Insights

United States Attorneys’ Offices recently announced a number of False Claims Act (FCA) settlements arising out of the Paycheck Protection Program (PPP). These settlements reveal several trends that PPP loan recipients should be aware of.

On December 18, 2024, the U.S. Attorney’s Office for the Western District of Texas announced a $680,000 False Claims Act (FCA) settlement with Lafayette RE Management LLC (Lafayette) in connection with the real estate investment firm’s receipt of a Paycheck Protection Program (PPP) loan at the height of the pandemic.  Crowell has previously reported on DOJ’s steady pursuit of PPP cases which have resulted in FCA settlements based on issues such as affiliation (discussed here) and ineligibility under the program’s rules (discussed here), but the Lafayette settlement is the first time that the government has intervened in a case based on the economic necessity certification that all PPP borrowers had to make on the initial loan application.  

Judge Kathryn Kimball Mizelle of the District Court for the Middle District of Florida recently declared the False Claims Act qui tam provisions unconstitutional in U.S. ex rel. Zafirov v. Fla. Med. Assocs., LLC, -- F.Supp.3d --, 2024 WL 4349242 (M.D. Fla. Sept. 30, 2024), turning up the heat on a simmering constitutional fight that is increasingly likely to reach the Supreme Court in the next few years. Judge Mizelle's decision was the first to strike down the FCA qui tam provisions, but not the first to consider the issue. Arguments challenging the constitutionality of the qui tam provisions proliferated after Justice Thomas indicated some doubt about the qui tam device in his dissent in U.S. ex rel. Polansky v. Exec. Health Res., 599 U.S. 419 (2023). But every other judge to consider the issue has upheld the constitutionality of the qui tam provisions.

In a novel False Claims Act (FCA) ruling, on September 30, 2024, Judge Kathryn Kimball Mizelle of the District Court for the Middle District of Florida upended decades of FCA jurisprudence in declaring the qui tam provisions of the FCA unconstitutional in U.S. ex rel. Zafirov v. Florida Medical Associates, LLC, 2024 WL 4349242 (M.D. Fla. Sept. 30, 2024). This decision follows Justice Thomas’ dissent in the recent Supreme Court decision, U.S. ex rel. Polansky v. Executive Health Resources, Inc., 599 U.S. 419 (2023), where he posited, “[t]here are substantial arguments that the qui tam device is inconsistent with Article II and that private relators may not represent the interests of the United States in litigation.” While Justice Thomas’ implicit constitutional challenge was not entirely new to FCA practitioners, including it in his Polansky dissent, with Justices Kavanaugh and Barrett in a concurring opinion noting their agreement that the Court should consider the constitutional questions in an appropriate case, swung wide open a door of opportunity for defendants and their counsel to attempt to dismiss FCA qui tam suits on constitutional grounds. Judge Mizelle’s decision in Zafirov is the first of its kind to actually dismiss a qui tam suit on constitutional grounds, and will likely lead to an avalanche of similar motions in nearly every non-intervened lawsuit brought by a relator.

On August 8, 2024, the U.S. Attorney’s Office for the Central District of California announced a $6.3 million False Claims Act settlement with West Coast Dental Administrative Services LLC (formerly West Coast Dental Services Inc.) and its founders and former owners due to seven improper second-draw Paycheck Protection Program loans received by West Coast Dental and affiliated dental offices. 

On August 5, 2024, in United States ex rel. Relator LLC v. Howard D. Kootstra and Golden Empire Mortgage, Inc., Case No. 1:22-cv-00924-TLN-CDB (E.D. Cal.), the District Court for the Eastern District of California granted a motion to dismiss allegations that a mortgage lender made false or fraudulent statements on its Paycheck Protection Program (PPP) application in violation of the False Claims Act where the relator could not overcome the FCA’s public disclosure bar.

The San Diego Union-Tribune reports that a homeowners association (HOA) in California has reached an agreement with the Department of Justice (DOJ) to resolve allegations that the HOA obtained approximately $1.5 million in loans through the Paycheck Protection Program (PPP) that the HOA was not entitled to receive due to its status as a 501(c)(4) organization.  The HOA reportedly will pay $2,037,451 to resolve the allegations.  Of that amount, $244,494 will go to Wade Riner—the relator who initiated the action by filing a complaint under seal pursuant to the qui tam provisions of the False Claims Act (FCA).  According to the Tribune’s reporting, Riner has filed dozens of similar FCA suits across the country.

On October 11, 2023, the Department of Justice announced a $9 million settlement with Victory Automotive Group Inc. (VAG) to resolve allegations that it violated the False Claims Act (FCA) by knowingly providing false information in support of its Paycheck Protection Program (PPP) loan. This settlement is one of the larger ones to date related to receipt of a PPP loan and one of the first in which affiliation rendered a PPP borrower other than small.

A False Claims Act (FCA) settlement recently announced by the U.S. Department of Justice stands at the intersection of two evolving trends:  DOJ’s increasing focus on cybersecurity lapses by government contractors as part of its Civil Cyber-Fraud Initiative, and DOJ policies incentivizing corporations to voluntarily self-disclose violations of federal law.

Although the COVID-19 public health declaration officially ended in May, government investigations of pandemic relief fraud are from over. As observed in a recent report by the Small Business Administration Office of Inspector General, investigations will likely ensue for years to come in light of Congress’s decision to extend the statute of limitations to ten years for pandemic relief fraud.    

On June 27, 2023, the Small Business Administration (SBA) Office of Inspector General (OIG) reported its estimate that SBA disbursed over $200 billion of potentially fraudulent COVID relief, including Economic Injury Disaster Loans (EIDL) and Paycheck Protection Program (PPP) loans.  These possibly fraudulent loans represent at least 17% of all EIDL and PPP funds—or 21% of all loans and grants--disbursed.  The SBA OIG estimates that the SBA disbursed $64 billion in potentially fraudulent PPP loans.

On June 16, 2023, the U.S. Supreme Court, in United States ex rel. Polansky v. Executive Health Resources Inc., held that the Government may seek dismissal of a False Claims Act (“FCA”) qui tam suit over a relator’s objection so long as it intervenes in the litigation, either during the initial seal period or afterward.  The Court also held that, when handling such a motion, district courts should apply Federal Rule of Civil Procedure (“FRCP”) 41(a), the rule generally governing voluntary dismissal of suits.  And in a dissent that—in the long run—may end up being more impactful than the Court’s holding, Justice Thomas (joined in a concurring opinion by Justices Kavanaugh and Barrett) questioned the constitutionality of the qui tam provisions themselves.  

On April 3, 2023, the U.S. Attorney’s Office for the District of New Jersey announced a settlement with a public relations firm to resolve allegations that the New Jersey company violated the False Claims Act (FCA) by receiving a $2 million second-draw loan from the Paycheck Protection Program (PPP) to which the company was not entitled.  The public relations firm had also sought and received forgiveness for the full amount of the loan.

Next Tuesday, April 18, 2023, the highest court in the land will hear arguments in what is poised to be the most influential False Claims Act (FCA) case since the landmark decision in Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).  On January 13, 2023, the U.S. Supreme Court granted certiorari to hear two consolidated appeals from the U.S. Court of Appeals for the Seventh Circuit in United States ex rel. Schutte v. SuperValu Inc., 9 F.4th 455 (7th Cir. 2021) and United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649 (7th Cir. 2022).  The Court’s decision will likely have far-reaching ramifications for FCA cases involving ambiguous contractual or regulatory requirements and may also provide benchmarks for assessing the key element of scienter across all FCA cases.  

The third year of False Claims Act (FCA) enforcement under the Trump administration was defined by a number of notable settlements, the implementation of several policy changes announced last year concerning how the Department of Justice (DOJ) will pursue (and in some instances, dismiss) cases under the FCA, and a Supreme Court decision addressing the statute of limitations circuit split. These highlights are among the important developments discussed by C&M attorneys in a “Feature Comment” published in The Government Contractor, which considers key issues impacting FCA liability, such as the increased risk associated with cybersecurity noncompliance, small business fraud, and the continued significance of materiality post-Escobar.

Along with the steady influx of cybersecurity requirements in federal procurement, contractors now face potential False Claims Act (FCA) liability in connection with cybersecurity noncompliance. Underscoring this risk was a recent FCA settlement, United States, ex rel. Glenn v. Cisco Sys. Inc., in which Cisco agreed to pay $8.6 million to settle allegations that it violated the FCA by selling products to the government that contained flawed software that was susceptible to data breaches. 

On September 12, 2019, the U.S. Court of Appeals for the Third Circuit issued an opinion in Chang, United States, and State of Delaware ex rel. v. Children’s Advocacy Center of Delaware, No. 18-2311 affirming a district court’s dismissal of a qui tam complaint without conducting an in-person hearing. Both the United States and Delaware had moved to dismiss the case, asserting that their investigations revealed that relator Weih Chang’s allegations were “factually incorrect and legally insufficient.” Although Chang did not request a hearing in his opposition to the governments’ motions, he argued on appeal that the False Claims Act (FCA) requires an in-person hearing before granting governmental motions to dismiss qui tam claims.

On July 31, 2019, Cisco Systems agreed to pay $8.6 million to settle allegations in United States ex rel Glenn, et al v. Cisco Systems, Inc. that the company violated the False Claims Act (FCA) by selling video surveillance systems to state and federal agencies that contained software flaws enabling those agencies to be hacked. An employee of one of Cisco’s resellers filed the suit in 2011 after discovering the alleged security weakness that could permit a cyber intruder to obtain administrative access to the software that managed video feeds.

On July 3, 2019, in United States ex rel. Johnson v. Raytheon Co., the U.S. District Court for the Northern District of Texas granted the government’s motion to dismiss a qui tam suit over the objections of the relator. The Johnson case is just the latest example of the Department of Justice (DOJ) using its authority under Section 3730(c)(2)(A) of the False Claims Act to seek dismissal of meritless qui tam suits, consistent with a January 2018 DOJ Memorandum emphasizing the importance of that authority (the “Granston memo”).