The U.S. Court of Appeals for the Second Circuit recently issued an important decision concerning (1) how to compute damages under the False Claims Act against grant recipients; (2) materiality of allegedly false claims; and (3) whether federal agency inaction after receipt of allegations of False Claims Act violations is “relevant.” The case, United States of America ex rel. Daniel Feldman v. Wilfred van Gorp and Cornell University Medical College, No. 10-3297 (2d Cir. Sept. 5, 2012), did not end well for Cornell University. However, my alma mater continues to provide important teachable moments.
In 1997, Cornell University Medical College (“Cornell”) applied for a T32 grant from the National Institutes of Health (“NIH”). T32 grants are designed to fund pre- and post-doctoral training programs in biomedical, behavioral, and clinical research. They are not intended for use in courses of study leading to clinically oriented degrees. Cornell’s initial grant application sought funding for a fellowship program entitled “Neuropsychology of HIV/AIDS Fellowship.” The application explained that the proposed two-year fellowship would train as many as six fellows at a time in “child and adult clinical and research neuropsychology with a strong emphasis upon research training with HIV/AIDS.” The grant application identified core courses and curriculum to be employed, identified fourteen faculty members who would serve as “key personnel”, stated that “the majority of [the fellows’] clinical work will be with persons with HIV infection”, and asserted that fellows would “devote an average of 75% of their time to research and an average of 25% [of their] time to clinical work with persons with HIV/AIDS and other neuropsychiatric disorders.”
After NIH accepted Cornell’s grant proposal, Cornell was required to submit annual renewal applications, and did so for the next four years. In each of these renewal applications, Cornell effectively asserted that there were no changes to the fellowship program.
Daniel Feldman, a former participant in the fellowship program who left before he completed the program, complained to NIH about the fellowship program in 2001. His complaints alleged that the actual fellowship deviated in many material ways from what was described in the grant application and that Cornell failed to inform NIH of these alleged deviations. Among the alleged deviations, were (1) some of the identified “key personnel” had no involvement with the fellowship; (2) the curriculum outlined in the grant proposal was never implemented; (3) the clinical training actually received materially differed from that described in the grant proposal; and (4) much of the research performed under the fellowship had no relation to HIV or AIDS. In response to Feldman’s complaint, NIH simply asked Cornell to conduct an investigation of the complaint. Cornell’s investigation found no wrongdoing. NIH took no further action.
In 2003, Feldman filed a qui tam complaint pursuant to the False Claims Act. The complaint, asserting the same claims considered but not acted upon by NIH, alleged that Cornell made false claims in both its initial grant application and all subsequent annual renewal applications. The case was tried to a jury for eight days in 2010. The jury found no False Claims Act violations relating to the original grant application or the first renewal application, but found liability based on the renewal applications for the third, fourth, and fifth years of the grant. The district court then awarded actual damages in treble the amount NIH paid Cornell for the last three renewal years of the grant – for a total of $855,714. The district court also imposed statutory penalties of $32,000, $25,862.15 in costs, $3,121.47 in expenses, and $602,898.63 in attorneys’ fees. In total, Cornell was facing a judgment of $1,519,596.25. Cornell appealed.
Cornell first argued that the proper measure of damages should have been a “benefit-of-the-bargain” analysis. In that analysis, the reduction in value of the services provided by Cornell from what it had offered in its grant proposal should have applied. The Second Circuit disagreed and held “the government did not receive less than it bargained for; it did not get the ‘neuropsychology with a strong emphasis upon research training with HIV/AIDS’ program it bargained for at all. Further, nothing in the record indicates that it could now secure such a program at any lesser costs. We therefore conclude that the appropriate measure of damages in this case is the full amount the government paid based on materially false statements” (in other words, the full amount NIH paid to Cornell for three years).
Cornell next argued that the allegedly false statements in the annual renewal applications were not material to the transactions in question. Cornell had presented unrebutted witness testimony asserting that the alleged false statements were not or could not have been relied upon by NIH in making its funding decision (e.g., nobody could have expected all of the faculty members listed in the initial grant application to be involved in the fellowship program; there was no reason to believe that Cornell would follow the exact curriculum outlined in the initial application). The Plaintiff, instead of testimony, presented NIH’s own grant instructions and guidelines in support of materiality arguments. The appeals court again ruled against Cornell, holding that “the test for materiality is an objective one. It does not require evidence that a program officer relied upon the specific falsehoods proven to have been false in each case in order for them to be material. The fact-finder must determine only whether the proven falsehoods have a ‘natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.’” In other words, so long as a jury reviewed the alleged falsehoods and determined that under the applicable agency rules and regulations such falsehoods could have a natural tendency to influence NIH’s decision to renew the grant and pay money to Cornell, no more proof of materiality was required.
Finally, Cornell appealed the district court’s refusal to admit certain evidence in support of its defense. The district court excluded evidence that the plaintiff “told NIH about the defendants’ fraudulent claims and, according to defendants, the agency saw no validity to the complaints as evidenced by its failure to take action beyond asking Cornell itself to investigate the complaints.” Cornell wanted to present this evidence to the jury to prove that NIH was not misled by any grant renewal application Cornell submitted. Once again, the Second Circuit ruled against Cornell. It upheld the district court’s decision because there was no testimony regarding “the standards NIH used to judge the merits of” plaintiff’s claims. “Without evidence as to what the standards of the agency were for beginning an investigation, the jury could not determine whether the complaints made by Feldman should have instigated one.”
The biggest practical lesson learned from this case is that grant recipients should carefully and regularly review programs funded by grants to determine whether there are any real or perceived material differences between what is stated in the grant application (or any renewals) and what is really happening as part of grant performance. Grant renewal applications should be submitted only after careful analysis as to whether there has been any change – material or otherwise – to the program that is being funded by the Government. Had Cornell simply disclosed the otherwise inconsequential minor modifications to the curriculum and changes in key personnel in each of its annual renewal applications, it is quite possible that NIH would have continued to fund the program and there would have been no basis for False Claims Act liability. The other big take-away from this case is that grant recipients should be prepared to forfeit the entire amount of a federal grant should they be found to have violated the False Claims Act. This damages calculation methodology should factor into any grant recipient’s decision on whether and how hard to fight any False Claims Act allegations.
Michael J. Schrier is the attorney responsible for the content of this article.