Buying Peace: The Importance of Releasing FCA Liability When Resolving Criminal Allegations of Fraud Against the Government

The facts before the Third Circuit in the recently decided case of Patel v. United States illustrate how parties can put themselves in a bind if they make factual admissions when resolving a criminal case involving fraud on the government while not simultaneously resolving the government’s civil claims under the False Claims Act (FCA) for the same underlying conduct.

Background

Nita and Kirtish Patel, a married couple, owned and operated mobile diagnostic testing companies providing services reimbursed by Medicare. The couple’s scheme consisted of submitting tests for reimbursement that they falsely represented as having been supervised by a licensed neurologist. Mr. Patel admitted to fraudulently interpreting and writing diagnostic reports produced by the companies despite having no medical license. Mrs. Patel admitted assisting her husband in forging physician signatures on the fraudulently produced reports to make them appear legitimate. The reports were then used by referring physicians to make patient treatment decisions.

The government learned of the scheme when a former employee of the Patels filed a sealed qui tam action against them under the FCA. Likely due to the risk of patient harm, the Department of Justice (DOJ) moved quickly. Not long after the qui tam complaint was filed, the Patels were arrested. The couple ultimately pled guilty to healthcare fraud in violation of 18 U.S.C. § 1347 and as part of the plea acknowledged over $4 million in losses. 

Crucially, when negotiating their plea deals, the Patels did not resolve the government’s potential civil or administrative claims arising from the same conduct. In their appeal to the Third Circuit, the Patels argued that they had been unaware of the pending qui tam action; however, the record on appeal included a letter from defense counsel stating that he had in fact sought to negotiate a global resolution but had been unable to reach agreement with the government on an amount to settle the FCA claims.

Regardless of what the Patels knew or did not know, what happened after the couple entered their guilty pleas underscores the risk of leaving potential FCA liability unresolved when making factual admissions as part of a criminal resolution. Immediately after the Patels’ guilty pleas were accepted by the court, the government intervened in the pending qui tam action.  Civil attorneys from DOJ subsequently obtained summary judgment by relying on the factual stipulations in the Patel’s plea agreements as well as the admissions they made in their plea colloquies. The FCA judgment, consisting of treble damages and statutory penalties, totaled nearly $7.8 million. The Patels sought post-conviction relief under 28 U.S.C. § 2255, arguing ineffective assistance of counsel for failure to warn of FCA collateral consequences.

No Constitutional Right to FCA Advice

The Third Circuit found that the Sixth Amendment does not require criminal defense lawyers to inform clients about potential civil liability under the FCA. The Court reaffirmed longstanding precedent holding that counsel’s constitutional duty is limited to explaining only the “direct consequences” of a guilty plea—such as the sentence length and fines—rather than “collateral consequences” like future civil lawsuits or regulatory actions. Civil liability under the FCA is not an automatic or certain result of a guilty plea and therefore remains outside the scope of what the Constitution obligates criminal counsel to address, according to the Third Circuit’s holding in Patel.  In reaching this decision, the Third Circuit distinguished the Patels’ case from Padilla v. Kentucky, where the Supreme Court required counsel to inform defendants of whether their plea carried the risk of deportation due to the severity of deportation as a penalty and deportation’s close connection to the criminal process.  The Third Circuit explained that Padilla’s holding was limited to deportation specifically, not collateral consequences generally, and was therefore not applicable to the Patels’ ineffective assistance of counsel claims.

The Lurking Specter of Civil FCA Liability

While FCA liability is not an automatic or certain result of a guilty plea, the FCA judgment against the Patels after their guilty pleas shows the risk of leaving the door open for civil DOJ attorneys to recover in a follow-on FCA action. Indeed, the FCA at 31 U.S.C. § 3731(d) provides for a broad application of collateral estoppel against fraud defendants. That provision reads as follows:

Notwithstanding any other provision of law, the Federal Rules of Criminal Procedure, or the Federal Rules of Evidence, a final judgment rendered in favor of the United States in any criminal proceeding charging fraud or false statements, whether upon a verdict after trial or upon a plea of guilty or nolo contendere, shall estop the defendant from denying the essential elements of the offense in any action which involves the same transaction as in the criminal proceeding and which is brought under subsection (a) or (b) of section 3730.

The government’s ability to use collateral estoppel offensively against a defendant in a follow-on FCA suit may include the factual basis for the party’s guilty plea. Courts may also look to admissions made by the party as part of the plea proceedings when considering whether the allegations and factual basis for the charged crime also form the essential elements of the FCA liability. This is not the first case where a federal court has held, as in Patel, that the United States is entitled to summary judgment on the issue of liability under this doctrine in a subsequent FCA case. See, e.g., United States v. Szilvagyi, 398 F. Supp. 2d 842 (E.D. Mich. 2005).

The collateral risks of admissions about fraud on the government extend beyond guilty pleas. Resolving allegations of fraud on the government through a non-prosecution agreement (NPA) or deferred prosecution agreement (DPA) would typically not trigger the application of Section 3731(d) since NPAs and DPAs do not result in a final judgment in favor of the United States, assuming the party abides by the terms of the agreement. Nonetheless, the risk of a party being pinned down in a follow-on FCA action by its own admissions remains high since most DPAs and NPAs involve some form of acceptance of responsibility or stipulations of facts. In turn, these admissions may be admitted under FRE 801(d)(2) in a follow-on civil action as a statement of a party opponent. See, e.g., BDG Gotham Residential, LLC v. Western Waterproofing Company, Inc., 631 F. Supp. 3d 76 (2022) (admissions in DPA’s statement of facts admissible under FRE 801(d)(2) in follow-on litigation). Accordingly, if the admissions in the DPA or NPA correspond with the elements of an FCA violation, the admissions could be dispositive of liability.

Conclusion

The underlying fact pattern in the Patel matter is not uncommon because qui tam filings can serve as a referral source for criminal AUSAs. When DOJ decides to pursue fraud on the government both criminally and civilly via parallel proceedings, the criminal proceedings will sometimes get out ahead of the civil investigation, especially if there is some imminent risk, such as potential harm to patients, that necessitates a quick criminal investigation and arrest. In other circumstances, the DOJ will opt to pursue civil remedies after the criminal proceeding has concluded.

When individual liberty is at stake or existential reputational damage to a company is on the line, parties understandably prioritize the resolution of criminal exposure when facing allegations of fraud on the government. Nonetheless, the facts in Patel highlight the importance of negotiating a global resolution that includes settlements of the government’s FCA claims because the Patel’s failure to secure a global settlement allowed the government to piggyback on the criminal pleas and secure damages and penalties under the FCA. This outcome is a cautionary tale that when parties admit to fraud on the government without addressing the attendant risk of civil exposure, they do so at their own peril.

Crowell would like to thank Matt Dye for his contribution to this alert.