The FCA’s Stringent Collateral Estoppel Provision

One of the most crucial provisions of the False Claims Act, 31 U.S.C. § 3729-33 (FCA), is one that receives relatively little attention until it is invoked by the government or a qui tam relator: the mandatory and stringent collateral estoppel provision contained in Section 3731(d). That section reads:

Notwithstanding any other provision of law, the Federal Rules of Criminal Procedure, or the Federal Rules of Evidence, a final judgment rendered in favor of the United States in any criminal proceeding charging fraud or false statements, whether upon a verdict after trial or upon a plea of guilty or nolo contendere, shall estop the defendant from denying the essential elements of the offense in any action which involves the same transaction as in the criminal proceeding and which is brought under subsection (a) or (b) of section 3730. [Emphasis added.]

As discussed below, this provision virtually ensures that any civil defendants who have been criminally convicted of an offense related to the subject of a later FCA complaint will be foreclosed, for all practical purposes, from defending themselves. Therefore, defense counsel should always have this section in mind when negotiating any kind of plea agreement with the government.

This is particularly true in health care fraud cases where defendants face the triple threats of criminal prosecution, FCA action and administrative sanctions. In negotiating any type of criminal plea agreement, counsel must always be assessing the impact of Section 3731(d) down the line should a civil FCA complaint be filed. Admissions in the plea, or the simple fact of the plea itself, is sufficient to invoke the collateral estoppel bar. Moreover, an inability to defend the FCA action will almost certainly ensure (along with the criminal conviction) that the Department of Health and Human Services Office of Inspector General (OIG) will begin reviewing mandatory and permissive exclusion sanctions to inflict upon the provider as well. This situation only once again illustrates the fundamental importance of never entering into any kind of agreement with the government (be it criminal, civil or administrative), without giving full consideration to the impact it will have on the other two hurdles a health care fraud defendant faces.

A. What Is the Reach of Section 3731(d)?

The section has usually been interpreted to give full effect to what it mandates. That is to say, for example, the collateral estoppel bar is invoked not only by a trial conviction, by court or jury verdict, but in the event of a plea agreement and even a nolo contendere plea. United States ex rel. Johnson v. D.E.L.L. Child Development Corp., 2006 WL 2385280, at *2 (S.D. Ill. Aug. 17, 2006). Even if the defendant tries to withdraw his plea and appeals the criminal conviction, the FCA court will probably still hold that the bar has been invoked. United States v. Szilvagyi, 398 F. Supp.2d 842, 845-47 (E.D. Mich. 2005); United States v. St. Luke's Subacute Hospital, 2004 WL 2905237, at *4 (N.D. Cal. Dec. 16, 2004). The section also mandates that the FCA defendant cannot deny “the essential elements” of the complaint, which virtually eliminates any successful defense. See, St. Luke's, supra. Note also that there is some flexibility as to the breadth of the bar, since the section reaches any FCA allegations involving “the same transaction,” not just the same identical offense that served as the basis for the criminal conviction. If the FCA case ends up in bankruptcy court, the bar is fully applicable there as well. In re Cassidy v. United States, 213 B.R. 673, 678-9 (W.D. Ky. 1997). Finally, the bar can be invoked by relators as well as the Department of Justice. See, D.E.L.L., supra.

B. How Do District Courts Usually Handle This Issue?

Typically, the collateral estoppel bar issue arises when the government or a relator moves for summary judgment, at an early stage of the FCA proceedings. A common case scenario is represented by United States v. Sazama, 88 F. Supp.2d 1270 (D. Utah 2000). As in Sazama, the district court typically first discusses the factual background on the criminal conviction or plea. The court then moves on to outline the criteria for granting summary judgment under Rule 56, i.e., the absence of any genuine issue of material fact. Next, the court typically juxtaposes the factual predicate of the criminal conviction or plea against the FCA complaint's allegations to determine whether the “same transaction” is involved. United States v. Kanelos, 1994 WL 148655 (N.D. Ill. April 20, 1994). The court then concludes that the collateral estoppel bar has been triggered, and that summary judgment must be given for the government or relator since the defendant is foreclosed from denying any of the central allegations of the FCA complaint. It works just like clockwork for the FCA plaintiff and to the fatal detriment of the defendant. District courts, furthermore, have no discretion as to the application of this mandatory section. Szilvagyi, at 847.

C. The Mickman Limitation

The reach of the section, however, is not without boundaries. One of the most important limitations was recognized most prominently in United States v. Mickman, 1993 WL 541683 (E.D. Pa. Dec. 22, 1993). There the government argued that the nonjury findings of fact made by the district judge for sentencing purposes should be included in the “essential elements” of the underlying offense to which the guilty plea was entered. The FCA court rejected this interpretation: “[T]he preclusive effect of Section 3731(d) of the False Claims Act with respect to guilty pleas extends only so far as the conduct described in the count or counts to which the guilty plea applies. Section 3731(d) does not apply to conduct or counts alleged in the indictment to which no plea of guilty or judgment of conviction is entered and to which the charges are dismissed.” Id. at *3. Another example is United States v. Lamanna, 114 F. Supp.2d 193, 197 (W.D.N.Y. 2000), where the government unsuccessfully argued that an additional 15 purportedly fraudulent disability checks in addition to the check that served as the basis for the plea should be included within the reach of the collateral estoppel bar.

Defense counsel should be vigilant in holding the government to this limitation. This is especially so because the defense has little else to work with in trying to brunt the impact of Section 3731(d).

D. Liability Does Not Equal Damages

As bleak as the picture appears, there are several bright spots. An important one is that the collateral estoppel bar does not obviate the government or relator's obligation to bring forward proof of damages in the FCA action. “Thus, it is incumbent on the United States to come forward with evidence of the amount of damages to which it claims entitlement, and the fact that the issue of damages was not before the jury in the criminal trial does not preclude the government from introducing an affidavit in support of [its] motion.” United States v. Nardone, 782 F. Supp. 996, 998 (M.D. Pa. 1990). The situation becomes more bleak if the criminal court made a finding of the government's loss. See, e.g., United States v. Boutte, 907 F. Supp. 239, 242 (E.D. Tex. 1995), aff'd, 108 F.3d 332 (5th Cir. 1997). Conversely, even should the criminal sentencing court order restitution, that does not as a matter of law establish the extent of FCA damages that could be awarded in a later civil proceeding. United States v. Barnette, 10 F.3d 1553, 1556 (11th Cir.), cert. denied, 513 U.S. 816 (1994).

E. Unsuccessful Defenses to the Use of the Bar

When confronted with the prospective doom likely to result from application of the collateral estoppel bar, defense counsel have put forward some creative – but largely ineffectual – arguments. In United States v. Peters, 927 F. Supp. 363 (D. Neb.1996), aff'd, 110 F.3d 616 (8th Cir.), cert. denied, 522 U.S. 860 (1997), several of these defenses were presented to the district court. Defense counsel argued that the bar was foreclosed by the doctrine of res judicata, by the double jeopardy clause of the Fifth Amendment, and the excessive punishment clause of the Eighth Amendment. All three arguments were rejected by the district judge. In St. Luke's, supra, counsel argued that in connection with the conspiracy provision of the FCA, 31 U.S.C. § 3 729(a)(3), that there must be actual damages resulting to the United States from the underlying offense for the bar to be invoked as well as asserting several state law arguments. Once again, these contentions were to no avail. Several of these arguments were once again asserted – and rejected – as recently as February 2007 in United States v. Eghbal, 2007 WL 581463 (C.D. Cal. Feb. 14, 2007). In United States v. Bickel, 2006 WL 1120439 at *2 (C.D. Ill. Feb. 22, 2006), in addition to the usual assortment of contentions, counsel unsuccessfully argued stare decisis .

F. What Approaches Are Feasible to Limit the Impact of the Bar?

The picture certainly is bleak for defense counsel when the topic is the collateral estoppel bar. So what strategies manifest at least some degree of potential effectiveness? One very important tactic is the Mickman limitation discussed above. A second is evidenced in United States v. Heart Trace of Nashua, Inc., 2001 WL 274804 (D.N.H. Jan. 10, 2001). There, defense counsel successfully argued that the government could not claim greater FCA single damages than it had admitted in sentencing stipulations regarding the amount of loss occasioned by the offenses underlying the conviction. The greater amount sought in the FCA case would have to be proved by the government and could be contested by defendants. Another tactic is to argue that only the facts absolutely “material and necessary” to the criminal conviction are embraced within the ban – all other facts have to be proven by the government at trial. United States v. Boutte, 907 F. Supp. 239, 241 (E.D. Tex. 1995), aff'd, 108 F.3d 332 (5th Cir. 1997). Put differently, the defendant is estopped only from arguing facts related to the “same transaction” as was the basis for the criminal conviction. United States v. Emergency & Patrol Air Services, Inc., 1988 WL 107576 (E.D. Pa. Oct. 13, 1988). That said, the purported criminal court finding must be “directly at issue and essential to the criminal judgment.” Seiffert v. Green, 1987 WL 26670 (E.D. Pa. Dec. 8, 1987). In a situation where both a corporation and an individual employee or officer of the corporation are criminally charged, but only the individual is convicted, the bar does not apply to the corporation. United States v. Conway Tec Corp., 1996 WL 41842 (S.D. Tex. Jan. 23, 1996).

G. Practice Tips

Always bear in mind the reach of the bar when entering into any stipulation in connection with a criminal plea. It is a foregone fact that anything the government or a relator can point to in a stipulation will trigger the bar. United States v. Fliegler, 756 F. Supp. 688, 694 (E.D.N.Y. 1990). Can it be argued that the allegations to which the government or a relator seeks to apply the bar are not really part of “the same transaction” as that recounted in the plea or conviction? See, United States v. Ford, 19 F.3d 20 (6th Cir. 1994). Criminal convictions for conspiracy present special challenges. If the criminal conviction is for the general crime of conspiracy, without a finding of specific actions taken in pursuance of the conspiracy, then it may be possible to evade the fatal embrace of the collateral estoppel bar. United States ex rel. Miller v. Bill Harbert International Construction, Inc., 2007 WL 851857 (D.D.C. March 14, 2007). Such cases are obviously heavily fact specific.

Conclusion

The central lesson contained in the reviewed cases is that the most effective device to defuse the collateral estoppel bar is to narrow as much as possible any plea language (or other stipulation) that is requested by the government. While there are some defensive tactics that can be utilized when confronted with Section 3730(d)(1), the best overall strategy is to constrict what the government or a relator can assert arises out of the “same transaction” as the criminal case.

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