Author: Kenneth M. Abell

This article was originally published in the Expert Analysis Section of Law360 on October 24, 2023, by authors Ken Abell, Scott Glicksman, and Jennie Yu.

For federal white collar defendants facing the likelihood of a custodial sentence, attention is, for good reason, centered on the length of sentence to be imposed upon conviction — an outcome dictated by the charges at issue and applicable U.S. sentencing guidelines, and ultimately determined by the sentencing judge.

Though parole has long been abolished in the federal sentence, federal defendants generally do not serve the full sentence imposed by the sentencing judge. Indeed, the sentence the defendant will likely have to serve, and what amount may be served in alternative custodial settings outside of prison, are impacted by several long-standing and more recent legal developments, especially in the context of white collar offenses. The fraction of the sentence to be served by a defendant is, quite obviously, a no less relevant consideration for those contemplating or negotiating a federal plea involving exposure to a custodial jail term.

In this article, we provide a brief overview of some of the more well-established federal programs widely applicable to white collar defendants that can affect one’s release date from federal prison, including early release to a prerelease facility, home confinement or supervised release under the First Step Act, as well as reductions to one’s total time served through so-called good-time credits.

While programs like good-time credits have been entrenched in statute and Federal Bureau of Prisons policy for years, the implementation of many aspects of 2018’s First Step Act is still evolving. Taken together or apart, the significant impact these programs can have on a white collar defendant’s time served makes plain the need to keep them in mind early in the life cycle of a client’s case than one might think.

Finally, we address two recent updates to this landscape: first, the September 30, 2023 expiration of the First Step Act’s Elderly Offender Home Detention Program, and second, a recent announcement by the U.S. Sentencing Commission to apply the so-called zero-point offender adjustment retroactively, allowing thousands of defendants who were sentenced as first-time offenders to petition courts for a reduction in their prison terms.

Good-Time Credit

Good-time credit is earned for satisfactory behavior, including “exemplary compliance with institutional disciplinary regulations,” according to Title 18 of the U.S. Code, Section 3624(b).

Good-time credit reduces an incarcerated person’s actual time in BOP custody. For each year of an incarcerated person’s imposed sentence, they can earn up to 54 days of good time. All federal prisoners serving a sentence of more than one year are eligible.

When awarded, good-time credit effects a material reduction in someone’s time served in prison, one that is calculated predictably and on an annual basis. The BOP calculates good-time credits 15 days from the last day of each year of the incarcerated person’s sentence.

For example, someone whose sentence began on April 5 should be awarded their good-time credit by April 20 every year after their first year in prison. And although good-time credits are not new, the First Step Act of 2018 amended Section 3624(b) to make clear that people in prison are eligible for a full 54 days of good-time credit for every year of their imposed sentence, rather than every year of their sentence served. Prior to the amendment, the BOP’s interpretation of the provision meant one would in effect only receive at most 47 days of good-time credit per year. See The First Step Act of 2018: An Overview, Congressional Research Service (Mar. 4, 2019), available here (discussing the modification of good time credits under the First Step Act).

That one’s time served could be reduced by roughly 15% is not insignificant information, particularly for those with high guidelines ranges driven by inflated loss amounts, as is commonly the case for federal white collar defendants. For example, consider a defendant with an offense level of 33 who receives a within-guidelines sentence of 135 months. With full good-time credit, the defendant’s resulting time served would be no more than roughly 115 months — the equivalent of a two-level reduction in their offense level under the sentencing guidelines.

Time Credit Under the First Step Act

On Jan. 13, 2022, the BOP published a rule implementing the time credits program that was included in the First Step Act. Under this rule, eligible people in prison can earn 10 to 15 days of time credits for every 30 days of successful participation in evidence-based recidivism reduction programs and productive activities. To qualify for earned time credits, inmates must 1) be convicted under the U.S. Code (i.e., a federal offense); 2) not be convicted of a disqualifying offense, as defined under 18 U.S.C. § 3632(d)(4)(D); and 3) be deemed minimum- or low-risk per the BOP’s risk assessment system. Offenses that make inmates ineligible to earn time credits are generally categorized as violent, or involve terrorism, espionage, human trafficking, sex and sexual exploitation; additionally excluded offenses include a repeat felon in possession of a firearm, or high-level drug offenses, that is, generally not white collar defendnats.

The FSA provides that “[a] prisoner shall earn 10 days of time credits for every 30 days of successful participation in evidence-based recidivism reduction programming or productive activities.” 18 U.S.C. § 3632(d)(4)(A)(i). An inmate determined to be at a “minimum or low risk for recidivating” who, “over 2 consecutive assessments, has not increased their risk of recidivism, shall earn an additional 5 days of time credits for every 30 days of successful participation in evidence-based recidivism reduction programming or productive activities.” 18 U.S.C. § 3632(d)(4)(A)(ii). “Productive activities” within the meaning of the rule includes a wide variety of programs and activities, such as anger management, cognitive behavioral therapy, post-secondary education and vocational training. For a list of all approved EBRR Programs and Productive Activities, please refer to the FSA Approved Programs Guide, available here.

Using earned-time credits under the First Step Act can amount to a meaningful reduction in the time someone spends in prison while under BOP custody. For every 30-day period that an incarcerated person successfully participates in the evidence-based recidivism reduction programs or productive activities recommended by the BOP based on their risk and needs assessment, they will earn at least 10 days of time credits. Once they have earned-time credits equal to the time left in their sentence — and met certain recidivism-risk requirements under Title 18 of the U.S. Code, Section 3632(d)(4)(A)(ii) — they can then apply those credits to earlier placement in prerelease custody, such as residential reentry centers and home confinement, and apply up to 12 months of credit toward supervised release.

Note that while application to supervised release is limited to the final year of someone’s sentence, they can still use their credits to transfer to prerelease custody earlier. Although earned-time credits under the First Step Act do not reduce one’s imposed sentence, they can have an enormous impact on time spent under BOP custody. Because most white collar defendants are first-time offenders convicted of nonviolent crimes, they are well suited to qualify under the eligibility criteria, which is focused on individuals with a low recidivism risk and excludes many sex-related, drug-related and violent crimes.

Given the program’s criteria and its potential to implicate roughly 30%-50% of a defendant’s sentence, practitioners should advise clients on earned-time credits and evidence-based recidivism reduction programs when considering what a custodial sentence might look like.

Elderly Offender Home Detention Pilot Program Under the First Step Act Expires

The Elderly Offender Home Detention Program was a pilot program introduced as part of the First Step Act in 2018. It permitted eligible people in prison who were at least 60 years old and served at least two-thirds of their total sentence to serve the remainder of their sentence in home confinement.

The pilot, which expired on September 30, 2023, was widely used during its implementation. See 34 U.S.C. § 60541(g)(3). Over 1,219 inmates participated in the program since 2018, see BOP data at p. 32 here. This program had a major impact on the time those thousands of inmates spent incarcerated. For example, even before accounting for good-time credit, earned-time credit and other programs, a 52-year-old sentenced to 135 months could, at age 60, become eligible for the program, and — having served two-thirds of their total sentence — be released to home confinement thereafter.

While the program’s expiration is an unwelcome development in general, it is particularly so for white collar practitioners, whose clients tend to be older than the average federal defendant. Indeed, roughly a quarter of the minimum- and low-security federal prison population, which includes virtually all incarcerated people sentenced for white collar crimes, are age 50 and older, which means that many of them will cross the 60-year-old threshold while in custody and would have qualified for early release to home confinement under this program. See Department of Justice data at p. 48 here (providing data as of 2016 on older offenders in the federal system). Although there have been calls for the program’s reimplementation, as well as a bipartisan proposal under the Safer Detention Act of 2023 that would further expand elderly offenders’ opportunities for home confinement, no actions have been taken since the program’s expiration.

Sentencing Guidelines Reduction for First-Time Offenders Applies Retroactively

The U.S. Sentencing Commission adopted several amendments to its sentencing guidelines in April. One such amendment was Amendment 821, Part B of which created a new Section 4C1.1 that allows for a two-level reduction in the offense level for certain first-time offenders. Part A of Amendment 821 limits the overall criminal history impact of “status points”—i.e., the additional criminal history points given to defendants for the fact of having committed the instant offense while under a criminal justice sentence, including probation, parole, supervised release, imprisonment, work release, or escape status—under § 4A1.1. See USSS here.

In addition to providing certain defendants with no prior criminal history an opportunity to receive a material reduction in their offense level, the amendment also provided others an avenue to argue for a sentence that does not include imprisonment.

This includes revisions to the Section 5C1.1 commentary advising that a sentence other than imprisonment is generally appropriate if a person qualifies for a Section 4C1.1 adjustment and is in Zone A or B of the sentencing table, and that a guidelines departure “may be appropriate if the offender received an adjustment under new § 4C1.1 and the applicable guideline range overstates the gravity of the offense because the offense of conviction is not a crime of violence or an otherwise serious offense.”

On Aug. 24, the U.S. Sentencing Commission voted that Parts A and B of Amendment 821 should be applied retroactively. Although Amendment 821 already promised to significantly reduce the sentencing ranges of future defendants, the commission’s recent announcement on its retroactivity will affect thousands more people who are incarcerated in federal prison.

Although the amendment does not go into effect until Nov. 1 — and court orders reducing terms of imprisonment are not to go into effect until Feb. 1, 2024 — practitioners should be prepared to assess each client’s eligibility for a sentence reduction under the new Section 4C1.1 and closely monitor federal courts’ handling of such motions. Moreover, many federal prosecutors’ offices have begun offering the two-point reduction as part of ongoing plea negotiations, anticipating the implementation and effect of the new rule.

Conclusion

Good-time credit as well as earned-time credit under the First Step Act are central considerations for many federal defendants serving a period of incarceration. But given their potential to materially and somewhat predictably affect the term of incarceration someone ultimately serves, they should be taken into account not only after sentencing, but also during plea negotiations alongside more common considerations, like the statutory maximums and the sentencing guidelines ranges dictated by the defendant’s offense level.

And for those currently incarcerated, the recently announced retroactivity of Amendment 821 can have an additional and meaningful impact on their sentence by effecting a reduction in offense level under those guidelines. The expiration of the Elderly Offender Home Detention Program is no less relevant, and until it or similar reform is reimplemented, its absence can have an equally meaningful impact on a sentence, albeit in the other direction.

Taken together, these programs and developments reveal the broad and dynamic universe of mechanisms at a federal defendant’s disposal when an custodial term is being contemplated. For practitioners, it underscores the need to monitor BOP policy and announcements by the U.S. Sentencing Commission as closely as one monitors case law.

***

Ken Abell is a partner of Abell Eskew Landau LLP and routinely handles white collar criminal and civil enforcement cases, including healthcare fraud cases arising under Title 18, the False Claims Act, and the Antikickback Statute. Scott Glicksman is an associate of Abell Eskew Landau LLP with a practice focused on parallel criminal and civil investigations and cases. Jennie Yu is a paralegal of the Firm.

This article was authored by Ken Abell and Kate Kulkarni, and originally appeared in the Expert Analysis Section of Health Law360, published on June 28, 2022. The original can be read here.

Pending before the Supreme Court are three certiorari petitions that could resolve the longstanding circuit split over the level of detail that Federal Rule of Civil Procedure 9(b) requires of qui tam complaints in False Claims Act (“FCA”) cases.

Complaints alleging violations of the FCA must meet the heightened pleading standard of Rule 9(b), which requires a party “alleging fraud or mistake . . . [to] state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). The question that has historically divided the circuit courts is whether a relator in qui tam actions must plead specific, representative samples of false claims to satisfy the “particularity” requirement of Rule 9(b).

The way the circuit courts answer this question can be boiled down to two distinct buckets, with some variation within those buckets. The first bucket includes five circuit courts that all employ a more defendant-friendly standard, generally requiring a relator to plead specific representative examples of fraudulent claims that were submitted to the government. The second bucket includes six circuit courts that take a far more lenient, relator-friendly approach, allowing the submission of false claims to be inferred from the circumstances.

The Circuits Requiring Specifics

In the first bucket, the most stringent interpretation of Rule 9(b) comes from the Eleventh Circuit, which has historically required a relator’s complaint to specify the time, the place, the fraudulent claim submitted and the identity of the person submitting the fraudulent claim. Unlike in other circuits, the submission of a fraudulent claim cannot be inferred from the circumstances; the complaint must generally plead specific details of fraudulent claims that were, in fact, submitted to the government. See, e.g., U.S. v. ex rel. Clausen v. Lab. Corp. of America, 290 F.3d 1301 (11th Cir. 2002); see also U. S. ex rel. Atkins v. McInteer, 470 F.3d 1350, 1359 (11th Cir. 2006); Carrel v. AIDS Healthcare Found. Inc. Corsello v. Lincare, Inc., 428 F.3d 1008, 1013 (11th Cir. 2005).

As discussed in greater detail below, there is some disagreement over the contours of the circuit split because the Eleventh Circuit does not apply this rule categorically. In U.S. ex rel. Mastej v. Health Mgmt. Assoc., Inc. (2014), the Court expressly noted that “there is no per se rule that an FCA complaint must provide exact billing data or attach a representative sample claim.” U.S. ex rel. Mastej v. Health Mgmt. Assoc., Inc., 591 Fed. Appx. 693, 704 (11th Cir. 2014). And in Estate of Debbie Helmly, et al. v. Bethany Hospice & Palliative Care of Coastal Georgia, LLC et al. (2021), the Eleventh Circuit case pending before the Supreme Court on a writ of certiorari, the Court confirmed that it “do[es] not always require a sample fraudulent claim” and is “more tolerant of complaints that leave out some particularities of the submissions of a false claim if the complaint also alleges personal knowledge or participation in the fraudulent conduct.” Estate of Debbie Helmly, et al. v. Bethany Hospice & Palliative Care of Coastal Georgia, LLC, et al., 853 Fed. Appx. 496, 501 (11th Cir. 2021), citing U.S. ex rel. Matheny v. Medco Health Sols., Inc., 671 F.3d 1217, 1230 (11th Cir. 2012). For instance, in Mastej, the Court said that a relator’s direct, first-hand knowledge of, or participation in, the defendant’s submission of false claims may be a sufficient basis for asserting that the defendants actually submitted false claims. U.S. ex rel. Mastej, 591 Fed. Appx. at 704, citing U.S. ex rel. Walker v. R & F Properties of Lake Cnty., Inc., 433 F.3d 1349, 1360 (11th Cir. 2005). Ultimately, though, in practice a complaint is likely to be dismissed in the Eleventh Circuit unless it pleads representative samples of fraudulent claims.

The Fourth, Sixth, and Eighth Circuits follow a similar approach, generally requiring details of specific claims while recognizing that other allegations might be sufficiently reliable to show that the defendant submitted false claims to the government. Like the Eleventh Circuit, the Eighth Circuit held in U.S. ex rel. Thayer v. Planned Parenthood of the Heartland (2014) and in U.S. ex rel. Joshi v. St. Luke’s Hosp., Inc. (2006), that it  might excuse the absence of specific examples of false claims if the relator has personal, first-hand knowledge of the submission of false claims. U.S. ex rel. Thayer v. Planned Parenthood of the Heartland, 765 F.3d 914, 917 (8th Cir. 2014); U.S. ex rel. Joshi v. St. Luke’s Hosp., Inc., 441 F.3d 552, 556-57 (8th Cir. 2006). In U.S. ex rel. Prather v. Brookdale Senior Living Cmtys, Inc. (2016), the Sixth Circuit held that, in the absence of representative samples, a relator might survive a motion to dismiss if, by virtue of the relator’s position, he or she has personal knowledge of the defendant’s billing practices which supports a strong inference that particular claims were submitted to the government for payment. U.S. ex rel. Prather v. Brookdale Senior Living Cmtys., Inc., 838 F.3d 750, 769-60 (6th Cir. 2016); see also U.S. ex rel. Ibanez v. Bristol-Myers Squibb Co., 874 F.3d 905, 920 (6th Cir. 2017). And, the Fourth Circuit held in U.S. ex rel. Nathan v. Takeda Pharmacies North America, Inc. (2013) that a complaint might be otherwise sufficient if the defendant’s actions as alleged would have necessarily led to the submission of false claims; it is not enough when a defendants’ actions as alleged in the complaint could have led to the submission of false claims. U.S. ex rel. Nathan v. Takeda Pharmacies North America, Inc., 707 F.3d 451, 453-54 (4th Cir. 2013).

The bottom line is that a relator who can plead representative false claims will better withstand a motion to dismiss in the Fourth, Sixth, Eighth, and Eleventh Circuits; in the absence of such allegations, the relator must have some personal or special knowledge of the defendant’s billing practices to aver that false claims were submitted. In U.S. ex rel. Duxbury v. Ortho Biotech Prod. (2009), the First Circuit adhered to the more stringent approach but with slightly more nuance; it stated that it would require a relator to plead representative samples, but if the action involved the inducement of third parties to file false claims, the Court would allow a relator to satisfy Rule 9(b) by providing “factual or statistical evidence to strengthen the inference of fraud beyond possibility.” U.S. ex rel. Duxbury v. Ortho Biotech Prod., L.P., 579 F.3d 13, 29 (1st Cir. 2009); see also U.S. ex rel. Nargol v. DePuy Orthopaedics, Inc., 865 F.3d 29, 38-39 (1st Cir. 2017).

The Circuits Requiring Less

In stark contrast to the more defendant-friendly standard employed by the First, Fourth, Sixth, Eighth, and Eleventh Circuits, the second bucket includes the Third, Fifth, Seventh, Ninth, Tenth, and D.C. Circuits, which allow for the submission of claims to be inferred from the circumstances. A relator filing a qui tam complaint in these circuits need not identify specific false claims or allege that the relator had personal knowledge of the defendant’s billing practices.  For example, in Foglia v. Renal Ventures Mgmt., LLC (2014), the Third Circuit articulated and adapted the more lenient standard employed by its sister circuits, finding it sufficient for plaintiff to “provide particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” Foglia v. Renal Ventures Mgmt., LLC, 754 F.3d 153, 156-57 (3d Cir. 2014), citing Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998-99 (9th Cir. 2010) and U.S. ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009); see also U.S. ex rel. Health v. AT&T, Inc. 791 F.3d 112, 126 (D.C. Cir. 2015) (same); U.S. ex rel. Lemmon v. Envirocare of Utah, Inc., 614 F.3d 1163, 1172 (10th Cir. 2010); United States v. United Healthcare Ins. Co., 848 F.3d 1161, 1180 (9th Cir. 2016).  

There are three pending certiorari applications that could allow the Supreme Court to decide which circuit court approach to Rule 9(b) is the best: an appeal from an Eleventh Circuit opinion, Estate of Debbie Helmly, et al. v. Bethany Hospice & Palliative Care LLC, et al. (2021), an appeal from a Sixth Circuit opinion, U.S. ex rel. Owsley v. Fazzi Assoc. Inc. et al. (2021), and an appeal from the Seventh Circuit, U.S. ex rel. Prose v. Molina Healthcare of Ill., Inc., et al. (2021). Estate of Debbie Helmly, et al. v. Bethany Hospice & Palliative Care LLC, et al., 853 Fed. Appx. 496 (11th Cir. 2021); see also U.S. ex rel. Owsley v. Fazzi Assoc. Inc. et al., 16 F.4th 192 (6th Cir. 2021); see also U.S. ex rel. Prose v. Molina Healthcare of Ill., Inc., et al., 17 F.4th 732 (7th Cir. 2021).

Consistent with its precedent,the Eleventh Circuit in Bethany Hospice found the complaint insufficient where, among other things, the relators failed to allege any specifics about actual false claims submitted to the government.  The Court noted that while it “do[es] not always require a sample fraudulent claim,” the relators did “not attempt to provide any particular facts about a representative false claim” or “have the personal knowledge or level of participation that could give rise to some indicia of reliability.” Bethany Hospice, 853 Fed. Appx. at 501-02.   

Nor is there anything particularly surprising about the Sixth Circuit’s opinion in Owsley.  The Court adhered to its standard application of Rule 9(b), finding that the relator failed to identify any specific claims that the defendant submitted pursuant to the fraudulent scheme or otherwise allege facts based on personal knowledge of billing practices to support a strong inference that particular claims were submitted to the government. Owsley, 16 F.4th at 196-97.  On the other side of the circuit split, in Molina Healthcare, consistent with its precedent, the Seventh Circuit deemed a complaint sufficient even though it did not identify any specific false claims; it was enough that the complaint contained information that “plausibly support[ed]” the inference that the defendant made false representations. Molina Healthcare, 17 F.4th at 741. The fraudulent scheme was pled with sufficient particularity, so there was no need to also plead the details of claims that were submitted for payment. Id. at 740.

Disagreement Over the Split Itself

In all three certiorari applications, the relators highlighted the deeply rooted circuit split regarding Rule 9(b)’s pleading requirements and stressed the importance of resolving the split.  The U.S. Government, however, does not agree.  In Bethany Hospice, the Solicitor General’s office submitted a brief arguing that certiorari should not be granted because the circuits are converging on a more flexible rule that evaluates each complaint under Rule 9(b) case-by-case.  The Relator shot back in reply, rebuking the notion that there is consistency amongst the circuits.

Notwithstanding the government’s position, there is, indeed, an outcome-determinative circuit split that needs to be addressed, even if it is not as well-defined as it was previously.  Admittedly, the circuits that once applied a categorical rule requiring the identification of specific false claims have retreated from that stringent interpretation of Rule 9(b) in every case.  

But there is still no single uniform rule.  The default rule in the Eleventh, Fourth, Sixth and Eighth Circuits is that a relator must plead specific false claims but those Circuits also recognize that detailed allegations regarding a relator’s intimate level of knowledge of, and involvement in, the submission of false claims might be enough in certain cases.  There can be no question that the application of that standard will continue to result in a much higher rate of qui tam dismissalsthan in the Third, Fifth, Seventh, Ninth, Tenth, and D.C. Circuits, which do not require examples of specific fraudulent claims.

The Supreme Court Should Weigh In

The fact that the viability of qui tam actions will vary significantly depending on the Circuit in which the complaints are filed is a significant problem that warrants the Supreme Court’s intervention.  A standard that is too stringent might result in premature dismissal of cases where fraud clearly occurred but in which the relator cannot yet articulate the false claims with requisite specificity; conversely, a standard that is too relaxed might allow for meritless cases to squeak past motions and proceed, to the detriment of the defendant. 

FCA cases carry draconian repercussions – treble damages and up to a $25,076 penalty on each fraudulent claim submitted – and they often spawn or are accompanied by parallel criminal prosecutions.  Given the severe consequences of FCA actions, it seems unjust to allow the same complaint to proceed in one circuit while subject it to dismissal in a sister circuit.  Yet, that is the reality litigants face today.  Relatedly, the split is problematic because it encourages forum shopping, especially in national cases in which the defendant is subject to suit in any circuit.  A uniform and consistent approach amongst the circuits would help resolve these issues and promote fairness in the institution and prosecution of FCA cases. 

The SEC suffered a rare defeat last week in SEC v. Christopher Clark when U.S. District Judge Claude M. Hilton, from the Eastern District of Virginia, entered a directed verdict midtrial in the agency’s civil insider trading case before any defense was offered by the defendant.

The defendant, Christopher Clark (alleged tippee), was accused of trading on insider information about the potential acquisition of CEB Inc., an IT advisory firm where his brother-in-law (alleged tipper) was controller. The SEC pointed to Clark’s risky trading in the leadup to the acquisition announcement and drew attention to the fact that Clark started purchasing call options for a combined $33,050 during this time, noting it was “the first time in more than five years that Clark took a bullish position on CEB.”  Clark also financed these CEB trades by borrowing money, including through a line of credit and taking out a loan on his car, as well as liquidating part of his wife’s IRA. As further circumstantial evidence, the SEC stated that some of Clark’s trades followed phone conversations and other interactions with his brother-in-law, including while Clark coached their daughters’ basketball team and at family holiday gatherings for Christmas Eve and Christmas.

But Judge Hilton was unpersuaded by the SEC’s evidence. Although he did not issue a written opinion, according to court transcripts, Judge Hilton rejected the notion that the “improbable success rate” of Clark’s trades, which the SEC argued was evidence of him getting insider information, was evidence of anything at all. “I mean, the government can speculate that he made a little too much money, he was a little too successful or more successful than he ought to be, so therefore he’s getting insider information, but there’s no evidence of it.” The Judge was equally unmoved by the fact of frequent communications between Clark and his brother-in-law. “Of course he would talk to his brother-in-law, and vice versa.”

In short, the Court insisted on definitive evidence of improper communications regarding material non-public information (“MNPI”) and rejected the notion that inferences alone can suffice. To many, the ruling stands as a rebuke to the SEC’s regular practice of bringing insider trading cases based on statistical data—that is, circumstantial evidence of suspicious trading that gives rise to an inference that the trade was on the basis of MNPI. The SEC’s statements at last week’s hearing indicate it may appeal the ruling, although it has yet to do so. 

* * *

AEL is a premier boutique law firm specializing in complex fraud and parallel criminal and civil investigations and cases, including in the areas of healthcare fraud, securities fraud, qui tam/whistleblower litigation, False Claims Act (FCA) cases, and computer fraud. AEL partners Kenneth Abell and David Eskew handle securities cases on both the criminal and civil sides and recently obtained the dismissal of a securities class action against an AEL client, the former Chief Financial Officer (CFO) of a publicly-traded company.

*** This article was originally published in the Expert Analysis section of Law360 on November 10, 2021 ***

There has long been a circuit court split over the standard that applies to Government-initiated motions to dismiss qui tam actions under the False Claims Act (FCA). Until last year, there were two approaches: the Swift standard, which derives from the D.C. Circuit’s ruling in Swift v. United States, 318 F.3d 250 (D.C. Cir. 2003), and the Sequoia Orange standard, which stems from the Ninth Circuit’s ruling in United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp, 151 F.3d 1139 (9th Cir. 1998).

While the Swift standard affords the Government an “unfettered right” to dismiss a qui tam FCA action, see Swift, 318 F.3d at 252, the Sequoia Orange standard requires the Government to identify a “valid government purpose” and then show a “rational relation” between its purpose and the dismissal of the case, see Sequoia Orange, 151 F.3d at 1145-46.

Last year, the Seventh Circuit carved out a third standard that treats the Government like any private party plaintiff under the Federal Rules of Civil Procedure. See United States ex rel. CIMZNHCA, LLC v. UCB, Inc., 970 F.3d 835, 845 (7th Cir. 2020). The Court determined that the standard applicable to Government-initiated dismissal motions is the one provided by Rule 41(a), which governs voluntary dismissal of a plaintiff’s claims in garden-variety civil practice. Id. at 849-50.

The Third Circuit Weighs In

On October 28, 2021, the Third Circuit added its view to the circuit split. In Polansky v. Executive Health Resources, Inc., No. 19-3810, 2021 WL 4999092 (3d Cir. 2021), the Third Circuit unanimously declined to follow either of the two more established standards – Swift and Sequoia Orange – and elected instead to adopt the recently-articulated approach of the Seventh Circuit. In doing so, it issued two significant holdings.

First, the Third Circuit held that, when the Government declines to move forward with a relator’s FCA action, and the relator elects to proceed on his or her own, the Government must intervene before it can move to dismiss. The Court held that the Government can seek leave to intervene at any point in the litigation upon a showing of good cause. Notably, the Government in Polansky did not actually file a separate motion to intervene; the Court construed the Government’s motion to dismiss “as including a motion to intervene” and deemed that sufficient to allow the Government to be heard in the case. Polansky, 2021 WL 4999092 at *11. Thus, although going forward it will be safer for the Government to file a separate motion to intervene before or alongside a motion to dismiss, a free-standing motion to dismiss seeking intervention and showing good cause will likely suffice. As the Court in Polansky noted, good cause is a “uniquely flexible and capacious concept,” which simply means a “legally sufficient reason.” Id. at *7, quoting Ridenour v. Kaiser-Hill Co., 397 F.3d 925, 934-35 (10th Cir. 2005).

Second, the Court held that a government-initiated dismissal motion in a qui tam action should be governed by Rule 41(a) of the Federal Rules of Civil Procedure. Polansky, 2021 WL 4999092 at *7. In so holding, the Court determined that the Government should be treated the same as any private party plaintiff would be treated when seeking to dismiss a civil case. The Court reasoned that because Rule 41(a) functions “[s]ubject to . . . any applicable federal statute,” Fed. R. Civ. P. 41(a)(1)(A), the governing standard should be a blend of Rule 41(a) and the provisions of the FCA.

Traditional Rule 41(a) analysis turns on whether the defendant has already filed a responsive pleading when the plaintiff seeks to dismiss the action. If a responsive pleading has not yet been filed, the plaintiff may move to dismiss the action as of right and without a court order. Fed. R. Civ. P 41(a)(1). On the other hand, if the defendant has already filed a responsive pleading, the plaintiff may only dismiss the action “by court order, on terms that the court considers proper.”  Fed. R. Civ. P. 41(a)(2).

In FCA actions, the analysis will operate as follows: the relator must receive notice of the Government’s motion to dismiss and an opportunity for a hearing, regardless of when the Government’s motion is filed. See 31 U.S.C. § 3730(c)(2)(A). If the Government moves to dismiss a relator’s FCA case before the defendant has filed a responsive pleading, and the relator has had the opportunity to be heard, the Government is entitled to dismissal unless it has engaged in unconstitutionally arbitrary conduct. See Fed. R. Civ. P. 41(a)(1)(A); 31 U.S.C. § 3730(c)(2)(A). Of course, very few cases will rise to the level of unconstitutionally arbitrary government conduct. After all, “only the most egregious official conduct can be said to be arbitrary in the constitutional sense,” and such conduct must amount to an “executive abuse of power” that “shocks the conscience.” Polansky, 2021 WL 4999092 at *9 n.17, quoting Cnty. of Sacramento v. Lewis, 523 U.S. 833, 846 (1998) (internal quotation omitted).

Conversely, if the Government moves to dismiss a relator’s case after the defendant has filed a responsive pleading, then dismissal will only be granted on terms the court considers proper. Fed. R. Civ. P. 41(a)(2). The Court in Polansky offered no insight into the kinds of factors that would justify dismissal by court order under Rule 41(a)(2) but suggested that dismissal should be encouraged, even at this later stage, unless the defendant will suffer prejudice beyond the prospect of a second lawsuit. Polansky, 2021 WL 4999092 at *9. Insight can also be gleaned from the Court’s review of the District Court’s dismissal order. In that regard, the Court noted that the District Court had engaged in a “thorough examination and weighing of the interests of all parties,” and thus, “did not abuse its discretion in granting the Government’s motion to dismiss on the terms that it did.” Id. at *12. In particular, the Court noted that the District Court had “exhaustively examined the interests of the parties, their conduct over the course of the litigation, and the Government’s reasons for terminating the action,” which included the litigation costs that Polansky’s suit imposed on the Government. Id. Further, the Court found that the District Court had adequately considered the prejudice to the non-governmental parties, even though the “litigation was at an advanced stage and significant resources had been expended on it by both parties.” Id.

Takeaways From the Polansky Decision

Read as a whole, there can be no question that the Third Circuit recognized the right of the Government to dismiss an action brought in its name, especially in the early phases of litigation. Indeed, after Polansky, it is essentially a given that the Government will win on a dismissal motion if it files the motion before the defendant files a responsive pleading. The Third Circuit made clear that the Government has an absolute right to dismiss a qui tam action at that early stage of the litigation. Providing that the relator has had the opportunity to be heard, the Government will succeed on its dismissal motion unless it has engaged in unconstitutional misconduct. And it is worth noting that Government motions to dismiss will most often be filed when the case is unsealed and before the defendant has filed a responsive pleading. Thus, as a practical matter, most of these motions will be analyzed under the extremely deferential Rule 41(a)(1) standard.  

Relators, however, will likely fare better in fending off government motions to dismiss if the Government files the dismissal motion after the defendant has already filed a responsive pleading. At that point, the Government no longer has an absolute right to dismissal and the court will have greater latitude to decide whether to grant the motion.

Ultimately, by following the standard promulgated by the Seventh Circuit, the Third Circuit chose the least Government-friendly approach to dismissal of a qui tam action under the FCA in cases where the motion is not filed right away. A motion seeking to dismiss pursuant to Rule 41(a)(2) will naturally face a greater hurdle to success than a dismissal motion filed by the Government under the Swift standard in the D.C. Circuit, which gives the Government an unfettered right to dismiss.

The governance of Rule 41(a)(2) over dismissal motions is also more restrictive than the rational relation standard in Sequoia Orange, which is grounded in constitutional principles. In fact, the Third Circuit in Polansky critiqued that approach, finding that the “right against arbitrary government action may provide a constitutional floor, but the Federal Rules of Civil Procedure are built above it, and the Ninth Circuit’s approach omits that structure entirely.” Polansky, 2021 WL 4999092 at *12. Because a Government-initiated motion to dismiss in the Third Circuit will be governed by both the Federal Rules of Civil Procedure and constitutional principles, it will be subject to greater scrutiny than motions to dismiss filed in the Ninth and Tenth Circuits.

In sum, the Third Circuit’s decision in Polansky further widens the long-standing circuit split over the standard to apply to Government-initiated motions to dismiss in qui tam actions. Although all three standards are largely deferential to the Government, the approach initially articulated by the Seventh, and recently adopted by the Third Circuit, evinces an increasing level of scrutiny for Government-initiated motions filed after the defendant has entered the fray.

More About AEL and the Authors

AEL is a boutique law firm that specializes in parallel criminal/civil healthcare fraud investigations, with a particular expertise in the False Claims Act (FCA) and Antikickback Statute (AKS), among others. Read more about our white collar practice, FCA expertise, and government investigations practice on this website. Ken Abell is a partner and co-founder of the Firm. Kate Kulkarni is an associate of the firm.

It seems self-evident that a whistleblower, known as a “relator” in False Claims Act (“FCA”) parlance, should not be able to derive a financial benefit by bringing to the government information of which the government is already aware or which already exists in the public domain.  That principle is enshrined in the so-called “public disclosure bar” of the FCA, which was most recently amended in 2010 by the Patient Protection and Affordable Care Act (“ACA”). In sum and substance, the public disclosure bar states that a relator’s qui tam action under the FCA is not viable if the essence of the allegations or transactions at issue have been publicly disclosed in court actions, government reports or news media.

There is, however, a critical and oft-utilized exception to this rule: notwithstanding the fact that the information at issue is in the public domain, a relator can assert a viable qui tam action if he is the “original source” of that information. It is this exception that recently caused the Second Circuit in United States ex rel. Hanks v. Florida Cancer Specialists et al. to vacate and remand a long-running FCA action for further and more specific consideration by the district court for the Eastern District of New York.

A Brief Historical Look at the Public Disclosure Bar and First-to-File Rule

Since its passage in 1863, the FCA has been amended several times.  Prior to 2010, and the passage of the ACA, it is important to note that the public disclosure bar within the FCA was jurisdictional.  Accordingly, a district court did not have jurisdiction over qui tam actions “based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media.”

As mentioned, there existed (and still exists) an exception to this bar for relators who are the “original source” of the information upon which the qui tam action was based. Prior to the ACA, “original source” was defined as “an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information.”

Under the ACA, the public disclosure bar was amended in a few significant ways.  First, the public disclosure bar is no longer jurisdictional, although if established, it provides a valid and explicit ground for dismissal.  In addition, the ACA broadened the definition of “original source,” which is codified in 31 USCS § 3730(e)(4)(B). Now, in order qualify as an original source, the relator need not have “direct and independent knowledge” of the information, and the relator is not required to provide the information on which the action is based.  Instead, in order to qualify as an original source under the new definition, the relator must simply “materially add” to the publicly disclosed transactions on which the claims are based.

An important corollary to the public disclosure bar is the FCA’s “first-to-file rule,” which essentially states that no person other than the government can bring a subsequent qui tam action based on facts alleged in a previously-filed action. Unlike the public-disclosure bar, however, the first-to-file rule has never been expressly jurisdictional (circuits have been split on that question) and applies even if the relator in the subsequent action would otherwise qualify as an “original source.”  The logic behind the rule is that once a qui tam suit has been filed, the government has the knowledge it needs to seek appropriate recourse.

The Second Circuit’s Focus on the Original Source Exception in Hanks

The Second Circuit’s recent decision in Hanks highlights the ongoing relevance of the original source analysis.  This appeal, in a more-than-decade old qui tam action by a former sales representative for Amgen, Inc., took issue with the district court’s dismissal of relator’s fifth amended complaint against a certain subset of remaining defendants.  The dismissal was based on, among other things, the first-to-file rule on the ground that the central allegations had, in the court’s view, been alleged in previous lawsuits by other plaintiffs.

The ultimate problem with the decision, from the Second Circuit’s perspective, is that it “elided” the core question of whether the public disclosure bar applied in the first instance, which, because the case was filed pre-ACA, would have expressly deprived the district court of jurisdiction. If the bar applied, of course, the district court would have had no basis to reach the first-to-file rule or other arguments pertaining to Fed. R. Civ. P. 9(b).  Although the Circuit stated that “it is hard to fault the district court’s critique of the pleading,” it gently chastised the district court for not squarely addressing the jurisdictional question upfront and head-on.

Thus, without taking a position on the ultimate merits of the appeal, the Second Circuit sent the case back to the district court to specifically analyze whether it had jurisdiction in light of the public disclosure bar.

How Hanks May Impact Future Qui Tam Actions

Astute observers might minimize the relevance of the Hanks decision given that the public disclosure bar is no longer jurisdictional post-ACA.  They could feasibly argue that the decision would have come out differently but for the fact that the underlying case in Hanks was filed way back in 2008, and the Circuit was forced to focus on a jurisdictional issue that no longer exists.  That argument should not, however, be read too broadly.

Hanks serves as an important reminder – for relators’ counsel and defense counsel alike – that the question of whether a relator is an original source is a threshold question on which the courts will continue to focus in determining the viability of qui tam actions.  Indeed, since the public disclosure bar still provides an express ground for dismissal, it remains critical for FCA practitioners to pay specific attention to precisely how relators came across the information on which their claims are based.  Without doubt, it is a question better addressed at the outset of a case than after years, or even decades, of hard-fought litigation.