Reigning in the Scope of False Claims Act

United States v. Sanford-Brown, Ltd. | 14-2506

September 2015

The number of qui tam suits filed alleging fraud in federal programs has grown from 30 in 1987, to 300 to 400 a year from 2000 to 2009, to more than 700 in 2013 and 2014. See “Justice Department Recovers Nearly $6 Billion from False Claims Act Cases in Fiscal Year 2014,” DOJ Press Release, dated 11/20/14. A casual observer might conclude from these statistics that fraud against the government has been rapidly increasing over the last 25 years. Those more involved in this area of litigation might have a different take – to wit, the means of alleging claims under the False Claims Act has rapidly increased.

In United States v. Sanford-Brown, Limited, 14-2506, the Seventh Circuit significantly curtailed the scope of liability under the FCA. In Sanford-Brown, the plaintiff, a former employee of a for-profit college, alleged various acts in which Sanford-Brown purportedly violated Department of Education regulations. Based on these violations, the plaintiff theorized that Sanford-Brown filed false claims because, to receive federal Department of Education dollars, it had agreed to follow all relevant federal regulations (and it had not). Specifically, like many federal programs, the Department of Education requires participating institutions to sign participation agreements. Those agreements obligate the institution to follow all applicable federal regulations while participating in the program. Medicare, Medicaid and other large government programs have similar practices.

Plaintiffs (or in qui tam parlance, “relators”) have long relied on technical violations of regulations as a basis for filing false claim actions, as opposed to demonstrating that the offending party never intended to follow the regulations in the first instance. The former is not a basis for FCA liability, while the latter is. As the Seventh Circuit noted, “[t]he FCA is simply not the proper mechanism for government to enforce violations of conditions of participation contained in . . . a [Program Participation Agreement]. Rather, under the FCA, evidence that an entity has violated conditions of participation after good-faith entry into its agreement with the agency is for the agency – not a court – to evaluate and adjudicate.” The logic applied by the Seventh Circuit would seemingly apply to all sorts of federal programs, not just the Department of Education program at issue in Sanford-Brown. If that is the case, expect the run-up of FCA cases to plateau in the Seventh Circuit, and perhaps other circuits as well if Sanford-Brown’s reasoning is adopted by other circuits.