the presentment of false claims under an earlier version of the False Claims Act. Bornstein at 313.
The Supreme Court agreed that the False Claims Act “permits recovery of multiple forfeitures” (penalties). Bornstein at 309. The defendant argued that it could only be liable for one penalty for each contract regardless of what Model did. But the Supreme Court said that is wrong:
To equate the number of forfeitures with the number of contracts would in a case such as this result almost always in but a single forfeiture, no matter how many fraudulent acts the subcontractor might have committed. This result would not only be at odds with the statutory language; it would also defeat the statutory purpose. Such a limitation would, in the language of the Government’s brief, convert the Act’s forfeiture provision into little more than a $2,000 license for subcontractor fraud.
Bornstein at 311. Instead, the Court decided that when a subcontractor “causes” a prime contractor to make false claims, a court should set the penalties as the number of acts of causation.
If United had committed one act which caused Model to file a false claim, it would clearly be liable for a single forfeiture. . . . If, on the other hand, United had committed three separate such causative acts, United would be liable for three forfeitures, even if Model had filed only one false claim.
Bornstein at 312. Importantly, however, the government sued Model only for causing false claims. Justice Rehnquist wrote a separate concurrence explaining that Congress also intended penalties for making false statements in violation of 31 U.S.C. §§ 3729(a)(1)(B), “turn on the number of false bills, certificates, affidavits, etc., made or used, or caused to be made or used.” Bornstein at 323 n.6.
This principle has been upheld in numerous federal cases. Some examples follow:
Once you have figured out how many False Claims Act penalties should be imposed, the second step is to figure out the range per violation. The False Claims Act statute sets penalties at $5,000 to $10,000 per violation. However, subsequent federal law periodically adjusts the amounts for inflation. As of June, 2020, penalties range from $11,665 to $23,331 per violation.
The 1986 False Claims Act set the to $5000 to $10,000 for each violation. Subsequent federal law changed these amounts to adjust for inflation.
In 1990 Congress passed the Federal Civil Monetary Penalties Inflation Adjustment Act of 1990, Pub.L. 101-410. That law stated that every five years, federal agencies would update penalties for violations occurring after that date. In 1996, Congress amended that law to limit the initial increase to 10 percent of the maximum penalty. 110 Stat. 1321–373 (Apr. 26, 1996).
In 1999, DOJ adjusted the False Claims Act penalties range for the first time. This amendment applied to violations occurring after September 29, 1999. In other words, this increased applies only to underlying conduct that occurs after 1999. For those violations, it raised the penalty range to $5,500 to $11,000. 64 Fed. Reg. 47099, 47103 at § 85.3.
The Bipartisan Budget Act of 2015, Public Law 114-74 (Nov. 2, 2015), again revised the method for calculating inflation adjustments. Now are made every year. In addition, the 10% cap was replaced by a %150 cap, meaning that penalties could increase by as much as 2.5 times over the prior penalty.
Importantly, new adjustments apply to all post-November 2015 violations. In other words, for conduct occurring after November 2015, the False Claims Act penalties for violations occurring after November, 2015 are determined by the last (most recent) adjustment when the court imposes penalties.
False Claims Act penalties inflation adjustments are published in the Federal Register. After publication they are codified in a chart in the Code of Federal Regulations at 28 C.F.R. § 85.5.
DOJ did not adjust the penalties for almost a year after the Bipartisan Budget Act. Penalties imposed during that period, for conduct occurring after November 3, 2015 range from $5,500 to $11,00.
In June 2016, DOJ published a rule adjusting the penalties range for the first time since 1999. 81 Fed. Reg. 42491. The rule took affect on August 1, 2016. Because it had been so long since False Claims Act penalties had been adjusted, the increase was substantial. Penalties assessed after August 1, 2016 for post November 3, 2015 conduct, more than doubled to $10,781 to $21,563.
In February 2017, DOJ adjusted the penalties range for 2017. 82 Fed. Reg. 9131. Penalties assessed after February 3, 2017 for post November 3, 2015 conduct, are $10,957 to $21,916.
In January, 2018, DOJ adjusted the penalties range for 2018. 83 Fed. Reg. 3944. Penalties assessed after January 29, 2018 for post November 3, 2015 conduct, are $11,181 to $22,363.
Despite the requirements in the law, DOJ did not adjust 2019 False Claims Act Penalties, but two other agencies did.
On June 19, 2020, DOJ did adjust the 2020 False Claims Act penalties. 85 Fed. Reg. 37004 This adjustment included a catch up adjustment for 1999. 2020 False Claims Act Penalties assessed after June 19, 2020 for post November 3, 2015 conduct, are $11,665 to $23,331.
Once you know the number of available penalties and the applicable range, you can calculate a broad range of potential penalties. But, the third step of the analysis is setting the exact number of False Claims Act penalties and penalty per violation. As we explain, in court, there is a role for both a jury and a judge. The jury determines the number of penalties and the judge decided the penalty per violation. In a settlement, however, the government generally does not seek penalties.
The jury decides the number of violations. United States v. Capitol Supply, Inc., Civil Action No. 10-1094, 2 (D.D.C. Sep. 20, 2017). This is because, as in all litigation, it is the jury’s job to decide questions of fact. On the other hand, it is the judge’s job to decide issues of law. For False Claims Act penalties, this means that the jury decides the number of violations, and later, a judge decides on the penalty for each violation.
Once a violation is established, a penalty is mandatory for each violation. Congress explained this clearly: The imposition of this forfeiture is automatic and mandatory for each claim which is found to be false. S. Rep. No. 99-345, at 8, reprinted in 1986 U.S.C.C.A.N. at 5274. Courts agree that imposition of a penalty is mandatory for each false claim. In re Schimmels, 85 F.3d 416, 419 n.1 (9th Cir. 1996) (In addition to treble damages, the FCA requires a court to award not less than $5,000 and not more than $10,000 for each false claim or statement submitted to the government, even if no damages were caused by the false submissions.).
Once the jury sets the number of violations, it plays no role in setting the amount of penalties. United States ex rel. Landis v. Tailwind Sports Corp., 292 F. Supp. 3d 211, 214–15 (D.D.C. 2017). In Cook County v. United States ex rel. Chandler, the Supreme Court explained that in a False Claims Act case, the “court alone” sets the penalty. 538 U.S. 119, 132 (2003).
Courts are given, “considerable discretion” in setting penalty amounts. U.S. ex rel. Rigsby v. State Farm Fire & Cas. Co., No. 1:06CV433-HSO-RHW, 2014 WL 691500, at *6 (S.D. Miss. Feb. 21, 2014). But, the False Claims Act does not tell courts exactly what to consider when setting a civil penalty. Therefore, courts consider many factors (they call this a “totality of the circumstances” test). Some of these factors include:
As we’ve discussed in elsewhere, government intervention is the most important factor in the success of a False Claims Act case. Part of this is because the vast resources of the government often convince defendants to settle. While settlements are a good thing for whistleblowers and the government, however, there is a possible downside.
Settlements require the agreement of both sides. When the Government settles a False Claims Act case they generally do not insist on payment for potential penalties. Instead, the settlements are usually based on a multiple of the agreed-upon damages.
As we’ve explained above a single fraudulent scheme can involve thousands of penalties. In addition, each penalty can be tens of thousands of dollars. Thus, it should come as no surprise that False Claims Act penalties add up considerably.
For example, in United States ex rel. Bunk v. Gosselin World Wide Moving, N.V, government contractors submitted 9,136 invoices under contracts they obtained through bid-rigging. The Government chose not to prove any damages at all and instead established 9,136 penalties. Therefore, even at the minimum penalty amount, the defendant faced over $50 million in penalties. Subsequently, the government agreed to accept $24 million in settlement.
Health care fraud can also generate huge numbers of penalties. In United States ex rel. Drakeford v. Tuomey, 792 F.3d 364, 386 (4th Cir. 2015), a hospital compensated its physicians in a way that violated the Stark Law against physician self-referrals. In other words, the hospital bribed the physicians to practice there. A jury found that the hospital violated the Stark Law and therefore the False Claims Act. It further found that Tuomey had submitted 21,730 false claims to Medicare with a total value of $39,313,065. The district court assessed 21,730 civil penalties. Ultimately, the hospital was on the hook for $119,515,000 in penalties.
Likewise, in United States ex rel Lutz v. BlueWave, No. 14-cv-00230 (D.S.C. May 23, 2018), a jury convicted defendants of violating the Anti-Kickback Statute to procure laboratory tests. The jury found that the defendants had presented over 38,000 claims, damaging the government by approximately $17 million. The court noted that the government could have sought penalties for 38,887 penalties for a total of between $213,878,500 and $427,757,000, but requested penalties of $5000 and for only 11,500 of the claims. The court therefore, imposed penalties of over $63 million as part of a $114 million total award.
When a mortgage company violated underwriting guidelines and therefore fraudulently obtained FHA insurance for its mortgages, it was liable for over 1000 penalties. United States v. Americus Mortg. Corp., No. 4:12-CV-2676 (S.D. Tex. Sep. 14, 2017) In that case, Allied Capital, Americus Mortgage, and their owner, Jim Hodge, falsely represented to HUD that FHA-insured loans had been underwritten with due diligence and were eligible for FHA insurance. As a result the court found 1,295 penalties, totaling $12,950,000 as part of a $268,757,929 total award.
There are keys to know to understand False Claims Act penalties. Firstly, a False Claims Act penalty is required for every violation, this may be for each false claim, false statement, or other depending on the misconduct. Secondly, the potential penalty range adjusts periodically to account for inflation. Thus, after June 2020, penalties are $11,665 to $23,331 per violation. Thirdly, a jury determines the number of penalties and a judge sets the precise penalty per violation. Moreover, the judge can consider many factors including, seriousness of the misconduct, acceptance of responsibility, and how isolated the actions were. The large numbers of penalties possible in a single scheme, together with tens of thousands of dollars per violation, result in some False Claims Act penalties awards in the tens or hundreds of millions of dollars.