Government-funded programs allow companies to receive reimbursement from the government when they provide certain services. For example, healthcare providers with a Medicare contract are reimbursed when they administer certain procedures or medications. [1] Similarly, telecommunications companies that have contracts with the Federal Communications Commission’s Universal Service Program are reimbursed when they provide discounted services to eligible schools and libraries. [2] By contracting with businesses, the government can easily provide services that benefit the public. However, some of these for-profit businesses might begin to focus more on their profits and less on the community. Healthcare providers might start administering unnecessary medical procedures to patients in order to receive increased Medicare reimbursements. [3] Telecommunications companies might overcharge disadvantaged school districts for services while receiving government reimbursement for supposedly providing those schools with discounted rates. [4] The unfortunate reality is that the government estimates that it loses hundreds of billions of dollars to false claims like these each year. [5]
To combat this problem, Congress passed the False Claims Act (FCA). The FCA is a federal law that imposes civil liability on parties that defraud the U.S. Government to recoup fraudulently obtained funds. [6] Despite being “the Government’s primary litigative tool for combating fraud,” [7] legal scholars and courts alike disagree on how to interpret the FCA. Particularly 31 U.S.C. § 3730(b)(5), commonly known as the FCA’s “first-to-file” provision, has created a host of interpretative challenges. [8] The first-to-file provision bars FCA qui tam plaintiffs from “bring[ing] a related action based on the facts underlying [a] pending action.” [9] While the Supreme Court has not yet adopted a test to determine whether two claims are related under the first-to-file provision, every circuit court that has addressed the issue agrees that the essential facts test is the appropriate standard to use. [10] However, circuit courts disagree on how to apply the essential facts test, with some courts applying the test broadly while others apply the test more narrowly. [11]
This Note examines how both the broad and narrow applications of the essential facts test affect the balance between the competing goals of the first-to-file provision. Part II provides background on the first-to-file provision and the development of the essential facts test. Part III then examines the inconsistent applications of the essential facts test by the circuit courts, with some circuits applying the test broadly and others applying the test more narrowly. Part IV explores the importance of FCA qui tam litigation. Finally, Part V argues that a broad application of the essential facts test achieves the best balance between the competing goals of the provision.
The FCA was enacted in 1863 to combat the excessive fraud committed by defense contractors against the government during the Civil War, [12] and it has been the subject of legal controversy ever since. [13] It remained generally unchanged until the 1986 False Claims Reform Act, [14] when Congress updated and modernized the FCA to improve the government’s ability to recover losses resulting from fraud. [15] Congress sought to make the FCA more effective because the government was losing anywhere “from hundreds of millions of dollars to more than $50 billion per year” to fraud in government programs. [16] As a result, people began to lose faith in the government’s management of federal programs. [17]
Congress recognized that whistleblowers with firsthand knowledge of a fraudulent scheme are invaluable to FCA litigation. [18] Therefore, the solution to this growing fraud problem was to strengthen the FCA’s qui tam provisions to encourage individuals with knowledge of fraudulent activity against the government to come forward. [19] To encourage private enforcement of the FCA, Congress increased protections for whistleblowers, also known as relators. [20] Additionally, Congress increased the portion of the award a relator could receive from a successful claim [21] and allowed relators to recover attorney’s fees. [22]
Although it is important for the government to promptly and efficiently investigate alleged fraudulent schemes, the Department of Justice expressed concerns that expanding qui tam provisions might lead to a greater number of frivolous or vexatious lawsuits. [23] Congress appears to have taken steps to address the Department of Justice’s concerns when it included § 3730(b)(5), also known as the first-to-file provision, in the 1986 FCA Amendments. The first-to-file provision states that private citizens are prohibited from bringing qui tam actions that are based on the facts of a pending FCA claim. [24] Congress included the provision to clarify that the FCA was “not meant to produce class actions or multiple separate suits based on identical facts and circumstances.” [25]
Based on the legislative history described above, circuit courts agree that the FCA’s qui tam and first-to-file provisions have competing goals: (1) encourage whistleblowers to promptly notify the government of potential fraud and (2) prevent repetitive, opportunistic lawsuits based on previously disclosed fraud. [26] However, Congress did not indicate how courts were supposed to determine whether two FCA claims are related for purposes of the first-to-file provision. [27] This led to courts developing the essential facts test. [28]
When circuit courts first began to discuss and apply the first-to-file provision, practitioners attempted to persuade courts to adopt an identical facts test. [29] The identical facts test would only bar later-filed claims that allege facts identical to those in the first-filed complaint. [30] The justification for this test comes from the first-to-file provision’s legislative history, which states that the provision “is not meant to produce . . . multiple separate suits based on identical facts and circumstances.” [31] However, the circuit courts have dismissed an identical facts test in favor of the essential facts test by relying on the plain language and the purpose of the statute. [32] For example, in the first federal appellate case to adopt the essential facts test, United States ex rel. LaCorte v. SmithKline Beecham Clinical Laboratories, Inc., the Third Circuit determined that the essential facts test is the appropriate standard to apply because the plain language of § 3730(b)(5) “speaks of a ‘related action,’ not an identical one.” [33] Additionally, the court found that an identical facts test would defeat the purpose of the FCA by preventing the government from uncovering fraud. [34] Currently, all eleven of the circuit courts to address the issue of whether two claims are related under the first-to-file provision have adopted the essential facts test. [35]
Under the essential facts test, two actions are related under the first-to-file provision if the later-filed complaint “states all the essential facts of a previously-filed claim or the same elements of fraud as described in an earlier suit.” [36] The circuit courts agree that under the essential facts test, the first-to-file provision can bar a later claim even when the claim includes different details. [37] When analyzing the similarities of qui tam claims under the essential facts test, courts compare the complaints side by side to determine whether similarities exist such that the facts alleged in the first complaint would have put the government on notice of the fraudulent scheme alleged in the later-filed complaint. [38] Despite the circuit courts’ agreement on many aspects of the essential facts test, the circuits apply the test inconsistently. [39]
When circuit courts apply the essential facts test, one panel might find that the government should have been put on notice by a certain set of facts, while a different panel may come to the opposite conclusion when presented with the same set of facts. This illustrates the judicial inconsistency that can arise in the application of the essential facts test. These varied applications can be split into two categories: broad or narrow applications. [40] Section III.A illustrates how the essential facts test has been broadly applied by analyzing recent decisions in the Second and Fourth Circuits. Section III.B then discusses how the test has been narrowly applied by analyzing recent decisions by the D.C. and First Circuit Courts of Appeals.
In United States ex rel. Wood v. Allergan, Inc., the Second Circuit’s first and only application of the essential facts test, the court held that two FCA qui tam complaints were related under the first-to-file provision because they alleged similar fraudulent schemes, even though the later-filed complaint included additional details. [41] In 2008, Holly Lampkin filed a FCA qui tam complaint (Lampkin Complaint) alleging that Allergan, a pharmaceutical company, sent physicians free surgical kits to induce them into prescribing Allergan products. [42] In 2010, while the Lampkin Complaint was still pending, Todd Wood filed a FCA qui tam complaint (Wood Complaint) against Allergan. [43] Wood alleged that from 2003 through 2011, Allergan gave free products to physicians who promised to prescribe or increase their number of prescriptions for Allergan products, which resulted in health insurance providers filing false claims with the government. [44]
The Second Circuit compared the Lampkin and Wood Complaints to determine whether they shared the same essential facts, stating that if the government “would be equipped to investigate” the second complaint based off the facts alleged in the first-filed complaint, “then the two cases are related within the meaning of Section 3730(b)(5).” [45] Ultimately, the Second Circuit held that the complaints relied on the same essential facts, even though the Wood Complaint alleged additional details, because they both alleged a similar fraudulent scheme where Allergan induced medical providers to increase their use of Allergan products by providing them with free cataract surgery kits. [46]
In the Fourth Circuit’s most recent application of the essential facts test, the court broadly applied the test, finding that two FCA qui tam complaints were related under the first-to-file provision, even when one complaint alleged additional methods of fraud. [47] In 2009, Christine Ribik, the first relator, filed a qui tam complaint (Ribik Complaint) against Manor Care, a health services provider, in United States ex rel. Carson v. Manor Care, Inc. [48] Ribik alleged that Manor Care provided patients with unnecessary physical therapy so that it could overbill Medicare. [49] Ribik alleged that Manor Care achieved this by encouraging staff to spend unnecessary time with patients in order to increase the billing charge, refusing to discharge patients from its facility so that it could continue to administer unnecessary services, and billing for therapy services that were never provided. [50] In 2011, a second relator named Patrick Carson filed a qui tam complaint (Carson Complaint) against Manor Care. [51] Carson alleged that Manor Care overbilled for therapy services, billed for services that were never provided, billed “non-skilled activities as skilled therapy,” billed for unnecessary therapy, increased billing by spending unnecessary time with patients, and “postponed the discharge of patients for days and sometimes weeks longer than medically appropriate.” [52] Additionally, Carson alleged that Manor Care defrauded the government by “consistently administering modalities like electric stimulation, diathermy, and ultra sound to inappropriate patients.” [53] Carson argued that his complaint indicated a different fraudulent scheme from the Ribik Complaint because he alleged several additional mechanisms by which Manor Care improperly increased its billing to the government. [54]
The Fourth Circuit compared the Ribik and Carson Complaints to determine whether they were based on the same essential facts and therefore related under the first-to-file provision. [55] The court recognized that the Carson Complaint alleged additional details and additional methods of fraud that were not included in the Ribik Complaint. [56] For example, the Carson Complaint specifically mentioned different therapy modalities such as ultrasounds and electric stimulation, whereas the Ribik Complaint only generally mentioned the administration of unnecessary therapy. [57] Additionally, the Carson Complaint was based on fraudulent conduct that took place in Pennsylvania, whereas the Ribik Complaint was based on fraudulent conduct that took place in Virginia. [58] Despite the differences in the details of the complaints, the court found that the Ribik and Carson Complaints were “materially similar” under the essential facts test because they both generally alleged that Manor Care implemented improper billing practices in order to fraudulently increase their billing of government-funded health programs. [59]
In the D.C. Circuit’s most recent application of the essential facts test, the court narrowly applied the test and found that two FCA qui tam complaints were not related under the first-to-file provision, even when the complaints contained significant similarities. [60] In United States ex rel. Heath v. AT&T, Inc., the D.C. Circuit compared two FCA qui tam complaints side by side to determine whether they shared the same essential facts. [61] In 2008, Todd Heath, a telecommunications auditor, filed the first complaint (Wisconsin Bell Complaint) against Wisconsin Bell, Inc., a subsidiary of AT&T. [62] Heath alleged that Wisconsin Bell overbilled schools and libraries eligible for E-Rate pricing for telecommunications services while offering favorable telecommunications pricing to other agencies. [63] While the Wisconsin Bell Complaint was still pending, Heath filed another FCA qui tam complaint (AT&T Complaint) in 2011, this time against AT&T, Inc. and nineteen of its subsidiaries. [64] Heath alleged that through its subsidiaries, AT&T carried out a “corporate-wide scheme” to submit false claims to the government “by depriving schools and libraries” of favorable telecommunications prices. [65] Additionally, the AT&T Complaint alleged that “AT&T knowingly concealed those violations to avoid having to reimburse the [government].” [66]
The D.C. Circuit compared the complaints to determine whether “the government already would be equipped to investigate” the AT&T Complaint, based on the Wisconsin Bell Complaint. [67] Despite both complaints naming subsidiaries of the same company and dealing with the same type of fraud (overcharging schools that were eligible for E-Rate pricing), the D.C. Circuit held that the claims did not allege the same essential facts because the Wisconsin Bell Complaint only put the government on notice of “a limited scheme by Wisconsin Bell to defraud the E–Rate program within Wisconsin” through affirmative misrepresentations. [68] By contrast, the AT&T Complaint alleged a “different and more far-reaching scheme to defraud the federal government through service contracts entered into across the Nation, and then to cover up that fraud.” [69] Consequently, the court found that the government could not have discovered the fraud alleged in the AT&T Complaint based on the Wisconsin Bell Complaint and the complaints were not related under the first-to-file provision. [70]
In the First Circuit’s most recent application of the essential facts test, it narrowly applied the test and found that two complaints that share significant similarities do not allege the same essential facts. [71] In United States v. Millennium Laboratories, Inc., the court determined two complaints were unrelated under the first-to-file provision, even though both complaints alleged that the same defendant ordered excessive confirmatory drug testing in order to receive increased revenue. [72] In that case, Robert Cunningham filed the first complaint in 2011, [73] alleging that Millennium Laboratories implemented a “point-of-care model” that led to excessive confirmatory drug testing, which boosted the defendants’ revenue at the government’s expense. [74] Mark McGuire filed the second complaint in 2012, alleging that Millennium Laboratories “engaged in a scheme that resulted in unnecessary confirmatory tests being performed and billed to the government after the point-of-care tests.” [75] Specifically, McGuire’s complaint alleged that Millennium Laboratories had a corporate policy where it would send physicians free test kits. [76] The test kits persuaded physicians to automatically conduct confirmatory drug testing on every patient’s sample, regardless of whether it was needed. [77] The United States chose to intervene in McGuire’s action and reached a settlement with Millennium Laboratories that awarded 15% of the $227 million settlement to the relator. [78] However, the settlement did not resolve the identity of the relator, and Cunningham and McGuire both filed claims arguing that they were the first to file. [79]
To determine which relator was the first to file, the First Circuit compared Cunningham and McGuire’s complaints side by side to determine whether “Cunningham’s amended complaint ‘contained all the essential facts’ of the fraud McGuire alleged.” [80] Although both Cunningham and McGuire both alleged that Millennium Laboratories defrauded the government by conducting unnecessary confirmatory drug testing, the First Circuit said that argument was “too general.” [81] Rather, the “actual mechanism” of the fraud is the essential fact the court must consider in its analysis. [82] Because Cunningham’s complaint alleged that the fraud resulted from Millennium Laboratories ordering multiple unnecessary tests for each initial test kit, and McGuire’s complaint alleged that the fraud resulted from Millennium Laboratories providing free test kits to physicians to persuade them to automatically perform confirmatory testing, regardless of whether the tests were necessary or not, the First Circuit held that the complaints “do not allege similar frauds, but allege different frauds with different mechanisms.” [83] Therefore, the court concluded that the complaints did not share all the same essential facts. [84] Furthermore, the court found that when the Government intervened in the qui tam claims against Millennium Laboratories, it pursued the fraud alleged in McGuire’s complaint, not Cunningham’s complaint. [85] Consequently, the court determined that McGuire was the first-to-file relator. [86]
One of the most unique, and arguably most important, aspects of the FCA is that it allows private citizens to sue companies on behalf of the U.S. Government in qui tam actions. [87] Only one other federal statute in the United States allows for qui tam actions, [88] and the constitutionality of qui tam litigation has often been debated. [89] While Congress repealed the qui tam provisions in other federal statutes, [90] it strengthened those in the False Claims Act. [91] However, this was not always the case. Congress almost barred all FCA qui tam actions in 1943, but it ultimately decided to considerably restrict the ability of FCA plaintiffs to bring them. [92] As a result, the efficacy of the FCA was significantly reduced, and relators only brought approximately six actions each year. [93] Comparatively, relators have filed 13,957 qui tam actions since Congress enacted the 1986 Amendments that expanded the ability of relators to bring qui tam actions. [94] The U.S. Government has only filed 5,570 non qui tam FCA actions in that same time. [95] The total amount of money that the government recouped from non qui tam actions since the 1986 Amendments took effect is a little less than $18 billion, while the government has recouped approximately $46.5 billion from qui tam actions. [96] Put simply, relators file approximately 2.5 times more FCA claims than the government and contribute approximately 70% of the money recouped from FCA judgments. [97] These numbers suggest that relators and the qui tam process are essential to combating fraud and recouping monetary losses.
Relators are clearly more effective than the government at identifying and bringing actions for false claims, presumably because they have firsthand knowledge of fraudulent schemes. [98] But how effective are qui tam actions overall? Although it is impossible to know exactly how much money the government loses to fraudulent claims, the Department of Justice has estimated that it loses anywhere from “1 to 10 percent of the entire Federal budget” each year. [99] In 2020, the government spent $6.6 trillion, [100] which means it likely lost anywhere from $66 billion to $660 billion to fraud. [101] Yet qui tam actions only recouped approximately $1.7 billion dollars in 2020. [102] Similarly, the government spent $4.4 trillion in 2019, [103] which means it likely lost anywhere from $44 billion to $440 billion to fraud. [104] Qui tam actions only recouped $2.2 billion in 2019. [105] This pattern continues. [106]
Relators are much more effective than the government in FCA litigation, but they only recouped anywhere from 0.5% to 5.1% and 0.3% to 2.6% of monetary losses sustained as a result of fraud in 2019 and 2020, respectively. [107] To increase the recovery of funds, the government must increase incentives for private citizens to bring FCA qui tam actions. With respect to the first-to-file provision, circuit courts applying the essential facts test broadly will best achieve this goal.
The goal of the FCA qui tam provision is to encourage whistleblowers to promptly notify the government of fraud, while the goal of the first-to-file provision is to discourage repetitive, opportunistic lawsuits. [108] The circuit courts adopted the essential facts test in order to help balance these competing goals; [109] however, as discussed in Part III, courts have failed to consistently apply the test. [110]
Courts that apply the test broadly advocate in favor of a more restrictive standard that second relators must overcome. These courts analyze claims at a general level, rather than focusing on specific details, in order to determine whether two complaints share all the same essential facts. [111] Additionally, the broad application prioritizes deterring repetitive lawsuits, [112] arguing that relators will be discouraged from filing qui tam actions if repetitive lawsuits are allowed to proceed. [113] Finally, courts that favor a broad application argue that it would be unfair for belated relators to share in the qui tam award because “their allegations are unlikely to increase total recovery” and repetitive claims “do not help reduce fraud or return funds” to the government. [114]
By contrast, courts that narrowly apply the essential facts test argue in favor of less restrictive standards that a second relator must overcome. These courts are more precise and fact specific when analyzing whether two complaints share the same essential facts. [115] The narrow application prioritizes the FCA’s goal of government notice by being overly cautious about how much information the government needs to uncover instances of related fraud. [116]
It is challenging for courts to uniformly apply the essential facts test because it is a fact-specific inquiry by nature. On one hand, later-filed qui tam complaints that allege additional methods, locations, or defendants of a fraudulent scheme may help the government uncover fraud and recoup monetary losses, even when a first relator has already filed a less detailed complaint involving the same company or some of the same methods of fraud. [117] On the other hand, if a court’s comparison of the similarities between the facts in each complaint gets too specific, the test might begin to resemble an identical facts test instead of an essential facts test. [118] As previously noted, every circuit court rejected the identical facts test in favor of the essential facts test in part because the identical facts test would defeat the purpose of FCA qui tam actions. [119] It would discourage plaintiffs from promptly reporting fraud, thereby hindering the government’s ability to recoup money lost to false claims, and it would encourage parasitic lawsuits. [120] An overly narrow interpretation of the essential facts test would lead to similar results. If courts do not bar qui tam actions that are substantially similar to the essential facts of a pending qui tam action, then the settlements for each case would be smaller than if there was only one relator. [121] Smaller awards, or sharing the award with an undeserving plaintiff, would disincentivize individuals from blowing the whistle on fraud and bringing qui tam actions. [122]
Logically, it is tempting to think that the government’s case against a defendant may not be as strong if courts dismiss a more detailed qui tam complaint that alleged new facts or locations about a particular fraudulent scheme. If the government does not have those additional details, then there might be a smaller settlement or judgment, or maybe even no recovery of funds at all. After all, government investigators are often overworked and might not have the resources to thoroughly investigate a fraudulent scheme and uncover related frauds in different locations. Fortunately, this is unlikely to occur because all FCA qui tam plaintiffs must serve the government with “a copy of the complaint and written disclosure of substantially all material evidence and information the [plaintiff] possesses.” [123] Additionally, the complaint “remain[s] under seal for at least 60 days” while the government reviews it. [124] Therefore, the government always has the opportunity to review the allegations in every qui tam complaint a plaintiff files. As such, a broad application of the essential facts test achieves the best balance between the FCA’s competing goals because it discourages parasitic lawsuits by analyzing facts generally instead of specifically, which creates a higher burden for opportunistic plaintiffs to overcome. It also encourages whistleblowers to promptly file their qui tam actions, notifying the government of fraud, because if another FCA qui tam plaintiff files before them, they risk having a court dismiss their claim under the first-to-file provision.
When courts analyze two complaints side by side to determine whether they share all the same essential facts, they should construe all facts generally. For example, say Complaint One alleges that Company X orders unnecessary medical testing for Disease A in order to receive increased reimbursement payments from Medicare. Complaint Two alleges that Company X’s satellite office prescribes unnecessary medication for Disease A in order to receive increased payments from Medicare. The court should find that the complaints allege the same essential facts because they involve the same company defrauding the government by ordering unnecessary medical treatment for the same disease. In reviewing Complaint One, the government would have likely reviewed all of Company X’s Medicare claims related to Disease A, and it would have uncovered the unnecessary prescriptions. The second relator’s claim should be dismissed under the first-to-file provision, and the first relator should be the sole beneficiary of the relator award. The first relator is content with his decision to blow the whistle, and the second relator now knows he will have to file his complaints more promptly in the future.
However, construing all facts generally does not mean the court should ignore completely different material facts. Consider example two: Complaint One alleges Hospital Y orders unnecessary medical procedures for children with Disease A. Complaint Two alleges Hospital Y’s nursing home facility unnecessarily overbills elderly patients for medical treatment they never received. In this case, even construing the facts generally, the court should find that the government could not have uncovered the fraud in Complaint Two based off the facts alleged in Complaint One. First, the government might not review the nursing home’s billing records based off a complaint about Hospital Y’s pediatric billing practices. Second, even if the government did review the nursing home’s records, it is unlikely that the government could figure out that elderly patients never received the services the nursing home billed them for without a complaint that alleged that fact. In this case, the government should find that the complaints do not share all the same essential facts, and the first-to-file provision does not bar Complaint Two. The court should allow the two complaints to carry on as separate lawsuits that uncovered two distinct types of fraud. This way, both relators are awarded a portion of their respective judgments. The court should avoid consolidating the cases because then only the first relator would receive a portion of the judgment, or both relators would receive a smaller award than they would have received if the complaints were kept separate. [125] Consolidating the cases would disincentivize future relators from coming forward and reporting fraud because someone else may recover for the fraud the second relator disclosed, or the second relator may receive a small award that would not make the process of filing the qui tam action worth the hassle. [126]
Many government-funded programs, such as Medicare, Medicaid, the Universal Services Program, and more, are intended to provide much needed benefits for the community. [127] Instead, they have turned into a vehicle for businesses to carry out fraudulent schemes in order to steal public funds from the government. [128] The impact of fraud on the federal government cannot be overstated. The government loses billions of dollars each year to false claims, losing anywhere from $66 billion to $660 billion in 2020 alone. [129] Fortunately, the FCA’s qui tam provision effectively allows the government to combat fraud and recover funds by allowing private citizens to file FCA actions on behalf of the government. [130] Nevertheless, the government is only returning a small percentage of lost funds to the federal fisc each year. [131]
Increasing incentives for relators to promptly file qui tam actions and notify the government of fraud will improve the ability of the government to recover monetary losses sustained as a result of fraud. [132] A broad application of the first-to-file provision’s essential facts test will help achieve this goal. A broad application incentivizes whistleblowers to promptly file their qui tam actions because if another FCA qui tam plaintiff files before them, they risk having a court dismiss their claim under the first-to-file provision. [133] Additionally, a broad application of the essential facts test furthers the first-to-file provision’s goal of discouraging parasitic lawsuits by analyzing facts generally instead of specifically, which creates a higher burden for opportunistic plaintiffs to overcome. [134] Overall, a broad application of the first-to-file provision’s essential facts test will incentivize relators to report fraudulent schemes quicker, which will allow the government to investigate fraud more effectively while also conserving judicial resources.