78 Times Is Not the Charm: Eighth Circuit Vacates FCA Penalty Award as Unconstitutionally Excessive Fine

Earlier this month, the Eighth Circuit held that the Eighth Amendment’s Excessive Fines Clause required vacating a district court’s US$7.5 million False Claims Act (FCA) award of treble damages and civil penalties in a non-intervened qui tam action. See Grant v. Zorn, No. 22-3591, 2024 WL 3309763 (8th Cir. July 5, 2024). This opinion follows the Eleventh Circuit’s 2021 decision in Yates v. Pinellas Hematology & Oncology, P.A., 21 F.4th 1288 (11th Cir. 2021), which also applied the Excessive Fines Clause when assessing the constitutionality of an FCA penalties award in a non-intervened qui tam suit, as we covered at the time. However, while Yates upheld the particular penalty at issue there, the Eighth Circuit held in Grant that the award was unconstitutionally excessive, despite being calculated using the FCA’s minimum per-claim penalty amount. The Eighth Circuit concluded that because the actual damages were relatively minimal and the loss was purely economic, with no evidence of aggravating factors such as patient harm, the punitive sanction (i.e., treble damages plus per-claim penalties) could not exceed a single-digit multiple of compensatory damages.

The Grant relator was an Iowa sleep medicine practitioner who had practiced at Iowa Sleep Disorders Center (Iowa Sleep). He brought qui tam claims under the FCA and the Iowa False Claims Act (IFCA) against Iowa Sleep, its operator Steven Zorn, and Zorn’s affiliated medical equipment company Iowa CPAP, alleging the submission of fraudulent Medicare, Medicaid, and Tricare claims for complex sleep medicine visits. Neither the United States nor Iowa intervened in the action. After a bench trial, the district court found that the defendants had submitted 1,050 false claims, resulting in actual damages of just over $86,000, which the court then tripled to nearly $259,000, as permitted by both the federal FCA and IFCA. Grant, 2024 WL 3309763, at *3. To calculate the civil penalty, the district court assessed per-claim penalties using the minimum set forth by statute for the relevant time periods, which yielded a total civil penalty of nearly US$7.7 million and a total award, with treble damages, of nearly US$8 million. The district court then conducted an Eighth Amendment excessive-fines analysis and reduced the total award to US$6.7 million, which was 26 times the treble damages amount and 78 times the single (actual) damages amount. The total award rose back up to US$7.6 million with attorneys’ fees and costs added, as well as special damages and backpay for violation of the federal and state FCAs’ anti-retaliation provisions.

Both parties appealed the court’s determination of damages and civil penalties. On appeal, the Eighth Circuit rejected the defendants’ arguments that damages cannot be based on an estimation of false claims. Instead, the Eighth Circuit held that mathematically imprecise claim calculations are acceptable in FCA cases, because “the Government is entitled to rough remedial justice.” Id. at *7. The Eighth Circuit also agreed with relator’s argument that the district court insufficiently adjusted for inflation when calculating some of the per-claim penalty amounts.

However, the appeals court ultimately vacated the punitive sanction, holding that the combination of the treble damages award and the per-claim civil penalties violated the Eighth Amendment’s Excessive Fines Clause. As a threshold matter, the court agreed with the Eleventh Circuit’s conclusion in Yates that the clause applies to non-intervened qui tam actions, because the monetary award is imposed by and payable to the government. Grant, 2024 WL 3309763, at *8. The court then concluded that the punitive sanction was “grossly disproportional to the gravity of [the defendants’] offense.’” Id. (quoting United States v. Bajakajian, 524 U.S. 321, 334 (1998)). It explained that “[p]roportionality is determined by a variety of factors, including the reprehensibility of the defendant’s conduct, the relationship between the penalty and the harm to the victim, the sanctions in other cases for comparable misconduct, legislative intent, and the defendant’s ability to pay.” Grant, 2024 WL 3309763, at *8. The court found that the district court’s punitive sanctions were erroneously disproportionate in two ways.

First, the district court’s own excessive-fines analysis incorrectly used the full treble damages amount as the baseline for its math. Instead, the district court should have removed the “punitive portion” of the treble damages from the total to determine the correct compensatory damages amount. The Eighth Circuit declined to give an exact number, but directed the lower court to determine what portion of treble damages would be “compensatory” to cover the government’s injury owing to the “costs, delays, and inconveniences” caused by the false claims. Id. at *9.

Second, the district court erred by imposing a punitive sanction of 26 times the amount of treble damages and 78 times the amount of actual damages. Drawing on “instructive” punitive damages decisions under the Due Process Clause, the Eighth Circuit rejected those double-digit multipliers as disproportionate because the defendants caused only a relatively small amount of economic loss and there was no record evidence of any danger to the health and safety of others. Id. at 10. The court deemed the facts “comparable” to those of its prior Excessive Fines decision in United States v. Aleff, 772 F.3d 508 (8th Cir. 2014), where it upheld a punitive FCA sanction of only 4.3 times the amount of actual damages and 1.4 times the amount of treble damages, and where the defendants had also caused purely economic loss. As a result, the Eighth Circuit vacated the punitive sanctions and remanded with instructions to recalculate them with a single-digit multiplier.

Chief Judge Smith filed a concurrence in part, disagreeing with the majority’s view that the Excessive Fines Clause required a single-digit multiplier. Instead, he would have adopted the Eleventh Circuit’s position in Yates of deferring to Congress’ per-claim penalty calculations, and would have required a punitive sanction falling within the FCA’s statutorily defined penalty range (here, between US$5.25 million and US$10.50 million, adjusted for inflation). Id. at *14.

This case provides ample ammunition for FCA defendants in future disputes to argue that the Excessive Fines Clause applies to all FCA litigation, whether brought by the government or private relators. Qui Notes will be monitoring the dockets as courts continue to wrestle with what exactly makes an FCA penalty “excessive.”

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.