Subject to Inquiry

Subject to Inquiry


Government Investigations and White Collar Litigation Group
Government Contracts

SBA Issues Interim Guidance After Ultima Decision Finds 8(a) Program Violates Equal Protection

Influenced by the U.S. Supreme Court’s SFFA college affirmative action decision, on July 19, the U.S. District Court for the Eastern District of Tennessee enjoined the U.S. Small Business Administration (SBA) from determining federal contractor eligibility for its 8(a) Business Development program according to a “rebuttable presumption” that individuals of certain racial groups are socially disadvantaged. The court held that the presumption, as applied, violated the guarantee of equal protection under the U.S. Constitution. The SBA, in turn, issued interim guidance on the program’s ongoing operation.

Read on for details of the Ultima Services Corp. v. U.S. Department of Agriculture decision and its impact on federal contractors.

Enforcement and Prosecution Policy and Trends

Massachusetts Attorney General Increasing Enforcement in Car Repossession Space

The Massachusetts Attorney General (AG) is increasing its enforcement in the motor-vehicle-repossession space. In a January 17, 2023 Assurance of Discontinuance (AOD), the AG stated that it is “conducting an investigation” into “entities collecting, servicing and/or funding” motor-vehicle-secured retail-installment contracts. The AG is focused on two primary areas of compliance:

  • the content of the pre-sale and post-sale repossession notices and, in particular, that the notices include a statement that a customer’s deficiency after auctioning their vehicle would be based on the vehicle’s fair-market value; and
  • the frequency of phone calls to debtors and whether those calls exceed the limits prescribed by 940 CMR 7.04(1)(f).

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Sanctions, Trade Embargo, and Export Controls

Departments of Justice, Commerce and Treasury Issue Tri-Seal Compliance Note on Voluntary Self-Disclosure of Potential Violations

On July 26, 2023, the U.S. Department of Justice’s National Security Division, U.S. Department of Commerce’s Bureau of Industry and Security, and U.S. Department of the Treasury’s Office of Foreign Assets Control issued a Tri-Seal Compliance Note (the Note) detailing updates to the three agencies’ voluntary self-disclosure policies applicable to violations of U.S. sanctions, export controls, and other national security laws.  The agencies highlighted the essential role that the private sector plays in identifying threats from malicious actors and foreign adversaries seeking to undermine the American economy and national security, and they encouraged prompt voluntary self-disclosure and remediation of apparent violations. The Department of Justice announced an updated policy that it “generally will not seek a guilty plea, and there will be a presumption that the company will receive a non-prosecution agreement and will not pay a fine” in cases “where a company voluntarily self-discloses potentially criminal violations, fully cooperates, and timely and appropriately remediates the violations.”

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Fraud, Deception and False Claims

Eleventh Circuit Affirms Order for $1.195 Million in Restitution and 48 Month Sentence in Commercial Insurance Healthcare Fraud Case

Last month, the Eleventh Circuit upheld a $1.195 million restitution order and 48-month sentence against Carlos Verdeza for three counts of healthcare fraud. See United States v. Verdeza, No. 21-10461, 2023 WL 3728960 (11th Cir. 2023). Verdeza was a case brought by the United States against a physician assistant who produced fraudulent patient files and sought reimbursement from Blue Cross Blue Shield (BCBS) commercial healthcare insurance for physical therapy treatments that were never performed. A jury in the United States District Court for the Southern District of Florida convicted Verdeza on three healthcare fraud counts. Verdeza illustrates that prosecutors can and do prosecute healthcare fraud cases that do not involve government payors.

Read the full commentary on The FCA Insider blog.

Fraud, Deception and False Claims

U.S. Supreme Court Clarifies DOJ’s Authority to Dismiss Whistleblowers’ False Claims Act Suits, Questions Constitutionality of Qui Tam Provisions

The U.S. Supreme Court recently resolved a circuit split by holding that, in a False Claims Act action, (1) the government may seek dismissal of a qui tam case in which the government initially declined to intervene over the relator’s objection so long as it later intervened in the litigation, and (2) district courts should apply Federal Rule of Civil Procedure 41(a), which says the government has broad latitude to seek dismissal.

Read on for details about this decision, which questions the constitutionality of the FCA’s qui tam provision permitting a private citizen to litigate a case on behalf of the United States.

Fraud, Deception and False Claims

DHS Issues Final Rule Regulating Federal Contractors’ Handling of Controlled Unclassified Information

On June 21, the U.S. Department of Homeland Security issued a long-anticipated cybersecurity final rule that revises an existing clause and adds two new clauses to the Homeland Security Acquisition Regulation related to contractors’ handling of controlled unclassified information.

Read on for highlights from this rule, which goes into effect July 21 and is likely to complicate DHS contractors’ cybersecurity compliance programs.

Enforcement and Prosecution Policy and Trends, Sanctions, Trade Embargo, and Export Controls

Disruptive Technology Strike Force Initiates Federal Prosecutions Targeting Trade Secret Theft

In early 2023, the U.S. Department of Justice and U.S. Department of Commerce launched the Disruptive Technology Strike Force to target illicit actors, strengthen supply chains and protect critical technology assets from theft by nation-state adversaries.

Read on to learn about recent federal prosecutions initiated by the Strike Force, targeting theft of trade secrets and export control violations.

Energy Enforcement, Enforcement and Prosecution Policy and Trends, Fraud, Deception and False Claims

CFTC: Calling All Whistleblowers in Carbon Markets

With an “alert” issued June 20, the Commodity Futures Trading Commission is targeting carbon markets by asking whistleblowers to come forward with information about fraudulent or manipulative trading of carbon credits and other environmental commodities as well as related derivatives.

Read on for details about the CFTC’s alert and implications for entities that trade in this market.

Fraud, Deception and False Claims, Government Contracts

Supreme Court Clarifies the False Claims Act’s Knowledge Requirement, Eliminating a Potential Defense for Government Contractors and Healthcare Providers Accused of Fraud

On June 1, 2023, the Supreme Court unanimously ruled in favor of whistleblower plaintiffs (referred to as “relators”) in consolidated False Claims Act (“FCA”) cases in a decision that clarified the application of the FCA’s knowledge requirement.  In United States ex rel. Schutte v. SuperValu Inc., the Court held that the FCA reaches defendants who knew that the claims they submitted were fraudulent, even if they subsequently offered an “objectively reasonable” interpretation of an ambiguous legal or contractual requirement material to the government’s payment decision.  McGuireWoods previously reported that the Supreme Court’s resolution of the case and the underlying circuit split was set to be significant.

In a concise ruling (with no concurring or dissenting opinions), Justice Thomas’s opinion interpreted the FCA’s knowledge requirement in a manner that is more favorable to relators and prosecutors, while foreclosing a line of defense for FCA defendants that several courts had previously allowed.

The FCA provides for liability for a defendant that “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.”[1]  “Knowingly” is defined in the statute as acting with (1) “actual knowledge” of the falsity, (2) “deliberate ignorance of the truth,” or (3) “reckless disregard of the truth.”[2]  In the consolidated cases before the Court, the Seventh Circuit held that the defendants, which own and operate retail pharmacies, had not “knowingly” presented false claims for reimbursement because they had offered in litigation “objectively reasonable” (if not accurate) interpretations of the complex Medicare and Medicaid prescription drug pricing schemes at issue (involving accurate reporting of “Usual and Customary” pricing to government payors) that would have rendered their claims true.  The Seventh Circuit reasoned, consistent with several other circuits, that even if a defendant’s statements are false under the best interpretation of an ambiguous provision, the defendant does not “knowingly” present false statements if there exists “an objectively reasonable reading of the statute or regulation” under which the statement was true.[3]  In making that determination, the Seventh Circuit concluded, “a defendant’s subjective intent does not matter for [the FCA’s] scienter analysis—the inquiry is an objective one.”[4]

The Supreme Court unanimously rejected the Seventh Circuit’s interpretation of the FCA, emphasizing that “[w]hat matters for an FCA case is whether the defendant knew the claim was false,” because “[t]he FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.”[5]  In other words, the inquiry into the knowledge element of the FCA should “focus primarily on what the respondents thought and believed” when they submitted “the false claim[s]—not what the defendant[s] may have thought after submitting” them or “post hoc interpretations that might have rendered the claims accurate.”[6]

In so ruling, the Court rejected the Seventh Circuit’s reliance on the Supreme Court’s 2007 interpretation of the Fair Credit Reporting Act’s knowledge standard in Safeco Insurance Co. v. Burr.[7]  The Supreme Court first explained that the Safeco Court interpreted “a different statute, the [Fair Credit Reporting Act], which had a different mens rea standard, ‘willfully.’”[8]  While that interpretation referenced the “knowing” and “reckless” standards that also apply in the FCA, the decision was not meant to “establish[] categorical rules for those terms.”[9]  The Court also explained that its Safeco decision itself “did not purport to set forth the purely objective safe harbor that respondents invoke.”[10]  Instead, Safeco held that recklessness “encompassed actions involving ‘an unjustifiably high risk of harm that is either known or so obvious that it should be known.’”[11]  “By a similar token here,” the Schutte Court refused to consider “legal interpretations that respondents did not believe or have reason to believe at the time they submitted their claims.”[12]

The Court’s rejection of the “objectively reasonable” standard under the FCA is a clear win for prosecutors and relators.  The Court’s holding will bolster FCA enforcement by removing an argument previously available to FCA defendants in several jurisdictions.  Moreover, while the existence of an “objectively reasonable interpretation” of an ambiguous regulatory provision or contract term in an FCA case may be ripe for resolution as a matter of law in a motion to dismiss or an early summary judgment motion, determining a defendant’s subjective intent is a fact-intensive inquiry that is generally unsuitable for early resolution.  Meaning, defendants are less likely to win early dismissals of complaints and will be forced to bear the costs and burdens of discovery and protracted litigation to resolve questions regarding what the defendant “thought and believed” when they submitted the claim.  And even beyond the FCA, the Court’s narrow description of the Safeco standard may also strengthen the federal government’s fraud enforcement efforts more broadly.

All is not lost for government contractors and healthcare providers, though.  There is some helpful language in Justice Thomas’s opinion that future defendants will cite to in arguing they had a good faith, if mistaken, interpretation of the vague terms at issue.  Furthermore, the Court suggested that even some objectively unreasonable interpretations may escape liability if the defendant believed they were accurate:  “The FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.”[13]  Putting the focus primarily on what the defendant thought or knew at the time, as opposed to an arguably more reasonable interpretation, will aid some defendants in future cases.

Companies that transact with the government can take prophylactic steps to protect against future FCA suits by making (and documenting) good faith efforts to reasonably interpret and comply with legal and contractual provisions.  The Court’s focus on subjective intent will aid those defendants who document their efforts to fairly interpret and comply with relevant provisions at the time they submit their claims.

Please contact the authors if you have any questions regarding the FCA and other government-contractor or healthcare-related enforcement or compliance concerns.

About McGuireWoods’ Government Investigations & White Collar Litigation Department

McGuireWoods’ Government Investigations & White Collar Litigation Department, which includes members of the Government Contracts team, is a nationally recognized team of more than 80 attorneys representing Fortune 100 and other companies and individuals in the full range of civil and criminal investigations and enforcement matters, including litigation and action under the False Claims Act. Our False Claims Act team includes former federal prosecutors, and experienced civil and white collar criminal litigators with experience in this unique area of law. We also tap attorneys from the firm’s other practice groups and our subsidiary McGuireWoods Consulting LLC. Strategically centered in Washington, D.C., our Government Investigations & White Collar Litigation Department has been honored as a Law360 Practice Group of the Year and earned the trust of international companies and individuals through our representation in some of the most notable enforcement matters over the past decade. For more information on our False Claims Act practice, download our brochure: False Claims Act Investigations, Litigation and Enforcement.

About McGuireWoods’ Government Contracts Team

The Government Contracts team at McGuireWoods has decades of collective experience assisting contractors and subcontractors in government contracting, including the navigation of proposal submission and compliance issues. Based strategically in the Washington, D.C., area, our full-service practice leverages McGuireWoods’ strong defense and national security credentials at every step in the procurement process. Our attorneys counsel clients ranging from small businesses to the nation’s largest government contractors on issues arising under the Federal Acquisition Regulation and its agency-specific supplements, and our team regularly assists clients in negotiating significant federal contracts and contract modifications.

We also have the deep experience necessary to defend our clients’ interests in bid protests, in litigation with the government and other contractors, and in investigations and regulatory enforcement actions involving a wide range of federal and state agencies, inspectors general, and law enforcement personnel. We provide these services to clients operating in a broad variety of industries and sectors, including defense, national and homeland security, intelligence support, technology, construction, healthcare, aerospace and energy.

About McGuireWoods’ Healthcare Team

With a team of more than 55 experienced, industry-focused lawyers, McGuireWoods’ Healthcare Department helps clients address ongoing, day-to-day obstacles and create new models for delivering healthcare services in the United States and abroad. Our healthcare group and individual lawyers are ranked by Chambers USABest Lawyers in AmericaLegal Elite and Super Lawyers as among the top legal providers in the nation. We represent clients from all sectors of the healthcare industry, as well as investors in healthcare-related transactions.

[1] 31 USC § 3729 (a)(1).

[2] 31 USC § 3729 (b)(1).

[3] United States v. SuperValu Inc., 9 F.4th 455, 468 (7th Cir. 2021), cert. granted sub nom. United States ex rel. Schutte v. SuperValu Inc., 143 S. Ct. 644 (2023), and vacated and remanded sub nom. United States ex rel. Schutte v. SuperValu Inc., No. 21-111, 2023 WL 3742577 (U.S. June 1, 2023).

[4] Id. at 470.

[5] United States ex rel. Schutte v. SuperValu Inc., No. 21-111, slip op. at 2, 8 (June 1, 2023).

[6] Id. at 10–11.

[7] Safeco Insurance Co. v. Burr, 551 U.S. 47 (2007).

[8] SuperValu, slip op. at 13 (quoting Safeco, 551 U.S. at 52).

[9] Id.

[10] Id. at 14.

[11] Id. (quoting Safeco, 551 U.S. at 68).

[12] Id.

[13] Id. at 8.

Fraud, Deception and False Claims

New York Pharmacy Owners Indicted for Alleged Healthcare Fraud Scheme

On May 2, the U.S. Department of Justice announced the indictment of two New York state pharmacy owners for their participation in an alleged $29 million healthcare fraud scheme. They face charges of conspiracy to commit healthcare fraud, conspiracy to commit money laundering and conspiracy to pay illegal healthcare kickbacks and bribes.

Read on for analysis of the case and takeaways for healthcare providers and pharmacies.

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