Government May Assess False Claims Act Penalties Below Statutory Minimum

A recent federal appeals court decision holds that a court may assess False Claims Act (FCA) penalties that are lower than the minimum specified by that statute. Paradoxically, that represented a win for the government and a loss for the contractor.

By way of background, hospitals have long feared FCA penalties as much as, or more than, liability for amounts overbilled to Medicare. And little wonder. The FCA provides for a minimum penalty of $5,500 plus triple damages for each wrongful claim. A hospital may submit tens of thousands of Medicare claims annually. Even one kind of error, consistently made over a year, could result in thousands of "false claims." Under the FCA wording, 1,000 such claims, no matter how small, would mean a minimum penalty of $5.5 million plus triple damages.

So, hospitals should be overjoyed at a ruling that allows penalties below the minimum, right? Well, not necessarily, as demonstrated by the opinion in U.S. v. Gosselin ( No. 12-1369, slip op. 30 (4th Cir.  Dec. 19, 2013). The court considered the case of a defense contractor guilty of bid-rigging in connection with a contract under which the government paid a total of approximately $3.3 million, of which no more than $865,000 represented overbilling. Since the contract involved 9,136 separate invoices, the minimum penalty under the FCA would be more than $50 million.

The lower court ruled that an award of more than $50 million for a wrong that resulted in  $865,000 of improper proceeds would violate the Eighth Amendment's prohibition of "excessive fines." Since the $50+ million penalty was the minimum permissible under the statutory language, the trial court ruled that it could not impose any penalty under the FCA.

On appeal, the court reversed, siding with the government and ruling that the trial court had the authority to assess FCA penalties in an amount below the statutory minimum. That is, if the statutory minimum would be so excessive as to be unconstitutional, then the trial court could impose a lesser penalty that would not violate the Eighth Amendment.