Three new FCA cases of interest were reported in the last few weeks. One was discussed previously on FCADefense.com in Toumey Loses Stark/FCA Case Again by Drew Howk. Another, Ulysses, Inc. v. United States ¹ is yet another example of the growing trend of failed FCA counter-claims by the Government in response to contract litigation. The Third, Fresenius Medical Care Holdings, Inc. v. U.S., ² explores tax deductions for FCA settlements.  The most interesting case of the last few months remains U.S. ex rel. Keltner v. Lakeshore Medical Clinic, Ltd., discussed in detail in Retained Overpayments Change the FCA Ball Game. Just a District Court case, Keltner shows the tremendous added risk to health care providers and other government contractors under the newly amended FCA.

In another of a series of cases showing the Government’s defensive use of the False Claims Act, the Government filed an FCA counter-claim in response to a breach of contract suit by a government contractor. In Ulysses, the Plaintiff alleged the Government improperly terminated a purchase order for electronic equipment. The Court rejected the FCA counter-claim for two reasons.  First, a quotation in response to a Request for Quotations is not a claim, a request for money; rather, it is “an offer to supply a product at a given price.” A request for money at that price would only follow if the government accepted the quote and Ulysses delivered the product. Second, where the purchase order language was not clear as to its meaning, and the contractor “candidly appraised the Government of its interpretation of its claim,” there could be no finding of reckless disregard for the truth or falsity of the claim. ³

Fresenius, which had paid  over $385M in settlement of an FCA case, sought to recover taxes paid on almost $127M of that settlement. The Court, in a thorough Order, explained in detail its reasoning why the IRS was wrong. It began by noting that settlement of a claim may constitute a deductable expense, but “any fine or similar penalty paid to a government for the violation of any law” was not deductible. ⁴ It next observed that single damages, on the one hand, are plainly compensatory, while the “civil penalty of not less than $5,000 and not more than $10,000… “ ⁵, on the other, is plainly punitive. However, the treble damages imposed by the statute is less clear, due to rulings by the Supreme Court. In Cook County v. United States ex rel. Chandler, ⁶ the Court held that local governments can be sued under the qui tam  provisions of the FCA because the FCA’s treble damages “have a compensatory side, serving remedial purposes in addition to punitive objectives.” ⁷ Absent specific language in the settlement agreement, the Court ruled, the matter was properly presented to the jury, which reasonably determined, based upon the evidence, that $95M of the disputed $127M was deductible, leading to a final judgment in the amount of over $50M, plus interest. ⁸ In conclusion, absent clear language in an FCA settlement agreement that specific dollars are compensatory or punitive, it is an issue of fact how much, above single damages, is compensatory and therefore tax deductible.