When Will a Settlement Agreement Preclude a False Claims Act Action?

A recent District of Columbia federal court ruling reminds employers that a severance agreement containing a release of claims under the False Claims Act does not guarantee dismissal of a suit on those grounds.

Background on the FCA

If you stopped a stranger on the street and asked them what, if any, relationship existed between the government’s purchase of mules and donkeys to aid the Union’s cause in the Civil War,1 Lance Armstrong,2 prescription drugs for Medicare patients, and the questionable receipt of Paycheck Protection Program funds during the COVID-19 pandemic,3 that person might very well give you a confused look and ask if this was a trick question or the beginning of a bizarre joke. It is neither. Instead, those are just a few of millions of types of contractual transactions that could be the foundation of a lawsuit brought pursuant to the False Claims Act (FCA), 31 U.S.C. § 3279 et seq. A recent case provides guidance on when a release of FCA claims in a settlement agreement may protect them from an FCA lawsuit.

Congress passed the False Claims Act in 1863 in response to widespread fraud and war profiteering during the Civil War.4 The FCA provides that any person—whether a natural person or a corporate entity—who knowingly submits a false claim for the payment of goods or services to the federal government may be civilly liable for up to three times the government’s damages plus statutory monetary penalties for each false submission.  These hefty penalties mean that the FCA is one of the primary avenues through which the federal government can recoup fraudulently obtained federal monies. In FY 2022 alone, the Department of Justice obtained more than $2.2 billion in settlements and judgments from civil cases.5

Since its inception, the FCA operates through a unique framework where an individual can initiate a lawsuit on the government’s behalf to recover purported fraud. These “qui tam” actions are brought in the name of the federal government and, if successful, the person initiating the suit—referred to as a “Relator”—has the chance of recovering up to 30% of the total amount recovered by the government.

Release of FCA Claims

FCA claims, including FCA retaliation claims, often arise from the employer-employee relationship. But unlike the vast majority of employment claims, an employer cannot necessarily protect itself against an FCA case through a release of claims in a separation or severance agreement. This is because FCA claims are the government’s claims, not those of the person filing the suit. Because of this key distinction, the inclusion of a release of FCA claims in a settlement agreement may or may not protect an employer against an FCA suit. So, how does a company know when such a release will be enforceable and when it won’t?

Recently, the U.S. District Court for the District of Columbia in U.S. ex rel. Winnon v. Lozano, et al., Civ. Case No. 17-2433, 2023 WL 5036355 (D.D.C. Aug. 8, 2023), issued an opinion elucidating the current understanding of when a release can bar an employee from bringing an FCA claim. In this case, the plaintiff-relator was an executive assistant and controller for the named defendant, who along with another defendant owned and operated a number of health care facilities in Texas. After working for the defendants for a period of time, the plaintiff-relator alleged she began to notice financial irregularities, and the defendants fired her after she raised concerns about them. As part of the conclusion of her employment, she signed a separation agreement with one of the defendants that contained a General Release of Claims provision that included, among numerous other statutes, a waiver of actions brought pursuant to the FCA. Despite having executed the agreement in March 2016, she filed the qui tam action in November 2017 alleging that defendants defrauded the federal Medicare and Texas state Medicaid program.  

Relying on this waiver provision, the defendants filed a motion to dismiss for lack of subject matter jurisdiction since the Department of Justice declined to intervene and take over prosecution of the matter. The plaintiff-relator argued that the release should not be honored because it violated public policy. The court agreed with the latter view and refused to dismiss the matter for lack of subject matter jurisdiction.6 

Two-Part Test to Determine Bar of FCA Claim

The court set out a two-part test for determining whether a release of FCA claims could bar an individual from prosecuting a qui tam suit: (1) whether the release of claims “encompass[ed] Relator’s qui tam claims” and (2) whether “the interest of enforcement must outweigh a public policy that would be harmed by the enforcement” of the release. The court found that this release did violate public policy because it directly contradicted the FCA’s intent and purpose – providing the government an opportunity to learn about and recover fraudulently acquired monies. The court reiterated the standard set out by the Ninth Circuit Court of Appeals that is directly linked to whether the government knew about the allegations in the suit and when the government learned of them. In situations where the government is not aware of the allegations prior to the filing of the suit, and therefore has not had the opportunity to evaluate the merits of the allegations, such a release will likely be found unenforceable and in violation of public policy. In contrast, when the government is aware of the claims prior to the filing of the qui tam action, the public policy of enforcing private settlement agreements prevails.

Here, the defendants argued that the government had knowledge of the claims because it had intervened in another matter similar to that filed by the plaintiff-relator. The court rejected this argument, finding that her claim was distinct because it involved different parties and because it alleged a different fraudulent scheme than the qui tam matter cited by the defendants. Because of the different parties and different fraudulent scheme, the court concluded that “the alleged fraud committed by the six Defendant Physicians was not ‘sufficiently disclosed to the [G]overnment” in the previous matter, nor did the other matter provide the government the “sufficient opportunity to conduct an investigation [into] and ‘evaluate the merits of [the plaintiff-relator] suit against the six Defendant Physicians.”7

U.S. ex rel. Winnons provides a helpful framework for companies to apply both when evaluating the potential enforceability of an FCA claim waiver (and, by extension, whether to include such a release to begin with), as well as defenses against an FCA claim once filed in court.  Such considerations include the utility of including a release of the FCA—as opposed to a release of the anti-retaliation provision of the FCA—at all. At its heart, if the government has insufficient knowledge of a purported fraudulent scheme, then courts may find a relator’s claim concerning that scheme may not be released by private agreement.

See Footnotes

4 The False Claims Act: A Primer, supra note 1.

6 The court did, ultimately, dismiss the case for failure to meet the heightened pleading “with particularity” standard required by Rule 9 when claiming fraud.

7 Id. at *4.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.