In the high-stakes realm of False Claims Act (FCA) litigation per-claim penalties can reach daunting levels that dwarf even treble damages. A recent ruling from the Eighth Circuit Court provides valuable guidance on the limits of penalties under the Constitution's Excessive Fines Clause (Clause). In Grant ex rel. United States v. Zorn the Eighth Circuit provides clarity applying the Clause in FCA litigation, specifically identifying when a penalty for purely economic loss offenses might be considered excessive. Of relevance, the Court held that:
- the Excessive Fines Clause applies in intervenor and non-intervenor qui-tam actions;
- punitive damages for purely economic offenses should be capped at a single-digit multiplier of actual harm; and
- actual harm should not be calculated based upon treble damages but instead upon the "gravity of the defendant's offense" which is potentially a figure closer to single damages.
In 2018, the relator, Stephen Grant, a medical practitioner, filed a qui-tam suit under the FCA and Iowa False Claims Act against Steven Zorn, another medical practitioner and co-owner of the Iowa Sleep Disorders Center and Iowa CPAP. The suit alleged that Zorn knowingly overbilled the federal and Iowa state governments for patient visits, engaged in a kickback scheme between both defending companies, and unjustly fired Grant after he reported these practices. Following a bench trial on the overbilling and retaliation allegations (the kick-back scheme allegation was dismissed), the district court found that Zorn submitted 1,050 false claims which resulted in single damages of $86,332 and per-claim penalties of $7,699,525. Recognizing that the penalties were excessive, the district court slightly reduced the penalties to $6,733,896. The Eighth Circuit reversed upon appeal ruling that the penalties were disproportionate to the actual harm and thus violated the Excessive Fines Clause of the Eighth Amendment.
In addressing the issue, which is one of first impression in the Eighth Circuit, the court joined the Eleventh Circuit in finding that the Excessive Fines Clause applies in qui-tam actions under the FCA, regardless of whether the government chooses to intervene. It reasoned that in cases where the government is not a formal party, it remains a "real party of interest" because it retains the right to intervene, maintains "sufficient control" over the action, and monetary awards are "imposed by the government and payable to it" the Clause applies.
The Circuit Court found punitive damages should not exceed a single-digit multiplier in FCA cases in which there was no risks to anyone health or safety. The Eight Circuit looked at Supreme Court rulings in due process cases, because, quoting the Seventh Circuit's United States v. Rogan, 517 F.3d 449, 454 (7th Cir. 2008) decision, "'[i]t's hard to see why the [Supreme] Court's approach to punitive damages under the Fifth Amendment would differ dramatically from analysis under the Excessive Fines Clause." The Circuit Court thus relied heavily upon due process cases, State Farm v. Campbell, 538 U.S. 408 (2003), in particular, which held that punitive damages exceeding four times "compensatory damages" may approach constitutional impropriety. Here, the Circuit Court reviewed decisions from both within and without the Circuit, finding that when the defendant's conduct causes purely economic harm without endangering health or safety, punitive damages and/or per-claim penalties were limited to a single multiplier. This distinction is crucial, as it deemed economic harm less reprehensible compared to conduct that disregards the well-being of others. Previous cases it reviewed with higher multipliers involved actions that endangered health or safety, unlike the current case, which involved only economic loss. Therefore, the Circuit Court concluded that a single-digit multiplier for punitive damages is more appropriate in instances of purely economic damage, aligning with precedent and the principle that punitive damages should bear a reasonable relationship to compensatory damages to avoid constitutional issues. It thus ruled that lower court's award of per-claim penalties of 26 times the treble damages and 78 times the actual damages are excessive for purely economic offenses and crossed "the line of constitutional impropriety."
The Circuit Court also determined that a single-digit multiplier used to determine Constitutionality is applied to compensatory damages and not be applied to treble damages. The district court used the entire amount of treble damages as its baseline for assessment of Constitutionality. This approach led the Circuit Court to deem the award excessive under the Clause because treble damages, as the Supreme Court recognized, has "punitive objectives." Cook Cnty. v. U.S. ex rel. Chandler, 538 U.S. 119, 130 (2003), and punitive damages should be excluded in using the multiplier analysis. The Circuit Court declined to determine the precise amount of compensatory damages in the first instance here, instead remanding the calculation to the District Court while noting that, according to Cook Cnty., "the government's injury includes not merely the amount of the fraud itself, but also 'the costs, delays, and inconveniences occasioned by fraudulent claims.'"
This ruling highlights the critical importance of assessing the proportionality of penalties in light of the offense's nature and the potential for leveraging the Eighth Amendment in instances in which, as is often the case in health care based FCA actions, there are a large number of claims each with a small single damage amount. The Circuit Court's emphasis on limiting per-claim penalties to a single-digit multiplier of actual damages for purely economic offenses provides needed guidance of what constitutes excessive fines in FCA cases, and offers a pathway for challenging disproportionate and punitive per-claim penalty awards.
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