There Are Limits! Reining In FCA Penalties Pursuant to the Excessive Fines Clause

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 of Appeals 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 applies the Clause in FCA litigation to identify when a penalty for purely economic loss offenses might be considered excessive. Specifically, the Court held that:

1. the Excessive Fines Clause applies in intervenor and non-intervenor qui tam actions;
2. punitive damages for purely economic offenses should be capped at a single-digit multiplier of actual harm; and
3. 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 kickback 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 Clause.

In addressing the issue, which is one of first impression in the Eighth Circuit, the court joined the Eleventh Circuit in finding that the Clause applies to qui tam actions under the FCA, regardless of whether the government chooses to intervene. It reasoned that the Clause applies in cases where the government is not a formal party because the government remains a “real party of interest”, retains the right to intervene, and maintains “sufficient control” over the action, and monetary awards are “imposed by the government and payable to it.”

The Eighth Court also found that punitive damages should not exceed a single-digit multiplier in FCA cases in which there was no risk to anyone’s health or safety. It relied upon and quoted the Seventh Circuit’s decision in United States v. Rogan, 517 F.3d 449, 454 (7th Cir. 2008): “’[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.” Therefore, relying upon due process jurisprudence, primarily State Farm v. Campbell, 538 U.S. 408 (2003) and its progeny, the Eighth Circuit found that when the defendant’s conduct causes purely economic harm without endangering anyone’s health or safety, punitive damages and/or per-claim penalties are limited to a single multiplier. The appellate court thus ruled that lower court’s award of per-claim penalties of 26 times the treble damages and 78 times the actual damages was 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 potential FCA penalties relative to the nature of the alleged offense, so as to potentially leverage the Eighth Amendment to reduce total exposure – particularly in health care FCA cases, where risk of health and safety is often not alleged or present. 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.

*Celene Gayle is a summer associate in the firm’s Washington, D.C. office.