The federal False Claims Act (FCA) provides for treble damages and penalties against those who knowingly submit false or fraudulent claims that are paid for or reimbursed by the US Government. Amendments to the FCA over the past few years have increased the reach of the statute. See Amendments to Federal False Claims Act And Likely Effect on State Counterparts,” New York Law Journal (Jan. 3, 2012). In a recent decision, United States ex rel. Feldman v. Van Gorp, No. 10-3297, 2012 U.S. App. LEXIS 18667(2d Cir. Sept. 5, 2012), the U.S. Court of Appeals for the Second Circuit upheld the award of treble damages on the full amount of research grants, based on false statements in the renewal applications. This decision demonstrates how the FCA can result in significant exposure for recipients of Government grants and reinforces the need to carefully monitor compliance with grant conditions.

Background Facts on the Feldman Case

Feldman involved National Institutes of Health (NIH) research grants under the T32 program, intended to “help ensure that a diverse and highly trained workforce is available to assume leadership roles related to the Nation’s biomedical and behavioral research agenda.” Id. at *4 (citing the NIH Guide). Defendants, Cornell University Medical College and the professor who served as program director, submitted an initial grant application proposing a “Neuropsychology of HIV/AIDS” fellowship program for “child and adult clinical and research neuropsychology with a strong emphasis upon research training with HIV/AIDS.” 2012 U.S. App. LEXIS 18667 at *8. The 123-page initial application included description of the faculty who would serve as “Key Personnel,” the proposed curriculum, a provision for a formal training committee that would meet with the fellows monthly, identification of additional institutions that would serve as clinical resources, statements that 75 percent of the fellows time would be spent on research versus 25 percent on clinical, and that the majority of the clinical portion would be attending HIV patients. Id., at 9-10. Renewal applications for the following years and accompanying progress reports indicated that there were no material changes to the program.

One of the fellows in the program left prior to completing his fellowship and complained in letters to NIH that the program was not conduct as represented in the grant application. NIH referred the complaints to Cornell, which investigated and concluded that no wrongdoing had occurred. The fellow then initiated aqui tam complaint, alleging that the statements in the application and renewals were false because the curriculum, resources, faculty members and training differed significantly from the descriptions. The United States declined to intervene, and the case proceeded, eventually, to trial. The jury found defendants not liable for the initial application and first renewal application, but found FCA liability on the second, third and fourth renewal applications. The district court awarded actual damages in treble the amount of the grants for those three years ($855,714), plus statutory penalties of $32,000, and attorneys’ fees, costs and expenses aggregating more than $600,000.

The Second Circuit’s Decision

On appeal, defendants challenged, among other things, the damages award, arguing that under the FCA, the award should have been limited to the “benefit-of-the-bargain”—the difference between the value of the training promised and that actually delivered. The Second Circuit rejected this analysis, agreeing with the qui tam relator and the United States (which, although it had earlier declined to intervene, submitted an amicus brief on the proper quantum of damages) that the Government received “no tangible benefit” from the grant. In the court’s view: “The grant represented an attempt to, but did not thereby, promote ‘child and adult clinical and research neuropsychology with a strong emphasis upon research training with HIV/AIDS.’”Id., at * 29. Based on this analysis, the Second Circuit concluded that “where the government has provided funds for a specified good or service only to have defendant substitute a non-conforming good or service, a court may, upon a proper finding of False Claims Act liability, calculate damages to be the full amount of the grant payments made by the government after the material false statements were made.”Id., at * 3.

The Implications of Feldman for Grant Recipients

The Feldman decision confirms the significant exposure faced by recipients of government grants, exposure that may not be apparent until long after such grants have been received and spent. The statute of limitations for FCA is long, up to ten years from the violation. Moreover, qui tam complaints are filed under seal pending review by the Government to determine whether to intervene. Although the FCA provides for a 60-day time period for Government review, the United States may and often does seek multiple extensions. For example, in Feldman the qui tam complaint was filed under seal on October 14, 2003 and not unsealed until April 2007. Grant recipients thus may not be aware that any misconduct has been claimed until years after grants have been spent. Substantively, under the Second Circuit’s damages approach, material false statements in a grant application or renewal can subject the grant recipients to damages of treble the full amount of the grants. This exposure is in addition to statutory penalties, attorneys’ fees to the qui tam relator’s counsel, as well as costs and expenses. FCA violations can also have collateral consequences on eligibility to participate in other government programs. Feldman reinforces the need to carefully monitor programs that receive government funding and to investigate claims of non-compliance with the terms and conditions of such funding.