Last week, in Washington v. Barr, the Second Circuit addressed a case seeking to strike down the federal government’s classification of marijuana as a Schedule I drug under the Controlled Substances Act (CSA). The Court held that plaintiffs had failed to exhaust their administrative remedies before the Drug Enforcement Administration (DEA). Rather than dismissing the case, however, the Court took the unusual step of holding the case in abeyance and retaining jurisdiction to take “whatever action might become appropriate if the DEA does not act with adequate dispatch.”

The Court majority determined that the case was unusual because the plaintiffs were individuals plausibly alleging a life-or-death threat to their health. Plaintiffs included a businessman seeking to expand his medical marijuana business into whole-plant cannabis products; two children with dreadful medical problems asserting that they had exhausted traditional medical options and marijuana had saved their lives; an Iraq War veteran who had managed his PTSD through medical marijuana; and the Cannabis Cultural Association, an organization focused on the way marijuana convictions have disproportionately affected people of color and prevented minorities from participating in the new state-legal marijuana industry.

Plaintiffs did not first bring their challenge to the Schedule I classification of marijuana to the DEA, the agency that has the authority to reschedule marijuana. Although the CSA does not mandate exhaustion of administrative remedies, the Second Circuit agreed that exhaustion is appropriate and consistent with Congressional intent. Congress intended to implement scheduling decisions under the CSA through an administrative process, and requiring exhaustion is consistent with that intent. The Court determined that the question raised by plaintiffs’ suit—whether developments in medical research and government practice should lead to a reclassification of marijuana—is precisely the sort of question that calls for the application of an agency’s special knowledge. Also, the Court held that none of the recognized exceptions to exhaustion, such as futility, inability to grant adequate relief, or undue prejudice, applied.

The Second Circuit gave credence, however, to plaintiffs’ argument that the administrative process might delay their ordeal intolerably.

But in light of the allegedly precarious situation of several of the Plaintiffs, which at this stage of the proceedings we must accept as true, and their argument that the administrative process may not move quickly enough to afford them adequate relief, we retain jurisdiction of the case in this panel, for the sole purpose of taking whatever action might become appropriate should the DEA not act with adequate dispatch.

Thus, if the plaintiffs seek agency review, and “the agency fails to act with alacrity,” plaintiffs can return to the Court under its retained jurisdiction.

Judge Dennis Jacobs agreed that plaintiffs had failed to exhaust administrative remedies, but dissented from the majority’s decision to hold the case in abeyance in case the DEA failed to act with “adequate dispatch.” He viewed DEA as unlikely to discern the majority’s view of “adequate dispatch” or “alacrity,” and did not anticipate a swift ruling given the need for an assessment of countervailing risks, the pendency of legislation, and the eliciting of opinions on issues of medicine and public health. Judge Jacobs also dismissed the cases the majority had cited in supporting its abeyance determination: “None of these cases supports the idea that a court is permitted to hold a case in abeyance because the court may on contingency gain jurisdiction to hear it, and can bully the agency in the meantime.”

As the New York legislature and other states address the issue of legalization of marijuana, the DEA’s assessment of the scheduling issue-and the speed with which DEA makes or does not make that decision-may come before the Second Circuit again.

The Supreme Court today unanimously decided that a relator may take advantage of the longer ten-year statute of limitations under the False Claims Act in a case in which the United States has declined to intervene, as long as the action is brought within three years of Government knowledge of the alleged fraud.  Cochise Consultancy, Inc. v. United States ex rel. Hunt.

The Timing of the Alleged Fraud, Disclosure to the Government, and the Complaint

In his FCA complaint, Relator Billy Joe Hunt alleged that two defense contractors defrauded the Government by submitting false claims for payment under a subcontract to provide security services in Iraq. Relator alleged that the fraud occurred “from some time prior to January 2006 until early 2007.” Relator filed a False Claims Act complaint on November 27, 2013, more than six years but less than ten years after the date of the alleged fraud.

Relator asserted that he disclosed the alleged fraud to the Government in a November 30, 2010 interview, which was within three years of his filing of the complaint.

The False Claims Act Statute of Limitations Provision

The False Claims Act contains two limitations periods for an action asserting that a defendant has presented false claims to the Government, in two subsections of 31 U.S.C. § 3731(b).

  1. Within six years after the statutory violation occurred, or
  2. Within three years after the responsible United States official knew or should have known the relevant facts, but not more than ten years after the violation.

The Court’s decision on the applicable subsection would determine the fate of the complaint: time-barred under the six year limitation period, but timely under the ten year period. Relator conceded that the six-year period did not apply, so the issue presented for the Supreme Court was whether a relator in case declined by the Government can take advantage of the ten-year statute of limitation in 31 U.S.C. § 3731(b)(2).

A Relator Can Take Advantage of the Ten-Year Limitation Period in a Declined Case

Justice Thomas wrote for the Court, beginning with a textual analysis of the False Claims Act statute. The two limitations periods apply to “civil action[s] under section 3730,” which includes suits initiated by either the Government or a relator. As “the plain text of the statute makes the two limitations periods applicable in both types of suits,” the ten-year period applies to relator-initiated actions, as long as the action is brought within three years of Government knowledge of the alleged fraud.

The Court rejected the defendants’ argument that the ten-year limitation period is a default rule of tolling, and should only apply when the Government has intervened as a party. Justice Thomas wrote that this reading was “at odds with fundamental rules of statutory construction.” He noted that a single use of a statutory phrase must have a fixed meaning, and interpretations that would attribute different meanings to the same phrase should be avoided. “There is no textual basis to base the meaning of ‘[a] civil action under 3730’ on whether the Government has intervened.”

The Relator Is Not the “Official of the United States” Whose Knowledge Triggers the Three-Year Period from Knowledge

The Court also rejected the defendants’ fallback argument, that a relator in a non-intervened case should be considered the responsible “official of the United States” within the meaning of section 3731(b)(2), so that the three-year period for bringing an action starts when the relator—and not the Government—knew or should have known of the fraud. Justice Thomas reasoned that a relator is not an “official of the United States” in the ordinary sense of that phrase; the statute’s use of the definite article “the” referring to “the official” suggests Congress did not intend for all private relators to be that official; and private relators are not “charged with responsibility to act” because they are not required to investigate or prosecute a False Claims Act action.

Here, the action was brought within three years of knowledge by the responsible Government official, and less than ten years after the alleged fraud, so it was timely under 31 U.S.C. § 3731(b)(2).  Under this ruling, a relator commencing an FCA action within three years of Government knowledge will be able to reach back ten years for alleged False Claims Act violations.

Earlier this week, the Department of Justice Civil Division announced guidelines for factors to consider and credit to be given in False Claims Act investigations and prosecutions. The guidelines broadly stressed three forms of conduct that may merit credit, including voluntary self-disclosure of misconduct, meaningful cooperation with an FCA investigation, and implementation of adequate and effective compliance and remedial measures. The policy is set out in Justice Manual Section 4-4.112.

Disclosure, Cooperation, and Remedial Action May Merit DOJ Credit Consideration

The policy starts by emphasizing DOJ’s “strong interest in incentivizing companies and individuals that discover false claims to voluntarily disclose them to the government.” Self-disclosing potential wrongdoing that is unknown to the government remains a significant factor for government consideration of credit, although the self-disclosure should be “proactive, timely, and voluntary.” Assistant Attorney General Jody Hunt called voluntary disclosure “the most valuable form of cooperation.” Self-disclosure may also include additional disclosure of misconduct that goes beyond the scope of the original government investigation.

Cooperation with a government investigation may also merit DOJ credit. Illustrative measures cited by the policy include identifying responsible or knowledgeable individuals; disclosing relevant facts from an independent investigation; making officers and employees available for interviews; preserving documents and information beyond what is legally required; facilitating the review and evaluation of information and losses to the government; and admitting liability or accepting responsibility.

Department attorneys will also consider remedial measures, which may include analyzing and remedying the root cause of the underlying conduct; implementing or improving an effective compliance program; disciplining or replacing responsible individuals; and accepting responsibility for the misconduct.

DOJ Attorneys Have Several Avenues To Credit Disclosure, Cooperation, and Remediation

For maximum credit, an entity or individual should undertake timely self-disclosure, identify the involved and responsible individuals, fully cooperate with the investigation, and take remedial steps to prevent and detect similar wrongdoing. Partial credit may also be available in the case of meaningful assistance that does not merit maximum credit.

Under the policy, credit will usually take the form of DOJ attorneys exercising discretion to reduce the penalties or the damages multiple sought by the government.  The maximum credit afforded, however, “may not exceed an amount that would result in the government receiving less than full compensation for the losses caused by the defendant’s misconduct (including the government’s damages, lost interest, costs of investigation, and relator share).”  Credit may also include DOJ notifying a relevant agency about the disclosure, cooperation or remediation; publicly acknowledging the disclosure, cooperation or remediation; or assisting in the resolution of qui tam litigation with a relator.

Other discretionary factors DOJ considers in resolving FCA matters under the policy include:

  • the nature and seriousness of the violation;
  • the scope of the violation;
  • the extent of any damages;
  • the defendant’s history of recidivism;
  • the harm or risk of harm from the violation;
  • whether the United States’ interests will be adequately served by a compromise;
  • the ability of a wrongdoer to satisfy an eventual judgment; and
  • litigation risks presented if the matter proceeds to trial.

The policy includes a number of caveats. The policy does not change the obligation that entities and individuals have under the law to report to or cooperate with the government, such as by disclosing information pursuant to a subpoena or other compulsory process. Cooperation also does not include disclosing information under an imminent threat of discovery or investigation. DOJ also will not award credit if there is concealment of board or senior management misconduct or some other form of bad faith.

The policy states that entities and individuals are entitled to assert all their legal rights and do not have to cooperate with the government, and that eligibility for credit is not predicated on (and does not require) a waiver of attorney-client privilege or work product protection.

As with other policies DOJ has implemented to guide the exercise of discretion in resolving cases, it will be interesting to follow how this policy on False Claims Act investigations and prosecutions will be implemented in practice.

The replacement of stairways at the Middletown Road Subway Station in the Bronx triggered accessibility requirements that may include installing elevators, according to a recent decision from SDNY District Judge Edgardo Ramos. In Bronx Independent Living Services v. Metropolitan Transportation Authority, Judge Ramos held that the Metropolitan Transportation Authority (MTA) and NYC Transportation Authority (NYCTA) are required under the Americans with Disabilities Act (ADA) to provide access individuals with disabilities, including those who use wheelchairs, regardless of cost, unless alterations are technically infeasible.

Middletown Road Station is an IRT 6 train station in the Bronx. To board a train at the station, passengers must climb two sets of stairs, one to reach a mezzanine area to buy a ticket, and a second to reach the elevated train platform. No elevators are available at the station. The scope of work for a renewal project at the station in 2011 called for, among other thing, complete replacement of the street-to-mezzanine and mezzanine-to-platform staircases, but did not provide for the installation of elevators.

Renovation at the Middletown Road Station began in October 2013 and ended in May 2014. In June 2016, two non-profit advocacy organizations and two disabled individuals filed an ADA complaint seeking declaratory and injunctive relief requiring MTA and NYCTA to install elevators at the station. In March 2018, the United States intervened and filed its own ADA complaint-in-intervention.  The SDNY advised the Court that the crucial discovery it would seek in the case was the technical feasibility for installing an elevator.

The Court’s summary judgment decision construed section 12147 of the ADA, which regulates the accessibility obligations of public entities making alterations to public transit facilities like subway stations, and its implementing regulations.  The parties agreed that on summary judgment the issue for the Court was which of two sections of the implementing regulations should apply.  Under 49 CFR § 37.43(a)(1), accessibility alterations must be made no matter the cost, and under 49 CFR § 37.43(a)(2), they must be made if doing so would not be disproportionately expensive.

Under section 37.43(a)(1), where alterations to existing public transportation facilities could affect the “usability” of a station, the altered potions must be readily accessible to individuals with disabilities, including those who use wheelchairs, “to the maximum extent feasible.” The Second Circuit has previously held that the phrase “maximum extent feasible” requires accessibility alterations to be made regardless of cost.

The Court held that this section applied because the subway station renewal project affected the usability of the station by, among other things, replacing the stairways. The Court found that the Defendants entirely replaced the stairways, along with replacing walls, floors, railings and platforms. The Court held the replacement of stairways to be an alteration triggering the stations’ usability within the meaning of the statute and regulation.

Judge Ramos rejected the MTA and NYCTA argument for application of section 37.43(a)(2), for alterations that affect the usability of an area with a primary function. This provision would have only required accessibility alterations if the cost and scope were not disproportionate. The Court agreed that this provision also applied, but held that the two requirements were not mutually exclusive, and the second applied to a less broad set of alterations. The Court ruled that since the first section on usability applied, Defendants are required to provide access, regardless of cost, unless the alterations are technically infeasible.

This decision presents a broad requirement with which the MTA and NYCTA will have to comply in subway renovations throughout the city, but the agencies will not have an immediate opportunity to appeal the legal issue. The case will continue with expert discovery in the district court, which will include the issue of whether it is technically infeasible to install elevators at the Middletown Road Station. Judge Ramos has approved a consent schedule for the parties to complete expert discovery by the end of July.

The Second Circuit examined the False Claims Act’s “alternate remedy” provision for the first time yesterday, holding that a fugitive who had dismissed his qui tam action was not entitled to a share of a $25.6 million FCA settlement. In United States v. L-3 Communications EOTech, Inc., the Second Circuit held that relator Milton DaSilva’s government coercion claim failed and that he could not share in the government’s recovery from L-3 Communications EOTech because he had voluntarily dismissed his qui tam action.

DaSilva’s Qui Tam Action

DaSilva was a quality control engineer at EOTech for a short time in 2013. In August 2013, his attorneys submitted information to the SDNY alleging that EOTech manufactured and knowingly sold defective holographic weapon sights to the government, in violation of the FCA.  Later that month, DaSilva was convicted of an unrelated charge in Michigan state court and then fled to Brazil before sentencing.

In April 2014, DaSilva filed a sealed qui tam action in the SDNY, while still a fugitive. The government indicated that it would move to dismiss the qui tam complaint due to DaSilva’s fugitive status if counsel refused to dismiss it voluntarily. Before the government made a motion, DaSilva’s attorneys voluntarily dismissed the qui tam action without prejudice. The district court dismissed the action in September 2014.

DaSilva Seeks A Share of the Government’s FCA Settlement

Fourteen months later, in November 2015, the SDNY filed an FCA complaint and a settlement agreement providing for EOTech to pay the government $25.6 million. DaSilva later filed a motion in the district court asserting that he dismissed his qui tam action only after intense pressure from the government, and asserted that he should have a share of the settlement under the FCA provision allowing a relator to share when the government pursues an alternate remedy.

The government argued that an alternate remedy analysis under the FCA is triggered only if a qui tam action is pending at the time the government pursues some other remedy. The district court agreed, holding that “when there is no qui tam action for the government to ‘take over,’ the government’s filing of its own action is not an ‘alternate’ to taking over (or not taking over) a qui tam action.”

Claim of Coercion Unsupported

On appeal, the Second Circuit rejected DaSilva’s assertion that the government coerced his dismissal of the qui tam action.  The alleged coercion was a belief that an AUSA claimed DaSilva’s attorneys were in violation of ethical duties by representing a fugitive, and counsel believed a bar grievance would be filed if the complaint were not dismissed. The Court, however, observed that the government attorneys correctly cited Michigan Bar ethics principles providing that a “lawyer may not represent [a] client in collateral or unrelated matters while the lawyer knows the client remains a fugitive.” In addition, DaSilva’s attorneys did not suggest that the government lacked a legitimate concern about (1) the United States being represented in a qui tam case by a fugitive, and (2) having the government represented by attorneys who seemed willing to proceed in violation of ethical restraints.  The Rule 41(a) voluntary dismissal left “the situation as if the action had never been filed.”

Relator Could Not Recover Under “Alternate Remedy” Theory

DaSilva based his claim for a share of the government recovery on FCA section 3730(c)(5), which provides that if the government elects to pursue its claim through “any alternate remedy available,” the relator has the same rights as he would have if the qui tam action had continued. While the Second Circuit has not previously interpreted this section, the Court noted that the consensus among other circuits is that it applies only when there is a pending qui tam action into which the government could have intervened.

In examining section 3730(c)(5), the Court found that the use of the word “alternate” implied that the government is expected to choose between or among existing options, allowing the government to choose between (1) the qui tam action option, and (2) an alternate or substitute remedy. “If no qui tam action is pending, a qui tam remedy is thus not ‘available’ to the government and is not an ‘alternate’ to any other remedy.”

The Second Circuit held that section 3730(c)(5) only allows a relator to share in an alternate remedy recovery “if the relator’s qui tam action was pending when the government was choosing what course to pursue.” DaSilva’s qui tam action was no longer pending when the government filed its own FCA complaint and settlement, so he was not entitled to any share of the government recovery.

The Eastern District of New York filed a Safe Drinking Water Act complaint this week against the City of New York and the NYC Department of Environmental Protection, seeking to require the City to cover the Hillview Reservoir in Yonkers, part of the City’s public water system. At the same time, the EDNY also lodged a proposed Consent Decree and Judgment with the Court that would require the City to address the cover and upgrades at the reservoir over the next thirty years, at a cost of over $2 billion.

The Hillview Reservior is an open water storage facility that distributes water to City residents. The water entering the reservoir receives chlorine and ultraviolet treatment before entering the reservoir, but the finished water in the reservoir is subject to recontamination before it continues on its path.  The complaint alleges that public health would be threatened if the Hillview Reservoir water were recontaminated, because sufficient microbial treatment is not available downstream.

In 2006, EPA promulgated the LT2 Rule, which addressed the risks in uncovered finished water storage facilities by requiring public water discharge systems to cover the facilities or provide specified treatment of the discharge. EPA’s goal was to protect the finished water from being contaminated by birds, animals and other sources.

The City had already entered into an Administrative Order with the NYS Department of Health in 1996, under state law, to cover the reservoir, but the City did not meet the performance dates. In May 2010, the City agreed with EPA to an Administrative Order on Consent to cover the reservoir. Again, the City failed to meet the performance deadlines.

The complaint asserts claims for violation of the LT2 Rule and the EPA Administrative Order on Consent, and asks the Court to enjoin future violations, order the City to complete construction of a Hillview Reservoir cover, and assess a civil money penalty.

The proposed Consent Decree requires the City to cover the reservoir, and also to construct two other projects, summarized in an EDNY press release. The Kensico Eastview Connection will be a new underground aqueduct, expected to cost $1 billion and be completed by 2035. The Hillview Reservoir Improvements include extensive repairs to the Hillview Reservoir, and are estimated to cost $375 million by their completion in 2033. The cover of the reservoir’s East Basin is expected to be completed in 2042, with the West Basin cover being completed in 2049. The City’s cost estimate for the cover in 2009 was $1.6 billion, although the cost under the Consent Decree may be lower depending on the type of cover selected. In the interim, the City will agree to enhanced wildlife management, additional sampling, and a response procedure. The City will also pay a $1 million penalty to the United States, pay $50,000 to New York State, and implement a $200,000 Water Quality Benefit Project.

The EDNY will publish a notice of lodging of the Consent Decree in the Federal Register, which will solicit public comment for thirty days. After the public comment period closes, the EDNY will evaluate comments and advise the Court whether the Consent Decree should be entered. New York State has filed an unopposed motion to intervene in the action.

Second Circuit Judges recently traded strong language in opinions accompanying the denial of a petition for en banc review in Tanvir v. Tanzin.

In Tanvir, Plaintiffs alleged that, in retaliation for their refusal to serve as informants, federal officials improperly placed or retained plaintiffs’ names on the “No Fly List” in violation of the First Amendment and the Religious Freedom Restoration Act (RFRA). Plaintiffs asserted that they rebuffed these efforts based in part on their sincerely-held religious beliefs.

SDNY District Judge Abrams held that RFRA does not permit the recovery of money damages against federal officers sued as individuals, but a Second Circuit panel reversed, holding that RFRA permits individual capacity suits for money damages. In strong opinions accompanying the denial of a petition for en banc review, Judges Jacobs and Cabranes asserted that the panel decision was wrong, akin to the creation of a new Bivens remedy, and dangerous.

The Panel Decision

The appeal was argued before Judges Katzmann, Pooler and Lynch, and Judge Pooler wrote the decision for the Court. RFRA provides that the Government shall not substantially burden a person’s exercise of religion unless it can demonstrate the application of the burden is in furtherance of a compelling government interest and is the least restrictive means of furthering that interest. In addition, RFRA provides a private right of action to assert the RFRA violation “as a claim or defense in a judicial proceeding and obtain appropriate relief against a government.”

Judge Pooler first determined that because the RFRA definition of “government” includes federal officials, RFRA authorizes individual capacity suits against government officials. Next, Judge Pooler found that “appropriate relief” against such individuals includes money damages. The Court acknowledged that the phrase was not defined in the statute. The Court resorted to canons of statutory interpretation and relied on Supreme Court precedent holding that that the availability of all appropriate remedies is presumed unless Congress expressly indicates otherwise.  The panel concluded that RFRA authorizes the recovery of money damages against federal officers sued in their individual capacities.

Judges Katzmann and Pooler Concur in Denial of En Banc Review

Defendants filed a petition for en banc review, which was denied because it lacked majority support. Judges Katzmann and Pooler filed an opinion concurring in the denial, and rejected the arguments from the dissenting Judges that the panel opinion improperly engaged in finding a new Bivens-like private right of action against individuals for money damages. They argued that RFRA contains an express private right of action with an express provision for “appropriate relief.” They drew the distinction that the panel decision did not imply a right of action, but instead interpreted the statute to provide a damages remedy. They viewed this as a “time-honored exercise of the judiciary’s power to grant relief where Congress has legislated liability,” and stated that they wrote separately “merely to expose the dissents’ Bivens accusations as a red herring.”

Judge Jacobs’s Dissent

Judge Jacobs would have granted en banc review to reverse “the panel’s erroneous creation of a right to money damages under RFRA.” Judge Jacobs pointed to Second Circuit and Supreme Court precedent under the Religious Land Use and Institutionalized Persons Act (RLUIPA), holding that the phrase “appropriate relief against a government” does not support a private right of action against individual state officials for money damages, and that RLUIPA does not authorize private suits for money damages against the states. Judge Jacobs also stated that if a statute imposed personal money damages liability against individual federal officers, “one would expect that to be done explicitly, rather than by indirection, hint, or negative pregnant.”

The language of Judge Jacobs’s dissent raised the alarm that the panel decision was wrong and dangerous.

  • “The panel’s expansive conclusion can be viewed without alarm only by people (judges and law clerks) who enjoy absolute immunity from such suits.”
  • “The panel has done what the Supreme Court has forbidden: it has created a new Bivens cause of action. The Supreme Court did not shut the Bivens door so that we could climb in a window.”
  • “The safest course for a government employee in doubt would be to avoid doing one’s job, which is not a choice in need of encouragement.”
  • “The panel opinion is quite wrong and actually dangerous.”

Judge Cabranes’s Dissent

Judge Cabranes, noting that Judge Jacobs had done the “heavy lifting” in his opinion, emphasized his view that the panel decision “represents a transparent attempt to evade, if not defy, the precedents of the Supreme Court.” He referenced two Supreme Court decisions that had reversed Second Circuit extensions of the Bivens remedy, Ashcroft v. Iqbal and Ziglar v. Abasi. Judge Cabranes rejected, also in strong language, what he saw as the panel decision’s presumption that “Congress legislated a Bivens-like remedy—sub silentio—in RFRA.”

  • “It appears our Court is still incapable of learning this lesson.”
  • “This rationalization is as flawed as it is transparent.”
  • “When asked why he persisted in issuing decisions that the Supreme Court would predictably overturn, a prominent judge of another circuit once explained, ‘[t]hey can’t catch ‘em all.’ Such an attitude is not, and must not become, the approach of our Circuit.”

A Petition For Certiorari?

Whether the strong language from the dissenting opinions will interest the Supreme Court remains to be seen. The government has requested a stay of the mandate so the Solicitor General, or possibly private counsel, can determine whether to file a petition for certiorari to the Supreme Court. In any event, this debate is likely to continue.

New York City will pay $5.3 million to the United States for fraudulently obtaining FEMA funds related to Superstorm Sandy in a False Claims Act settlement with the Southern District of New York. The City admitted improperly seeking reimbursement from FEMA for vehicles that were not damaged by Superstorm Sandy.

Superstorm Sandy swept through New York in October 2012 and left extraordinary damage in its wake. The New York City Department of Transportation (NYC DOT) sought reimbursement from the Federal Emergency Management Agency (FEMA) for 132 vehicles it certified had been directly damages by Sandy. Many of these vehicles, however, had been non-operational prior to the storm.

In February, the SDNY filed a civil complaint asserting False Claims Act and common law claims. In a settlement stipulation filed the same day, the City admitted to fraudulent conduct, including:

  • NYC DOT failed to sufficiently review whether the vehicles were operational or in use prior to Sandy, and whether the amounts in the request for reimbursement accurately represented losses incurred due to Sandy;
  • The City official signing the certification did not have personal knowledge and failed to direct a proper investigation before signing the certification;
  • Shortly after the certification, a NYC DOT employee sent an e-mail to the certifying official that certain vehicles were “junk for years;”
  • The City did not take steps to notify FEMA that it was not entitled to certain of the requested funds until after it became aware of the SDNY investigation.

The City agreed to a total settlement of $5.3 million, including a repayment of over $4 million and a de-obligation of over $1 million that FEMA had authorized but not yet paid.  The City agreed to cooperate with the investigation of individuals, and the release language of the settlement agreement specifically provided that “[f]or avoidance of doubt, this Stipulation does not release any current or former officer, director, employee, or agent of the City from liability of any kind.”

This settlement, and the possible continuing investigation, highlight the significant responsibilities held by those who certify information in requests for federal funds.

EDNY Judge Nina Gershon analyzed several False Claims Act issues in United States ex rel. Omni Healthcare Inc. v. McKesson Corp., ruling on first-to-file, Rule 9(b), and statute of limitations issues.

Relator Omni Healthcare alleged that defendants improperly used “overfill” in vials of injectable drugs. “Overfill” is the amount of a drug in excess of the amount indicated on the label, typically included so the provider can withdraw a full dose from the vial. Relator alleged that defendants wrongfully broke into the vials, harvested the overfill, and then sold syringes with the overfill to providers who then billed the government.

Identify of Defendants Drives First-To-File Ruling

The Court initially addressed whether relator’s second amended complaint should be dismissed under the first-to-file rule, based on an earlier-filed case that also addressed alleged fraudulent repackaging of overfill. The Court reviewed Second Circuit law holding that a later-filed action is related and therefore barred if it “incorporate[s] the same material elements of fraud as the earlier action.” The Court concluded that the Omni Healthcare allegations were only related as to the one defendant that was a defendant in the earlier action, and dismissed the complaint only as against that defendant. The Court held that “the first-to-file bar would not reach a subsequent qui tam action otherwise alleging the same material elements of fraud, but alleging those elements concerning different defendants.” A later complaint is related if the earlier complaint equips the Government to investigate the fraud, and the Court determined that to be “‘equipped’ to investigate a fraud, the government must know whom to investigate.”

2017 Chorches Decisions Defeats Rule 9(b) Challenge

Defendants next asserted that the complaint did not satisfy the particularity requirement for pleading fraud under Rule 9(b), because it lacked allegations about the content of the false claims, who submitted them, and when they were submitted. Judge Gershon denied this argument based on the 2017 Second Circuit decision in United States ex rel. Chorches v. Am. Med. Response, Inc., which was discussed in our New York Health Law Blog here. The Court held that “such information is not required where, as here, the relator’s allegations create a strong inference that specific false claims were submitted.”

Statute of Limitations Bars Claims Against Added Defendants

Omni Healthcare conceded that, to satisfy the False Claims Act six year statute of limitations, the new allegations in its second amended complaint would be timely only if they related back to its earlier-filed first amended complaint. The Court noted that the False Claims Act specifically allows a timely complaint to satisfy the statute of limitations even though the named defendants were deprived of notice while the complaint was sealed. New claims against defendants named by Omni Healthcare in the first amended complaint were therefore timely. The second amended complaint, however, had added five additional defendants, and the Court held that claims against these defendants were untimely. “The statute of limitations, like the first-to-file rule, encourages relators to come forward promptly with information to help the government uncover fraud … This purpose would be undermined if a relator were permitted to add additional defendants years later—and potentially after the government has declined to intervene.”

Judge Gershon’s rulings highlight the importance of naming all False Claims Act defendants as early as possible to avoid procedural dismissals.