Federal contractors, beware: False Claims Act penalties will nearly double, effective Aug. 1

Under the Bipartisan Budget Act of 2015, Congress required federal agencies to adjust for inflation its civil monetary penalty (CMP) levels, with automatic annual adjustments. The initial catch up adjustments for inflation to CMPs must be published through an interim final rule not later than July 1, 2016, and the adjustments for inflation shall take effect not later than Aug. 1, 2016. For each year thereafter, the adjustments for inflation to CMPs shall take effect not later than Jan. 15.

The first agency to adjust FCA penalties under that Act was the Railroad Retirement Board, an obscure agency that occasionally generates FCA cases. Under the interim final rule, the Board increased minimum FCA penalties from $5,500 to $10,781 and increased maximum penalties from $11,000 to $21,563. It’s expected that other agencies, including the Department of Justice, will employ the same calculation when issuing their rules.

“These increases are significant because the penalties are automatic and mandatory for each false claim submitted to the government,” Jacqueline Unger, an associate with law firm PilieroMazza, wrote in a blog post. “While the penalties are required only when a judgment is entered against the contractor by the court, the threat of such high penalties gives substantial leverage to the government in negotiating settlements of FCA claims.”

The increase in FCA penalties underscores the importance of the U.S. Supreme Court’s decision in Universal Health Services v. Escobar, a case that addressed when a company can face liability under the FCA. In Escobar, the court—in a rare unanimous decision—upheld the viability of the implied certification theory, while at the same time arming healthcare providers, government contractors, and others that conduct business with the government ammunition to more easily battle minor regulatory and contract violations or allegations that lack merit. Read the full Compliance Week coverage here.

“Should the [Department of Justice] and other agencies follow the lead of the Railroad Retirement Board and issue regulations doubling the civil penalties under the False Claims Act, the life science industry, health care industry, and government contractors would be well served to vigorously challenge the agencies’ rulemakings,” a client alert from law firm Arent Fox states.

Comment on the interim final rule ends July 7.