The FCA Insider

The FCA Insider

Insights and updates on False Claims Act Litigation

Uncategorized

Tenth Circuit Elaborates Upon FCA’s Materiality Requirement

The FCA’s implied certification theory is based on the concept that every time a payee submits a claim to the government it has impliedly certified compliance with all contractual, statutory, and regulatory obligations, and therefore, is entitled to payment. While the courts are currently divided on whether implied certification is a valid theory of liability, the courts that have endorsed this theory have distinguished between violations that are conditions of participation (where the penalty for a violation could be exclusion from a government program) and conditions of payment (where the penalty would be nonpayment of the claim) and have found that only the latter are actionable under the FCA.  These courts have also almost uniformly held that such a violation must be material to the government’s decision to pay the claim.  However, “materiality” is an amorphous concept under the FCA and courts have applied different standards and relied upon various sources of evidence in determining whether a payee’s violation was material.

In United States ex rel. Thomas v. Black & Veatch Special Projects Corp., the Tenth Circuit elaborated upon the materiality standard in an implied certification dispute between a government contractor and its former employees.  Defendant – an engineering and construction firm – was awarded a government contract to build facilities and distribute electricity in Kandahar, Afghanistan.  Pursuant to the contract, defendant was required to obtain visas and work permits from the Afghan government. The relators – former employees of the defendant – discovered copies of forged documents that had been submitted to the Afghan government as part of the defendant’s visa application process.  The relators reported their discovery to a supervisor, and two days later provided copies of the forged documents to the OIG.

Shortly thereafter, the defendant met with the OIG to discuss the forged documents, requested copies of all documents it had submitted to the Afghan government, launched an internal investigation to determine who created the forged documents, and had a third-party perform a forensic analysis of its computers.  The defendant also kept the OIG updated with any findings.  In response, the government never took any adverse action against the defendant and continued to make payments to the defendant in full.  In fact, the government amended the contract to provide the defendant with additional work.

In its motion for summary judgment, the defendant argued that the government’s awareness of its violations and subsequent failure to take any adverse action or reduction in payment evidenced that the defendant’s violation of the contract’s visa provisions was nonmaterial, and therefore, it was not liable under the FCA.  The district court agreed and granted summary judgment in favor of the defendant.

The Tenth Circuit affirmed, and in doing so provided guidance on the materiality standard.  Specifically, the court explained that “an FCA plaintiff may establish materiality by demonstrating that the defendant violated a contractual provision that undercut the purpose of the contract” or if the defendant has only violated minor contractual provision, “by coming forward with evidence indicating that, despite the tangential nature of the violation, it may have persuaded the government not to pay the defendant.” The court quickly dismissed the notion that the submission of forged documents undercut the purpose of the contract.  Turning to the latter option, the Tenth Circuit reasoned that because the government had made payment to the defendant (and in fact given the defendant more work), it was evident that the submission of forged documents was not material to the government’s decision to make payment, and therefore, the relators did not have an actionable claim under the FCA.  In so holding, the Tenth Circuit also expressly rejected the relators’ argument that the government’s knowledge and actions are irrelevant to the materiality analysis.

Thomas is a useful case for the FCA defense bar as it provides a detailed analysis of the “materiality” requirement and provides further support for the argument that the government’s knowledge of the defendant’s conduct serves as a valid defense to an FCA action.

FCA Litigation

Supreme Court Hears Arguments Regarding the Implied Certification Theory

On April 19, 2016, the United States Supreme Court heard oral arguments in the case of Universal Health Services v. U.S. ex rel. Escobar.  The Universal Health Services case was brought by two relators whose child had been seeing a counselor at UHS and who came to learn that the counselor was not licensed.  The relators’ child ultimately had serious health complications and a fatal seizure and the relators pursued this False Claims litigation and argued that UHS had violated the FCA by billing for services that were not provided by licensed professionals.

The arguments before the Supreme Court are particularly notable because it is expected that the Supreme Court will provide guidance on the “implied certification” theory of liability under the FCA.  The “implied certification” theory is distinct from the typical “express certification” theory under the False Claims Act.  An express certification claim is based on the submission of an actually false claim to the Government — i.e. the claim itself contains false or fraudulent statements.  The “implied certification” theory focuses on the general compliance with applicable regulations that is expected of persons and entities who submit claims to the Government.  The theory provides that by virtue of participating in Government programs (such as Medicare), it is implied that the participant is complying with all applicable regulations, with a failure to so comply giving rise to FCA liability.

The Universal Health Services case was initially dismissed by the district court, but was reversed by the First Circuit on appeal.  The First Circuit’s opinion recognized the implied certification doctrine and furthered the existing Circuit split regarding the applicability of an implied certification of liability under the FCA.  The First Circuit, along with the Fourth Circuit and DC Circuit and others, have adopted the implied certification theory.  However, it has not been universally adopted, with the Seventh Circuit recently rejecting the application of the implied certification theory.

The Supreme Court has not previously clarified whether the implied certification theory is valid and its ruling in the Universal Health Services case should provide clarity in this critical area of FCA litigation.

Uncategorized

Fifth Circuit Provides Guidance on Who Has Standing to Pursue an FCA Retaliation Claim

In United States ex rel. Bias v. Tangipahoa Parish School Bd., — F.3d —-, 2016 WL 906227 (5th Cir. 2016), the Fifth Circuit provided guidance on the scope of individuals with standing to bring an FCA retaliation claim under 31 U.S.C. §  3730(h).  In reversing the lower court’s dismissal, the circuit court explained that liability under § 3730(h) extends to defendants “by whom plaintiffs are employed, with whom they contract, or for whom they are agents,” and found that a school board could be liable under § 3730(h) even where the plaintiff was employed by a different entity because the complaint alleged the existence of an agency-like relationship between the plaintiff and school board.

Bias was employed by the Marine Corps and worked as an instructor for the JROTC program at Amite High School. Foster, a teacher at Amite High, worked with Bias and was a faculty adviser for the school’s cross-country team.  In 2009, Foster attempted to use JROTC funds to pay for expenses associated with the cross-country team.  Bias reported the conduct to Amite High’s principal, Stant, who assured Bias that JROTC funds would not be utilized.  Bias subsequently discovered that Stant approved the use of JROTC funds to pay for the trip.  Sometime thereafter, Bias reported a second misappropriation of JROTC funds to his JROTC Regional Director.  Unsurprisingly, Bias’s relationship with Stant and Foster deteriorated and the Marine Corps attempted to transfer Bias to another school district.

Thereafter, Bias filed suit against Foster, Stant, and the school board alleging, in relevant part, an FCA retaliation claim under 31 U.S.C. § 3730(h). Bias contended that Foster and Stant hindered and disrupted his ability to carry out the JROTC program and had caused his transfer.   The district court dismissed this claim, holding that only the Marine Corps (Bias’s employer) could have retaliated against him, and that the defendants’ conduct could not have been the cause of the purported retaliatory actions.

In reversing, the Fifth Circuit examined the pleading requirements and statutory history for a claim under 31 U.S.C. § 3730(h). The court explained that to survive a motion to dismiss, a FCA retaliation plaintiff must show that: (1) he engaged in a protected activity; (2) was retaliated against because of the protected activity; and (3) his employer, contractor, or principal knew about the protected activity.  The circuit court’s analysis focused on this last element—whether the required statutory relationship existed between Bias and the school board.

The Fifth Circuit first noted that § 3730(h) was amended in 2009 and expanded the scope of culpable and aggrieved parties beyond the employer-employee relationship to also include the contractor-contractee and principal-agent relationships. The Fifth Circuit found, therefore, that liability under § 3730(h) extends to defendants “by whom plaintiffs are employed, with whom they contract, or for whom they are agents.”  The court found that while the relationship between Bias and the school board was unclear, the fact that he was allegedly supervised by Stant, performed teacher-like functions, and participated in meetings with school officials sufficiently pled the existence of an agency type relationship between himself and the school board.  Furthermore, the court found that Foster’s and Stant’s attempts to undermine Bias’s ability to perform his job constituted retaliatory acts.

Bias serves as a useful interpretation of the potential far-reaching scope of § 3730(h) since its most recent amendments.  While FCA retaliation claims typically arise in the employer-employee relationship, Bias illustrates that courts are willing to get creative when it comes to establishing a statutorily protected relationship under the FCA.

 

Defense Arguments

7th Circ. May Be Willing To End FCA Circuit Split

The False Claims Act’s “public disclosure bar” calls for dismissal of complaints by qui tam plaintiffs (or “relators”) whose allegations have already been publicly disclosed. The primary aim of the bar is preventing parasitic suits based on public information. Courts generally agree that disclosure to the government alone does not count as disclosure to the “public” for purposes of the bar.

The Seventh Circuit, however, has been a standout since a 1999 decision and is the lone circuit taking the opposite view in a circuit split over the issue. But a recent decision suggests it is open to siding with its sister circuits on the issue and thus ending the circuit split.

Background

The initial False Claims Act — enacted in 1863, during the Civil War, to combat fraud and abuse in government contracting — did not include any bars on relators’ sources of information. It also did not require relators to provide new information to bring suit. In the 1930s and ’40s, relators began filing “parasitic” suits that merely copied information uncovered in government investigations, primarily pulling allegations from criminal indictments.

To counteract these copycat suits, Congress amended the act in 1943. The primary change was the addition of an absolute bar against jurisdiction over suits based upon information already known by the government. This “government-knowledge bar” served its purpose, but it also ended up preventing legitimate private suits.

For a number of reasons, major changes were made to the act in 1986. Relevant here, the changes included replacing the overly restrictive government-knowledge bar with a bar to jurisdiction over suits based upon publicly disclosed information — a “public disclosure bar.” This new bar sought to balance the tension between preventing parasitic suits and still encouraging private individuals to come forward with information about fraud and abuse involving government funds.

Congress again amended the public disclosure bar in 2010. The changes included the addition of a provision giving the federal government the power to veto a public disclosure bar dismissal by opposing it.

Recent Seventh Circuit Decision

Under the current public disclosure bar, seven circuits subscribe to the view that Congress’ use of “public” in the statutory language means an act of disclosure to the general public outside of the government.

The only circuit taking a different view is the Seventh. It agrees with the obvious conclusion that disclosure to the general public at large satisfies the requirement. But it also holds that disclosure to a competent government official qualifies as public disclosure, a view it has expressed in several prior decisions. In particular, it considers internal government administrative reports and investigations to be sufficient to demonstrate disclosure to the public.

On Feb. 29, 2016, the Seventh Circuit affirmed dismissal of a False Claims Act case because the plaintiff’s allegations had already been publicly disclosed through an audit report made available online to the general public. This result itself is not particularly interesting or unique, as it relies on the first, obvious category of disclosure to the general public.

But before the court considered this obvious disclosure and reached its conclusion, it reviewed its prior holdings that disclosure to the government alone satisfies the “public” requirement. It then assessed whether a different disclosure in the case — a federal agency investigation and resulting letter to the subject of the investigation — was sufficient. It found that, under its precedent, a letter from the federal agency describing its “in-depth review” was “placed in the public domain” when it was sent to the subject.

Interestingly, the court then acknowledged and fully outlined the other circuits’ views that disclosure to the government alone does not satisfy the “public” requirement. It noted, “There is significant force in the position of the other circuits.” It next expressed that, if the government letter disclosure were the only one before the court, respect for the other circuits would have warranted “in-depth reconsideration of our precedent.” Ultimately, it declined to address the issue further and relied on the obvious general public disclosure alone to satisfy the “public” requirement.

Implications

Although the Seventh Circuit did not end up reversing its prior holdings, its decision serves as an open invitation to challenge the standard in district court cases within the circuit and on appeal. And the full voice the court gave to its sister circuits’ view, its acknowledgement of the “significant force” of that view, and its suggestion that “in-depth reconsideration” would be warranted, all indicate that the court may be open to joining the other circuits and ending the split over this issue.

This development will embolden False Claims Act plaintiffs in the Seventh Circuit, who will feel confident pressing claims in spite of ample government review simply because the government’s efforts have not been disclosed to the general public.

Ultimately, when the Seventh Circuit confronts this issue again, the court should strongly consider upholding its precedent. Interpreting government disclosures as “public” is consistent with the public disclosure bar’s primary purpose of discouraging opportunistic suits by plaintiffs leeching off already known information. And, unlike the repealed government-knowledge bar that stymied even legitimate whistleblower cases, the original source exception to the current public disclosure bar protects and encourages those with valuable, new information to come forward even if some of their allegations have already been disclosed to the government or the general public. Moreover, under the post-2010 public disclosure bar, if the government wants a case to continue, it is now empowered to veto a public disclosure bar dismissal by simply opposing it.

If the Seventh Circuit does follow its sister circuits, the issue will be settled for the judicial branch, absent an appeal to the U.S. Supreme Court or another circuit taking a stand. In that case, it will be up to Congress to decide if the current application of the bar still serves the purposes of the act. If not, it may be time to amend the act once again.

Petition for Rehearing En Banc

As it turns out, the Seventh Circuit already has an opportunity to reconsider its prior holdings. On March 14, 2016, in the case discussed above, the relator petitioned the Seventh Circuit for a rehearing en banc of its decision. The petition provides three separate reasons for the rehearing. The first two target the court’s holdings regarding the general public disclosure. Applicable here, the third applies to the government letter disclosure, arguing that the court’s holding that it was sufficient under its precedent conflicted with decisions of seven other circuits.

It is unlikely the Seventh Circuit will view this third reason alone as sufficient for a rehearing. In its decision, the court took the time to explore the view of the other circuits and acknowledged the resulting need for a reconsideration of its prior holdings. But it explicitly stated that it did not need to do so at that time because it did not rely on the government letter disclosure — and instead relied solely on the general public disclosure — to satisfy the “public” requirement of the bar.

The case is Cause of Action v. Chicago Transit Authority, No. 15-1143, 2016 WL 767345 (7th Cir. Feb. 29, 2016).

FCA Litigation, FCA Statistics

Relators Recover Over $1 Billion in Non-Intervened Cases in Fiscal Year 2015

In fiscal year 2015, more than $1 Billion of the Government’s False Claims Act (FCA) recovery was derived from cases in which the Government declined to intervene. This significant recovery far exceeds the typical, annual recovery that is obtained by relators without Government intervention.

During the past decade, the Government has intervened in approximately 20-24% of the qui tam filings.  Despite intervening in less than a quarter of the cases that are filed by relators, the Government has consistently derived more than 90% of its total annual recovery from cases in which it intervenes.  The 2015 recovery by relators in cases in which the Government declined intervention represented more than 30% of the Government’s total FCA recovery in 2015, which far exceeds the Government’s typical recovery from cases in which it declines intervention.

This result deviates dramatically from past years and it remains to be seen as to whether it was an aberration or an indication of a shift in trends. However, there are some potential explanations for this exceptional result.  First, approximately 40% of the relator-driven recovery ($450 million) was derived from one FCA case that was settled by DaVita.  Second, relators are pursuing increasingly novel theories of FCA liability.  Third, the FCA relator bar continues to develop and is a well-organized, talented group of attorneys.  These attorneys typically pursue cases vigorously on behalf of their clients even if the Government declines to intervene.

It will be interesting to review these results in the coming years to determine if fiscal year 2015 was an aberration or the start of a trend.

Uncategorized

The Olympus Debacle: Why Internal Whistleblowing is a Good Thing for Compliance

The U.S. Department of Justice announced last week that Olympus Corporation of the Americas (OCA) agreed to pay $646 million to resolve three cases relating to its longstanding practice to bribe doctors and hospitals in the U.S. and abroad. The company entered deferred prosecution agreements (DPA) related to violations of the Anti-Kickback Statute (AKS) and Foreign Corrupt Practices Act (FCPA).  It also settled a qui tam complaint filed by the company’s former chief compliance officer (CCO) John Slowik.  The government awarded Slowik $51 million for blowing the whistle on the underlying issues in these cases.  The OCA matters remind us of the importance of internal whistleblowing in compliance.

 

Overview of the Resolutions

OCA is the largest distributor of endoscopes and other medical devices in the U.S. In one case, DOJ charged it with criminal conspiracy to violate the AKS.  According to DOJ’s press release, OCA admitted it “won new business and rewarded sales by giving doctors and hospitals kickbacks, including consulting payments, foreign travel, lavish meals, millions of dollars in grants and free endoscopes.”  The kickbacks “helped OCA obtain more than $600 million in sales and realize gross profits of more than $230 million.”  As part of the DPA, OCA agreed to pay $312.4 million in criminal penalties.  It must also invest heavily in its training and compliance programs.  Among other things, the DPA requires OCA to enhance and maintain its compliance program by creating a whistleblower hotline and website, requiring its CEO and board to certify compliance annually, and forfeiting compensation if executives engage in wrongdoing or fail to promote compliance.

In another case, DOJ charged OCA’s subsidiary Olympus Latin America Inc. (OLA) with FCPA violations in connection with bribes paid to government officials throughout Central and South America. From 2006 through most of 2011, OLA provided “cash, money transfers, personal grants, personal travel and free or heavily discounted equipment” to doctors at government-owned healthcare facilities in exchange for increased medical equipment sales.  According to DOJ, OLA paid nearly $3 million in bribes, resulting in sales that generated more than $7.5 million in profits.  OLA paid $22.8 million in criminal penalties to resolve the FCPA matter.

The last case involved federal and state false claims allegations based on the qui tam complaint filed by Slowik.  Slowik’s complaint provided many firsthand details of the fraud at the company.  It detailed how the company provided free medical equipment to doctors and made cash payments of up to $100,000 per year (or more) to doctors.  It also explained how the company gave annual “grants” worth hundreds of thousands of dollars to programs based solely on sales potential.  The company also funded all-expense paid luxury holidays for doctors and their spouses.  OCA agreed to pay $310.8 million to settle the False Claims Act charges.

 

The Need for Open Doors, Anti-Retaliation Policies and Whistleblower Hotlines

Slowik worked for OCA for 18 years. Most recently, he served as its first CCO starting in February 2009.  According to his lawyers in one news report, Slowik “boldly put aside self-interest and took swift action to let the truth be known” when he discovered that OCA’s business success relied heavily upon bribery.  “He immediately put Olympus’s top brass on notice of the full nature and scope of the company’s non-compliance with the US Anti-Kickback Statute and international anti-bribery laws.”  Nevertheless, management resisted Slowik’s attempts to enhance the company’s compliance efforts.  Ultimately, the company ousted Slowik in 2010.

The Olympus resolutions and Slowik’s history with the company highlight the importance of internal whistleblowing in compliance. How often internal whistleblowing mechanisms are used is one possible data point for measuring success in any compliance program.  In fact, if internal reporting happens on a regular basis, it is very likely a sign that a company has a thriving compliance culture built around open doors, free communication, and no fears of retaliation.  Companies must ensure they have internal reporting mechanisms that are available and working.

Companies must also appropriately handle reports of wrongdoing once they are made. Essentially, they must document and address all reports—no matter how minor or incomprehensible they may seem—with the appropriate level of scrutiny.  They need to write procedures that clearly outline exactly what needs to happen and when.  Investigation teams should be deployed to uncover the underlying causes and issues associated with the alleged misconduct.  And companies must ensure that remedial measures are available and put into practice when wrongdoing is discovered and responsible parties are identified.

Simply put, internal whistleblowers are a sign of a healthy compliance program. The Olympus resolutions remind us how ignoring this key attribute of compliance can lead to troubles down the road.

Defense Arguments, FCA Litigation

Third Circuit Ruling Reflects the Narrowed Scope of the Public Disclosure Bar under the Affordable Care Act

The public disclosure bar is a statutorily created hurdle that plaintiffs must cross to successfully maintain a False Claims Act suit. The principle was originally enacted to prevent individuals from filing “parasitic” False Claims Act (FCA) lawsuits that were not based on their independent knowledge.

The public disclosure bar has undergone several statutory changes during the history of the FCA, including, most recently, as part of the Patient Protection and Affordable Care Act (“PPACA”) in 2010. The new public disclosure bar states:

The court shall dismiss an action or claim under this section, unless opposed by the Government, if substantially the same allegations or transactions as alleged in the action were publicly disclosed-
(i) in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party;
(ii) in a congressional, Government Acccountability Office, or other Federal report, hearing, audit or investigation; or
(iii) from the news media,
unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.

 31 U.S.C. § 3730(e)(4)(A) (2012).

The PPACA amendments also expanded the definition of an original source:

For purposes of this paragraph, “original source” means an individual who either (i) prior to public disclosure under subsection (e)(4)(A), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.

31 U.S.C. § 3730(e)(4)(B) (2012).

As demonstrated by a recent Third Circuit opinion, these amendments will have a profound effect on FCA litigants. U.S. ex rel. Moore & Co., P.A. v. Majestic Blue Fisheries, LLC began as a wrongful death action that was brought against two defendants after a shipwreck resulted in the death of the ship’s captain. During discovery, Moore learned that the defendants may have defrauded the government by falsely certifying that they were LLCs controlled by U.S. citizens with fishing vessels commanded by U.S. captains; in reality, the vessels at issue were actually controlled by a South Korean tuna company and were under the command of Korean fishing masters.

The district court dismissed the FCA action under the public disclosure bar, noting that two different news articles, as well as information that the attorneys had obtained from the government through Freedom of Information Act (“FOIA”) requests, showed that the transaction setting forth the alleged fraud was publicly disclosed. Moreover, the district court held that Moore was not an original source “because the information that it had obtained through discovery in the wrongful death action did not constitute ‘independent knowledge’” because it was “in the ‘public domain’ and was not ‘obscure.’”

While the Third Circuit agreed that the pre-PPACA public disclosure bar would have barred Moore’s FCA action, it held that the PPACA’s new definition of “original source” did not preclude the lawsuit. First, while the pre-PPACA language defined an “original source” as having “direct and independent knowledge of the information on which the allegations are based,” the new language requires only “knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions.” According to the Third Circuit:

This definition therefore states that a relator’s knowledge must be independent of, and materially add to, not all information readily available in the public domain, but, rather, only information revealed through a public disclosure source in § 3730(e)(4)(A). Indeed, the text plainly requires courts to compare the relator’s knowledge with the information that was disclosed through the public disclosure sources enumerated in § 3730(e)(4)(A).

Thus, the Third Circuit concluded, because Moore gained information “through discovery in the wrongful death action as to how [the defendants] established and controlled the LLCs,” Moore possessed knowledge that is “independent of…the publicly disclosed allegations or transactions.”

While the defendants contended that the information Moore obtained through the wrongful death action simply provided additional immaterial details to the publicly disclosed fraudulently scheme, the Third Circuit disagreed. Noting that Federal Rule of Civil Procedure 9(b) requires plaintiffs alleging fraud to provide the “who, what, when, where and how of the events at issue,” the Third Circuit held:

[A] relator materially adds to the publicly disclosed allegation or transaction of fraud when it contributes information – distinct from what was publicly disclosed – that adds in a significant way to the essential factual background: “the who, what, when, where and how of the events at issue.”

Under this framework, the Third Circuit concluded that the law firm was an “original source” because “the information that Moore acquired from discovery in the wrongful death action added significant details to the essential factual background of the fraud – the who, what, when, where, and how of the alleged fraud – that were not publicly disclosed.” Accordingly, the district court’s dismissal was reversed.

The Third Circuit’s ruling illustrates the new landscape under the post-PPACA public disclosure bar. Defendants in FCA actions will have to carefully assess the time period of the claims at issue to determine the applicable version of the public disclosure bar and will have to further tailor their public disclosure bar arguments to address the applicable factors.

Damages, FCA Litigation

Federal Government Recovers $3.5 Billion from False Claims Cases in 2015

The United States Department of Justice has announced that it has recovered over $3.5 Billion from cases brought under the False Claims Act (FCA) in fiscal year 2015.  This significant aggregate recovery is a slight decline from the $5.69 Billion that was recovered in fiscal year 2014; however, it is the fourth consecutive year in which the Federal Government has recovered at least $3.5 Billion in connection with False Claims cases.

There were a couple of industries from which the Government derived the substantial majority of its aggregate recovery.  The healthcare industry was once again the largest source of the Government’s recovery as $1.9 Billion came from the healthcare industry.  The cases in healthcare largely involved allegations of kickbacks to healthcare providers, allegations of unnecessary care, and allegations of excessive charges for goods and services that were paid for by federally funded healthcare programs.

The second largest segment of the Government’s aggregate recovery came from government contractors, as the Government recovered $1.1 Billion in connection with allegations of false claims that were submitted in connection with government contracts (which includes defense and national security contracts, as well as programs related to the mortgage industry, research grants, and agriculture).

A substantial majority of the FCA cases that were filed during fiscal year 2015 were filed under the FCA’s whistleblower provisions.  There were 638 lawsuits that were filed by FCA relators during fiscal year 2015.  Moreover, the Government recovered approximately 80% of its total recovery ($2.8 Billion) from such qui tam lawsuits in fiscal year 2015, although some of those qui tam lawsuits were filed in prior years.

 

FCA Litigation

Mitigating FCA Whistleblower Risk When Employees Leave

Over the past decade, efforts to enforce health care fraud regulations have been bolstered significantly with increased government funding and a dramatic increase in whistleblower claims filed under the False Claims Act’s qui tam provisions. The majority of FCA civil litigation in 2014, approximately 70 percent, resulted from these whistleblower claims and the substantial majority originated from current and former employees of the defendant company.

The dramatic and mounting risks of FCA litigation posed by a company’s own employees highlight the need for companies and their counsel to take proactive measures in developing strong compliance processes and mitigating employee risk. This article will highlight and discuss several creative considerations for those dealing with departing employees, including an employee’s release of proceeds from future FCA claims along with affirmative declarations they are not aware of fraudulent activities within the company. This article will also discuss the benefits and relatively limited case law regarding these considerations.

Overview of False Claims Act Trends

The False Claims Act is the government’s primary fraud enforcement and prevention tool and it has taken on a growing importance in recent years. The expansion of FCA litigation has been caused by several developments. First, statutory amendments through the Fraud Enforcement and Recovery Act of 2009 and the Patient Protection and Affordable Care Act of 2010 expanded the scope and reach of the FCA and served to encourage litigation. These amendments were the first substantive amendments to the FCA in more than 20 years.

Second, the government has steadily increased its budgetary allocation for financial fraud enforcement. In fiscal year 2015, the government requested $681.5 million in funding for this purpose.[1] The government is allocating these funds to the conduct of investigations, with an emphasis in enforcing the criminal aspects of the FCA, and to intervening in an increasing number of civil FCA cases. The government’s increased efforts and emphasis in connection with the FCA has yielded significant financial recoveries. In FY 2012, the government recovered a then high $4.9 billion in settlements and judgments in cases involving allegations of fraud against the government.[2] In FY 2013 that number declined to $3.8 billion[3], but then increased to a record $5.69 billion in recoveries in FY 2014.[4]

Third, the expansion of FCA litigation is linked with the dramatic increase in the number of qui tam cases that are being filed by relators (whistleblowers). In 2008, there were 379 qui tam lawsuits that were filed nationwide and that number grew to over 700 in 2014. These qui tam lawsuits comprise the substantial majority of the civil FCA litigation that takes place. Significantly, the most common group of whistleblowers is employees and former employees. For example, among qui tam cases that were unsealed over the past year, approximately 70 percent of the cases were brought by employees or former employees. Moreover, in its 2014 Global Fraud Study, the Association of Certified Fraud Examiners found 42.2 percent of occupational fraud was initially detected by tips during the year 2014, and 49 percent of tips came from employees. Accordingly, employees and ex-employees are playing an increasingly important role in fraud enforcement and in FCA activity.[5]

Mechanisms for Minimizing Risk Associated With Employees and Former Employees

In light of the growth in FCA litigation and the volume of cases brought by current or former employees, a prevention strategy should be focused on minimizing risk associated with these parties. Compliance plans, internal investigations and effective exit interviews and questionnaires together make up a useful strategy to prevent and inhibit future FCA litigation.

Compliance Plans

The importance of a robust, active and functional compliance plan cannot be overstated. A robust compliance plan is thorough in presenting the company’s approach to compliance issues without being overly verbose. An active compliance plan is a living and breathing system, updated at least annually to take into account both new developments in law and changes on the ground at the company for which it is developed. An active plan is also one that establishes a top-down culture of compliance: Senior management should be involved in the development and blessing of the plan.

A functional compliance plan has a clear and straightforward process for concerns to be raised internally and includes anti-retaliation provisions. A functional plan should have a way for such concerns to be evaluated so they are addressed on a regular basis, even if that means a written record stating, for example, that no compliance concerns were reported in a certain quarter. Best practices include a sign-off from each employee that he or she has read and acknowledges the company’s compliance plan and understands the process for reporting possible violations.

Internal Investigations

If a compliance plan is robust, active and functional, it’s likely it will identify a certain number of complaints. A company should have a system in place to review and investigate each complaint. Some companies set up a committee to review all complaints on a quarterly basis and designate one person to systematically investigate each. The compliance committee’s notes, any investigation and the outcome should all be fully documented.

Exit Interviews and Questionnaires

Effective exit interviews and questionnaires can be an important component in preventing and hindering future FCA litigation. Employees leaving a company may be more candid about compliance concerns in addition to providing other valuable feedback. It is important to make these individuals feel comfortable revealing not only specific fraudulent activity, if identified, but also general disquiet about the company’s compliance culture. While interviewing each exiting employee might be a daunting human resources task, such interviews may not only help to avoid future issues, but they can also assist in advancing an active compliance plan by identifying risks to the company.

If in-person interviews are not possible, questionnaires can be a good alternative, however written documentation should always accompany these actions. Interviews and questionnaires should be tailored to the company’s business and unique concerns. Of course, if a departing employee raises a compliance concern, the company should commence a thorough, documented investigation.

At the end of the exit process, employees should be asked to sign and date a written declaration acknowledging they have fully disclosed any information they may have related to a company’s potential inappropriate conduct. Such declarations may induce a former employee to be more forthcoming and may certainly impair their credibility as a witness if additional information is disclosed in the future. An example of language included in such a declaration is the following:
I __________________ (print name), former _________________ (print title) met with ________________________ (print compliance officer or HR representative) as part of Company X’s exit interview and questionnaire process. I was given an opportunity to share and discuss any legal, ethical, regulatory or other compliance related issues. I have made Company X aware of any of the above-said issues, or any other concerns I may have with Company X.
Potential Uses and Construction of Releases

Taking exit interviews, questionnaires and written declarations a step further, some companies are asking departing employees to sign written releases whereby the employee releases all potential claims, including recovery under future FCA claims, against the employer. Such release agreements become complicated in the context of qui tam claims because such litigation is brought on behalf of the government and it is the government who is entitled to the majority of any recovery. Accordingly, employers need to act carefully to ensure that the release is enforceable.

One approach may be for the employer to include contractual language that is narrowly tailored to release an employee’s right to any portion of a recovery in any lawsuit that is brought on behalf of the government. Such a release will not preclude the employee from commencing litigation on behalf of the government and, therefore, does not interfere with the government’s right to deter fraud. However, by releasing the right to share in the recovery in a qui tam lawsuit, the employee may lose a fundamental part of his or her motivation to pursue litigation on behalf of the government. This approach may not deter employees who are acting purely out of animus towards a former employer or those who are genuinely concerned about purported misconduct; however, removing financial incentives from the equation can be helpful in deterring potential whistleblowers.

Additionally, employers may want to consider a broader release that covers the filing of qui tam claims in the future. “There is an emerging agreement within the Courts of Appeals that pre-filing releases bar subsequent qui tam claims if (1) the release can be fairly interpreted to encompass qui tam claims and (2) public policy does not outweigh enforcement of the release.” United States ex rel. Nowak v. Medtronic Inc., 806 F. Supp. 2d 310, 336 (D. Mass. 2011). In Nowak, the court found that a release was valid where it applied to all claims that arose on or before the execution of the settlement and covered all claims relating to Nowak’s employment with the company, including claims of fraud. This release was found to be sufficient to preclude the relator from having standing to pursue a qui tam action.

Similarly, in United States ex rel. Radcliffe v. Purdue Pharma LP, 600 F.3d 319, 326 (4th Cir. 2010), the Fourth Circuit found that a release was valid where it included a release of “all liability for a recovery from claims employee ever had, nor has or might have against the company as of the date of this agreement.” In Purdue Pharma, the Fourth Circuit considered the relator’s argument that the release was contrary to public policy and found that the appropriate analysis turns on “whether the allegations of fraud were sufficiently disclosed to the government, not on whether the government’s investigation was complete.” The Fourth Circuit explained that drawing this line preserves the government interest in rooting out fraud, while simultaneously supporting the private settlement of suits or grievances that contain a release.

The growing volume of FCA litigation creates an increasing need to emphasize compliance and resolve issues promptly upon identification. However, in light of the growing number of claims being brought by former employees, it is also important to consider steps that can be taken to identify and minimize risks that may be posed by departing employees. In addressing such risks, employers should consider the inclusion of a release of an employee’s right to share in a recovery as that can limit incentives of a putative whistleblower. Moreover, while an employee may challenge the enforceability of a release that includes qui tam actions, in light of the developing case law, employers should also consider including a broad release of all claims that the employee may have against the employer.

Conclusions

A significant volume of qui tam complaints are being filed annually and a substantial proportion of such complaints are filed by current or former employees. Employers must act carefully and diligently to minimize the risks associated with current and departing employees. This risk management should include internal compliance policies and training, conducting internal investigations into alleged wrongdoing, and the completion of thorough exit interviews including questions and analysis of an employee’s potential concerns. Perhaps most importantly, each of these activities should be well-documented and memorialized including relevant declarations and releases signed by the employee. Proactive steps should be taken to address these risks and limit the company’s exposure to FCA whistleblower claims.

 

This article was co-authored by:

Chris Haney is a director in Duff & Phelps’ Washington, D.C., office. He specializes in forensic accounting, statistical analysis and investigations of health care regulatory disputes, and was a member of the FBI’s Forensic Accounting Unit.

Sarah Sager is an attorney at Axiom Law in Chicao specializing in commercial contracts and health care regulatory matters.

 

[1] “Financial Fraud Law Enforcement.” FY 2015 Budget Fact Sheets. US Department of Justice, n.d. http://www.justice.gov/sites/default/files/jmd/legacy/2013/09/30/fin-fraud.pdf. Last visited Aug. 14, 2015.

[2] Office of Public Affairs. Department of Justice. JUSTICE DEPARTMENT RECOVERS NEARLY $5 BILLIONIN FALSE CLAIMS ACT CASES IN FISCAL YEAR 2012. Justice News. The United States Department of Justice, 04 Dec. 2012. http://www.justice.gov/opa/pr/justice-department-recovers-nearly-5-billion-false-claims-act-cases-fiscal-year-2012. Last visited Aug. 14, 2015.

[3] Office of Public Affairs. Department of Justice. JUSTICE DEPARTMENT RECOVERS $3.8 BILLION FROM FALSE CLAIMS ACT CASES IN FISCAL YEAR 2013. Justice News. The United States Department of Justice, 20 Dec. 2013. http://www.justice.gov/opa/pr/justice-department-recovers-38-billion-false-claims-act-cases-fiscal-year-2013. Last visited Aug. 14, 2015.

[4] Office of Public Affairs. Department of Justice. JUSTICE DEPARTMENT RECOVERS NEARLY $6 BILLION FROM FALSE CLAIMS ACT CASES IN FISCAL YEAR 2014. Justice News. The United States Department of Justice, 20 Nov. 2014. http://www.justice.gov/opa/pr/justice-department-recovers-nearly-6-billion-false-claims-act-cases-fiscal-year-2014. Last visited Aug. 14, 2015.

[5] “2014 Report to the Nations on Occupational Fraud and Abuse”. Copyright 2014 by the Association of Certified Fraud Examiners, Inc.

Defense Arguments

Circuit Court Rules that Ambiguous Regulatory Requirements Cannot Give Rise to FCA Liability

A recent decision from the United States Court of Appeals for the District of Columbia Circuit evaluated whether a regulatory requirement was sufficiently ambiguous that it precluded a finding of liability under the False Claims Act (FCA).

United States ex rel. Purcell v. MWI Corporation involved the sale of water pumps to Nigeria.  The relator alleged that MWI Corporation had made improper certifications to the Export-Import Bank in order to obtain loans that would finance the sales at issue.  Specifically, the allegation was that MWI had falsely certified that it had only paid “regular commissions” to the sales agent who was involved in obtaining the sales contract.  The United States intervened in the litigation.

The case was tried to a jury, which found that the certifications had been false and awarded the Government $7.5 million in damages, which was trebled to $22.5 million. However, the loan at issue had been repaid and the district court found that the repayment of the loan should be offset against the damages.  Accordingly, MWI was only subject to civil penalties of $10,000 per certification for the 58 certifications at issue.  Both sides appealed the verdict.

On appeal before the D.C. Circuit, the primary issue was whether the term “regular commissions” was ambiguous and, if so, whether FCA liability could be based upon such an ambiguous term. The Court noted that the parties did not contest the fact that the term “regular commissions” was ambiguous and acknowledged that this term was subject to at least three possible standards (industry-wide, intrafirm or individual-agent).  The Court explained that “[c]ontentions like these—that a defendant cannot be held liable for failing to comply with an ambiguous term—go to whether the government proved knowledge.”  Ultimately, the Court concluded that MWI’s interpretation of the term “regular commissions” was objectively reasonable.  The Court also found that MWI had not been adequately informed that it was not properly interpreting the term.

Accordingly, the Circuit Court reversed the judgment and remanded the case with instructions to enter judgment in favor or MWI.