Wednesday, April 22, 2020

Spectre at the feast: Post-Crash False Claims Act Enforcement Looms Over Large Banks and the Paycheck Protection Program


Recently, I was reading the Washington Post’s Finance 202 Newsletter about the Small Business Administration’s Paycheck Protection Program (PPP). Right next to the article was an ad from a plaintiff’s law firm soliciting whistleblowers to report fraud. Such advertisements are just a small reminder that whistleblower firms are looking for opportunities to bring False Claims Act cases in connection with the more than $2 trillion in government aid being dispersed in the Coronavirus Aid, Relief, and Economic Security Act.

While banks are making most of the PPP loans, some large banks are especially sensitive to the down-the-road threat from False Claims Act (FCA) and Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) suits. The Washington Post reports that several large banks were concerned that they may later face lawsuits for their loans from whistleblowers or the U.S. Department of Justice (DOJ). As a result, these banks were either not participating in the program or were being “extra diligent,” which delayed the dispersal of the loans. Sen. Marco Rubio, one of the chief sponsors of the program, complained on Twitter that “some banks were putting crazy restrictions on who could apply for a loan through the program.”

The reluctance of some large banks to participate in the PPP or to quickly process these loans stems from the numerous FCA and FIRREA suits brought against them after the 2008 financial crash. According to the Washington Post, large banks remember all too well how the DOJ sued numerous large banks for allegedly failing to strictly enforce standards for mortgage loans either insured by the Federal Housing Administration (FHA) or which were later bought by Fannie Mae or Freddie Mac. Those suits led to settlements in the billions of dollars. Bank of America, for example, settled for $9.65 billion and provided an additional $7 billion in consumer relief. Citibank and JP Morgan Chase settled for $7 billion and $13 billion, respectively, in combined payments and consumer relief. Many of these suits turned on a “false certification” theory of liability, whereby the banks were accused of falsely certifying their compliance with mortgage loan underwriting standards.


The present-day reluctance of lenders to issue federally backed loans or to participate in federal loan programs due to FCA and FIRREA exposure should not be a surprise. Secretary of U.S. Department of Housing and Urban Development (HUD), Ben Carson, noted last year that depository banks previously issued almost 50 percent of all FHA loans, but “that number is down to less than 15 percent.” The DOJ, Carson explained, was “so vigorous” in its pursuit of banks who issued FHA loans for alleged fraud that “they basically drove them away because, in many cases, the banks had been involved in some version minor, non-material defect in the process and were slammed with enormous fines and suspension.” To entice these lenders to return to the FHA lending program, HUD recently entered into a “memorandum of understanding” with the DOJ that provides for “prudential guidance on the appropriate use” of the FCA for violations by lenders. Along with the agreement, HUD recently unveiled a new certification that “limits the banks’ liabilities for some loan errors.”

Like the broad certifications of compliance formerly required by banks for FHA loans, lenders issuing PPP loans also make broad certifications and representations, including:

·     For purpose of making covered loans, the lender is responsible, to the extent set forth in the PPP loan requirements, for all decisions concerning the eligibility (including size) of a borrower for a covered loan.

·    By making any demand that SBA purchase the guaranteed portion of a loan, the lender will be deemed thereby to certify that the covered loan has been made, closed, serviced and liquidated in compliance with the PPP.

·     The lender consents to all rights and remedies available to the SBA under the Small Business Act, the PPP and its Loan Program Requirements, as each of those are amended from time to time, and any other applicable law.

·     To the best of its knowledge, the lender certifies that it is in compliance and will maintain compliance with all applicable requirements of the PPP and its Loan Program Requirements.

·     Certification that “all representations made are true and correct” that “any false statements made to the U.S. Small Business Administration and the Department of Treasury can result in . . . imposition of civil monetary penalties under 31 USC 3729 [of the FCA].

The Washington Post quoted a senior SBA official who was frustrated with how slow the banks had been to help small businesses as saying, “There really is no risk to the banks.” Also, the SBA and U.S. Department of the Treasury issued an Interim Final Rule as well as a set of answers to Frequently Asked Questions, in which they state that the “U.S. government will not challenge lender PPP actions that conform to this guidance.” But as a recent Wall Street Journal editorial pointed out, “This [statement]was followed with a footnote: ‘This document does not carry the force and effect of law independent of the statute and regulations on which it is based.’ In other words, trust Treasury guidance at your own risk.” Such skepticism is well taken. The DOJ’s own Brand Memo prohibits converting “agency guidance documents into binding rules.” Perhaps in the short term as the country wrestles with the COVID-19 crisis, the DOJ will follow Treasury’s guidance, which claims to apply to all U.S. departments and agencies. But does that apply to regulators who may seek to bring FCA suits against banks for alleged fraudulent certifications of PPP loans? What about for DOJ down the road a year or two?

The FCA and FIRREA are both akin to legal thermonuclear weapons. Their widespread use by DOJ against banks and other commercial lenders after the 2008 crash has caused some of these institutions to be understandably cautious about dispersing large amounts of government loans and funding. If Congress wants to encourage participation in its relief programs and the rapid dispersal of funds, it may wish to consider other means to enforce compliance with these desperately needed funding programs. 

A. Brian Albritton
April 22, 2020

Wednesday, March 18, 2020

Insights About False Claim Act Cases and Qui Tams from Joseph “Jody” Hunt and Michael Granston from the U.S. Department of Justice at the Federal Bar Association’s 2020 Qui Tam Conference

Two key representatives of the U.S. Department of Justice - Joseph “Jody” Hunt, Assistant Attorney General for Civil Division, and Michael Granston, Deputy Assistant Attorney General for the Commercial Litigation Branch of the Civil Division – recently addressed the Federal Bar Association’s (FBA) National “Qui Tam” Conference, held on Feb. 27 and 28. Hunt and Granston provided insight as to DOJ’s priorities for False Claims Act (FCA) enforcement, application of the so-called “Granston Memo,” how defendant “cooperation” is evaluated and addressed a number of other topics of importance to FCA practitioners.

Hunt’s Remarks

Hunt began by reaffirming the importance of the FCA as the government’s primary civil tool for addressing fraud against the government and that FCA enforcement remains a “top priority” for DOJ. Hunt noted that DOJ had $62 billion in FCA recoveries and judgments since 1986, of which $45 billion resulted from qui tam suits. The past year, 2019, was another good year for qui tam filings. Hunt said 636 of the 782 FCA cases filed last year were qui tams. Most FCA enforcement continues to be in health care.

One notable fact that Hunt spoke about was the number of settlements and judgments that gave rise to nearly $3 billion dollar recovered in 2019: 213 settlements and judgments. According to Hunt, 2019 was the seventh year in which FCA settlements and judgments exceeded 200 for the year.

Addressing DOJ’s enforcement policies, Hunt listed three areas of focus in health care:
  • Medicare Part C/Managed Care Organizations: Hunt said that “plans and providers” have been “taking advantage” of the Part C program by manipulating risk adjustments.
  • Prevent fraud pertaining to electronic health records (“EHS”): Hunt mentioned the example of kickbacks paid to EHS providers that “subvert physician decision making.”
  • Nursing home cases, especially those cases concerning unnecessary and/or substandard care: Hunt said such enforcement represented “no better use of resources to protect the most vulnerable.” He further cited to the DOJ’s “Elder Justice Initiative” which aimed at pursuing the nation's worse nursing homes. (On March 3, DOJ formally announced its “National Nursing Home Initiative.”)

Hunt along with several Conference speakers discussed the Granston Memo, now incorporated into the Department of Justice Manual at Section 4-4.111, and its enumerated factors that can prompt the government to dismiss a qui tam pursuant to 31 USC 3730(c)(2)(A). Granston Memo dismissals, Hunt explained, are a “small fraction” of the overall number of FCA cases. In the last two years, 45 cases were dismissed compared to 1,200 qui tams filed during this same period. The policy to dismiss qui tams as expressed in the memo will continue to be exercised “judiciously” he emphasized. Hunt made clear that while the government’s “potential burdens” of discovery in a qui tam are one factor in evaluating dismissal, “such burdens will not cause an otherwise meritorious case to be dismissed.”

Hunt further explained that DOJ will evaluate the merits of a qui tam and its impact on other important interests in light of the “statutes, regulations, and contracts” at issue. Here, Hunt appears to be saying that DOJ will evaluate the alleged violation of legal duties at issue in a qui tam in light of the black letter law and contracts, as opposed to non-controlling regulatory guidance – a position first expressed by DOJ in its 2018 “Brand Memo” and now codified in the Department of Justice Manual Section 1-20.100. Hunt noted that DOJ reserved the right to reassess an initial Granston decision against dismissal if “new facts” subsequently emerge during the course of the matter.

The Conference’s panel on “Dismissals” shed further light of the 45 Granston dismissals filed since July 2018. These 45 motions to dismiss qui tams were filed in 30 judicial districts: 12 cases related to pro se litigants; 14 cases related to repeat relators, and 10 cases were effectively voluntary dismissals since the motions to dismiss were not opposed. The 45 Granston motions to dismiss, one speaker noted, were not limited to qui tam cases filed in the last two years but applied to cases as far back as 2012. The result, the speaker explained, is that Granston motions to dismiss were filed in 45 instances out of roughly 6,000 qui tams filed during this period.

Hunt also discussed the merits of defendant “cooperation” in FCA investigations. He explained that a “range of actions may qualify for cooperation” and gave examples such as voluntarily making witnesses and documents available without a subpoena, improving corporate compliance and replacing offending corporate officers.

Granston’s Remarks

In contrast to Hunt’s prepared speech, Michael Granston made his remarks in the context of questions posed to him by DOJ attorney David Finkelstein, co-chair of the Qui Tam Conference. Granston spoke about the following:

  • He stressed that application of the so called Granston factors only arises when the continuation of a qui tam is not in the public interest as opposed to the interest of the defendant.
  • Addressing “factor 6,” of the Granston memo, which he referred to as the “cost/benefit evaluation” of a qui tam, Granston emphasized that for all “non de minimis” cases, “burden does not overcome [a meritorious case] under any circumstances.” Cost/benefit “is not a singular consideration.”
  • Asked about whether the FCA has a “self-disclosure” plan similar to that of other agencies (such as HHS’ Self-Disclosure Protocol), Granston noted, without apology, that the FCA “has its own voluntary self disclosure” plan right in FCA statute itself which provides for “double damages” to those prospective defendants who disclose false claims to “responsible government officials” within 30 days of their discovery.
  • Granston stressed that aside from settlement discounts attributable to “litigation risk,” defendants now have an “additional opportunity” to obtain a discount based on their “cooperation” with an FCA investigation.
  • When asked if and when DOJ will “veto” the dismissals of qui tams that might otherwise be subject to dismissal under FCA’s public disclosure bar, 31 USC 3730(e)(4), Granston suggested that the government might do so when such qui tams “are in the public interest” or “in the government’s best interest.” Such a determination, he added, would “look beyond the merits of the case itself.”
  • Explaining who, DOJ and/or US Attorneys, handle qui tams, Granston explained that DOJ handles cases where the damages are in excess of $10 million and cases below that would be delegated to the District. If I heard him correctly, Granston said that DOJ handles around 25% of qui tam filings, the US Attorneys handle 60%, and another 15% are done jointly. Granston also added that there are exceptions whereby DOJ will keep a case instead of delegating it.
  • Speaking of the US Attorney Districts, Granston noted that qui tam cases are “much more evenly distributed” across districts. Only one District (which he did not identify) had more than 5% of the qui tams filed. He identified that top districts for qui tam filings as Middle District of Florida, Central District of California, Southern District of New York, District of Columbia, and Eastern District of Pennsylvania.
  • Granston addressed the “policy on providing claims data” to relators in declined qui tams. Once declined, Granston explained, they treat relators and defendants as third parties and DOJ does not provide claims data to them. Rather, they are directed to the agency at issue to try to obtain claims data there, which that agency may decline to do. Granston stressed that in declined cases, the government is a “third party” as described in United States ex rel. Eisenstein v. City Of New York.
  • As for “trends” beyond those identified by AAG Hunt, Granston identified (i) fraudulent schemes in telemedicine, such as those that are part of other schemes; (ii) non-compliance with trade restrictions and trade duties; (iii) using data analytics in Medicare to analyze claims data which helps DOJ to analyze the qui tam cases it receives.
  • Granston noted that what is “falsity” remains a central question in FCA cases.
  • The question arose regarding a party seeking a meeting with Michael Granston or other senior DOJ official overseeing FCA cases: what can one expect if they ask for a meeting? Granston stated that if you are trying to seek a meeting above the “case team” about a case, such meetings really should be directed to addressing the “broader legal and policy questions” posed by a case. By contrast, he added, case-specific fact issues are usually best addressed by the case team and not by “upper levels.” That said, the legal and/or policy issues should first be addressed by the case team as that focuses and narrows the issues. If a litigant obtained an audience with Michael Granston, he counseled that for such a meeting to be most effective the person seeking the meeting should “engage early” with the government, “be fully transparent” with “full disclosure on both sides,” and both sides should be candid about the strength of the case. Do not, Granston added, push arguments that don’t work.
Along with the remarks by AAG Hunt and DAAG Granston, the sold out Qui Tam Conference had several very good and informative panels about different facets of FCA and qui tam practice. The leader of the FBA’s Qui Tam Section, Scott Oswald, together with the conference co-chairs, Katherine Seikaly from Reed Smith and David Finkelstein from DOJ, did a great job with the Conference overall. I look forward to next year’s conference which will be co-chaired by Jennifer Short of KaiserDillon and Natalie Waites of DOJ.

A. Brian Albritton
March 18, 2020

Monday, January 20, 2020

U.S. Department of Justice 2019 False Claims Act Statistics -- Another Great Year for DOJ Recoveries in Health Care Fraud Cases


Dear Readers:

On January 9, 2020, the Civil Division of U.S. Department of Justice (“DOJ”) finally released its annual False Claims Act (“FCA”) statistics for filings, settlements, and judgments for fiscal year 2019 (10/1/18 – 9/30/19). In conjunction with its release of the FCA statistics, DOJ also issued a lengthy press release highlighting various cases. That’s worth a quick read, and I will not repeat it here. Rather, let’s look at what the numbers tell us about the state of FCA practice and claims.

Overall, DOJ recovered $3.054 billion in FCA “settlements and judgments” this year --just a bit more than last year’s $2.902 billion.  While not the reaching the heady years of 2014, 2012, and 2016 -- $6.1 billion, $5 billion, and $4.9 billion respectively -- 2019 was similar to the other $2-3 billion-ish years, recovered by DOJ in 2009-2011, 2013, 2015, 2017-18.

DOJ had a good year in direct file (non-qui tam) cases: 146 cases filed, up 18.7% from 2018. That number tied with 2012 and 2017 as DOJ’s third best year for direct filed cases since 1998. DOJ recovered $844 million in direct file cases last year, which is its fifth best year since 1986.

As for the 636 qui tam cases filed by relators last year, that is the fewest qui tam cases filed since 2011. Qui tams, both intervened and non-intervened, recovered $2.210 billion, and that was the second lowest year of recoveries since 2009, where qui tams accounted for $1.976 billion in recoveries.
 
In intervened qui tam cases in 2019, relators recovered $197 million in relator share awards – the lowest since 2007 and a 34% decrease from 2018. In non-intervened qui tams, relators had a very good year: $74 million in relator share awards, a 49% increase from 2018 and the third best year ever.

If there was a contest for best category of FCA cases ever, it would be health care FCA cases. In fact, except for 2014 when DOJ recovered $3.367 billion in the “Other” FCA category, the recovery in health care related FCA cases exceeded DOD and “Other” in every year since 1997.  Heath care as a category should be granted government “Hall of Fame” status.

Total health care related recoveries, in both direct filed and qui tam cases, were $2.605 billion, or 85% of the overall FCA recoveries. Seventy percent of all qui tams (449) filed were health care related. Eight-nine percent of all relator recoveries in 2019 ($197 million) were from health care related qui tams. In direct filed cases, however, health care accounted for only 38% (56 out of 146) of the direct file cases in that category.

DOJ’s press release illustrates that it is not really a large number of health care cases that drives the large health care totals each year.  Rather, as in past years, a small number of large recoveries account for the overwhelming portion of the $2.605 billion recovered. For example, Insys paid DOJ $195 million to settle kickback allegations related to the marketing of its drug, Subsys.  RB Group paid $500 million to resolve claims relating to its opioid drug, Suboxone.  Additionally, seven drug manufacturers paid $624 million to resolve claims that they illegally paid patient co-pays for their own drugs through purportedly independent foundations.

As for Department of Defense (“DOD”) FCA related filings and recoveries, DOJ recovered $252 million, up 57% from the year before.  Only 6.2% of the qui tams filed last year (40 out of 636) by relators were related to DOD files, however. In non-intervened cases, only $350,000 were recovered by relators.  DOJ filed 13 direct filed cases relating to DOD, which accounted for 13% of the 143 filed.

As for the “Other” category of FCA cases, DOJ recovered $196.7 million, which represents the worst year for “Other” recoveries since 2008. There were 147 qui tams filed in this category, which is the lowest number since 2010, when 135 were filed.  On the bright side, if it can be called that, DOJ filed 77 direct file cases, which is a 33% increase over 2018.

Overall, without the “Big Pharma” settlements of years past or the large mortgage fraud settlements after the recession which gave rise to huge recoveries, the number of FCA cases filed and amounts recovered appear to be holding up pretty well, especially in health care.

Finally, in addition to my annual plea that DOJ release FCA statistics for each U.S. Attorney District -- thus far ignored — I propose a few additional statistics. For starters, DOJ should reveal the stats for how long cases are under seal, by district, with an overall award for the top three cases that have been under seal the longest in a given year. Additionally, it would be good to know how many qui tams the government intervened in, and for cases in which it did not intervene, how many were dismissed by the Court or the relator. A last plea: how many cases did DOJ dismiss under its Granston authority, and what were the reasons for their dismissals?

A. Brian Albritton
January 20, 2020

Monday, April 1, 2019

Challenging the Relator's Standing to Bring a Qui Tam Can Open the Door to Jurisdictional Discovery


Dear Readers:

Is a relator’s release of claims valid and enforceable if she or he executed it prior to filing a False Claims Act qui tam against the same defendants whom the relator released? There is an “emerging agreement” among the circuits that a relator’s pre-filing release of claims is effective in non-intervened cases. United States ex rel. Class v. Bayada Home Health Care, Inc., 2018 U.S. Dist. LEXIS 162962, 2018 WL 4566157 (E.D. Pa. 2018). In fact, a relator’s pre-filing release of claims will deprive a court of subject matter jurisdiction over a relator’s qui tam against those same defendants provided that (1) “the release can be fairly interpreted to encompass qui tam claims; and (2) public policy does not otherwise outweigh the enforcement of that release.” Id. Of course, “public policy” is really a euphemism for whether a defendant seeking to enforce a release of claims sufficiently informed the Government of the fraudulent conduct at issue prior to the relator filing a qui tam.

So, how can you determine if the qui tam defendant seeking to enforce a release sufficiently informed the Government of the misconduct subsequently alleged in the relator’s qui tam and thereby satisfied “public policy”? In United States and State of Delaware ex rel. Sherman v. Christiana Care Health Services, Inc., et al., 2019 U.S. Dist. LEXIS 49804, 2019 WL 1349523 (D. Del., March 26, 2019), the Court surveyed the law on “pre-filing” releases and answered this question. The Court found that a relator may conduct jurisdictional discovery of the sufficiency of defendants’ disclosure to Government in light of what is alleged in the relator’s qui tam.

In Christiana, Defendants moved pursuant to Fed. R. Civ. P. 12(b)(1) to dismiss the relator’s non-intervened qui tam. Defendants argued that since the Relator had executed a release of claims in favor of the Defendants prior to filing his qui tam, the Relator did not have standing to bring his qui tam and the Court was without subject matter jurisdiction. In support of their motion and to satisfy the “public policy prong,” Defendants attached the Relator’s release and their disclosures to HHS-OIG. [Though not referenced in the Court's opinion, these “disclosures” consisted of “compliance disclosure logs submitted to the Government pursuant to a Corporate Integrity Agreement.”] Disclosures to HHS-OIG, the Court explained, are “sufficient” to satisfy public policy if they are “truthful and not misleading and alert the government that potential fraud has been alleged.”

Prior to responding to Defendants’ motion, the Relator moved for jurisdictional discovery as to the sufficiency of defendants’ disclosure. The Court found that the Defendants’ 12(b)(1) motion challenging Relator’s standing raised “factual” issues as to whether the Court had subject matter jurisdiction. Rule 26, Fed. R. Civ. P., the Court noted, permits jurisdictional discovery to “ascertain the facts bearing on such issues.”  In turn, the Third Circuit “allows” a plaintiff to conduct jurisdictional discovery unless a plaintiff’s claim is “clearly frivolous.” Such discovery is “warranted,” the Court stated, where a party can “at minimum, state a non-frivolous basis for subject matter jurisdiction and do so with reasonable particularity.”

Christiana found that the Relator alleged a non-frivolous basis for subject matter jurisdiction in his qui tam and permitted the Relator to conduct jurisdictional discovery.  The Court observed that the Relator’s complaint had alleged “concrete and specific instances of fraud,” including “initial reports to the Defendants, conduct of the internal investigation by the Defendants into those reports and the failure of the Defendants to disclose the results of those investigations to the government.” Additionally, the Relator pointed to the small size of the Defendants’ alleged disclosures (supposedly only 500 words) as not being sufficient to fully disclose Defendants’ alleged fraud. The Court noted further that the Government took 18 months to investigate the allegations before deciding not to intervene. Though such a time period does not indicate that the Defendants' disclosures were insufficient, “it counsels in favor of permitting Relator to engage in jurisdictional discovery that could aid in determining whether or not the disclosures were truthful and not misleading.” The Court permitted the Relator jurisdictional discovery on the “limited issue of the facts related to Relator’s allegations that were known to the defendants at the time they submitted the disclosures to HHS-OIG.”

From a defendant’s perspective, Christiana is somewhat disturbing for a number of reasons. First, the Relator was the Defendants’ former compliance officer who signed a severance agreement, apparently years before. Second, Defendants claimed that they disclosed the conduct at issue years before in compliance logs –- and now the Relator gets discovery in order to evaluate the sufficiency of that disclosure? Where is the Government? HHS-OIG apparently did not have a problem with it. The Government should step up and say so. Third, the fact that the Government took 18 months to “investigate” the Relator’s qui tam complaint means very little and presumes much. The Government is slow and in FCA cases is often very deliberate in its decision making. Moreover, while it may have taken 18 months to decline, that certainly does not mean it was “investigating” the entire time. With courts increasingly accepting "pre-filing" releases, I predict we will see more disputes like that found in Christiana in the future.


A. Brian Albritton
March 31, 2019

Tuesday, February 26, 2019

A Case to Keep In Your Pocket: Two Dismissal Rule Applies to Identical Qui Tam Cases Brought by Different Relators


Dear Readers:

I came across a small case to keep in your pocket as it might be needed one day: Arizona Medical Billing, Inc. v. FSIX LLC, 2019 U.S. Dist. Lexis 19164 (February 6, 2019). This case addresses the frequent issue of who is a party in a non-intervened qui tam: the government, relator, or both. This issue is addressed in the context of applying Fed. R. Civ. P. 41(a)(1). Rule 41(a)(a) governs voluntary dismissals of cases and provides for what is commonly referred to as the “two dismissal rule.” According to Rule 41(a)(1), an action that has been voluntarily dismissed without a court order or by filing a stipulation signed by the parties is presumed to be without prejudice unless it states otherwise “but a voluntary dismissal of a second action operates as a dismissal on the merits if the plaintiff has previously dismissed an action involving the same claims.” 

In Arizona Medical, the Court decided whether the two dismissal rule applies to two different relators who brought “identical” qui tams against the same defendants and then voluntarily dismissed each. The Court held that Rule 41(a)(1) applied and barred the second relator from reviving its previously dismissed qui tam.

Here are the facts of the case: Relator #1 brought a qui tam against FSIX LLC and three individuals alleging that these defendants had violated the False Claims Act due to their alleged violations of Medicare’s mileage reimbursement policies. A second Relator subsequently filed a separate qui tam suit against these same defendants along with one other individual defendant and made similar allegations against them. The defendants in Relator #2’s qui tam moved to dismiss on the grounds that #2's suit violated the “first to file” rule due to Relator #1’s pending qui tam. Relator #2 stipulated to the motion to dismiss. Interpreting the stipulation as a voluntary dismissal pursuant to Fed. R. Civ. P. 41(a), the Court in Relator #2’s case dismissed that qui tam without prejudice. Months later, the defendants in Relator #1’s qui tam case moved to dismiss and Relator #1 voluntarily dismissed its case. The Court “granted [Relator #1’s] notice of voluntary dismissal and dismissed the claims without prejudice.” With the first qui tam gone, Relator #2 filed a new qui tam that was identical to the one it had previously filed and dismissed. The defendants moved to dismiss Relator #2’s new qui tam on the grounds that a “common plaintiff, the United States of America, has filed two proper lawsuits . . . against the Defendants alleging identical claims” and thus should be dismissed pursuant to Rule 41(a).

In dismissing Relator #2’s new qui tam, the Court found that the two dismissal rule applied because “[i]t is undisputed that a common plaintiff, the United States of America was the primary plaintiff” in these two qui tams that “alleged identical claims.” The Court noted further that pursuant to 31 USC 3730, the relators in both cases could not have dismissed their actions without the “explicit consent of the Government as the primary plaintiff.” The Court rejected Relator #2’s argument that Rule 41 did not apply because the “relators in each case were different.” The Court found that Relator #2’s second dismissal “operated as an adjudication on the merits” because the claims in both cases were “identical.”

Arizona Medical illustrates that for the purpose of Rule 41(a), the United States is a party to a qui tam even if it has declined to intervene. In addition, while separate dismissals by relators bringing identical actions is uncommon, it does occur on occasion and Defense counsel now have a new case to defend against these serial actions.

A. Brian Albritton
February 26, 2019

Wednesday, January 23, 2019

Partially Intervened Qui Tam Cases Cannot Have Two Masters: Court Bars Relators From Proceeding With Their Non-intervened Claims


Dear Readers,

I commend to you a remarkable case, U.S. ex rel. Wride v. Stevens-Henager College, Inc., 2019 U.S. Dist. LEXIS 6783, 2019 WL 186663 (D. Utah 2019), which addresses the question of whether a qui tam in which the government has partially intervened has “two masters,” the government and the relator, each controlling their own sphere of the litigation, or just one. The District Court held that only one master — the government — can conduct the litigation in a partially intervened qui tam and relator cannot proceed with its own non-intervened claims or amend to bring new claims. The Court specifically found that where the government has intervened in a qui tam “action,” including where the government has intervened in only some but not all of the relators’ qui tam claims, the False Claims Act (FCA) provides that the government alone has the “primary responsibility for conducting the action” and the relators do not have the right to “amend his or her complaint to add defendants and claims to the government’s action.”

In Wride, two relators filed a FCA qui tam against a for-profit school and its successor (herein “for profit schools”). The government intervened in some but not all of their claims against the for-profit schools and filed its own complaint in intervention, which it later amended. Subsequently, relators filed amended complaints (four in all) adding new claims and new defendants. The Court observed that the complaint against the for-profit schools had “two masters,” the government and the relators. Additionally, relators had also been pursuing its separate claims against the for-profit schools and other defendants. The defendants moved to dismiss, and in the process of considering that motion, the Court asked the parties to brief whether the FCA permitted the relators to independently pursue claims against the defendants after the government elected to intervene in the lawsuit. Finding that the relator cannot maintain a separate complaint against the defendant, the Court struck all of the relators’ post-intervention complaints.

The Court observed that nothing in the FCA or its legislative history suggests that “a relator can maintain the non-intervened portion of an [qui tam] action. In fact, the plain language of the statute suggests otherwise.” The FCA, the Court concluded, “is clear that the Government either ‘elect[s] to intervene and proceed with the action,’ sec. 3730(b)(2), or it ‘declines to take over the action,’ sec. 3730(b)(4)(B). There is no in-between.”
The government contended that 31 USC 3730(b)(1) “allows a realtor to maintain the non-intervened portion of the action in the name of the United States.” (Emphasis added.) The references to “the action” here and in other parts of the FCA, the government argued, mean “cause of action” as opposed to “civil action.” The Court rejected that argument and conducted a plain language analysis of the FCA references to “action.” The Court found that the FCA’s text and “its structure” undermine the government’s interpretation because the FCA “unambiguously uses ‘action’ to mean ‘civil action.’”

The government’s chief argument was that Congress’ silence in the FCA as to whether a relator may prosecute the non-intervened portion of an action “suggests that the relator retains a right to do so.” In support of its argument, the government cited 31 USC 3731(c) which in discussing government intervention provides “the Government may file its own complaint or amend the complaint of [the relator] to clarify or add detail to the claims in which the Government is intervening and to add any additional claims. . . .” The Court did not read the provision to permit the relator the right to proceed with claims of its own once the government intervenes. Congress, the Court asserted, “would not have given relators the primary responsibility for prosecuting the non-intervened claims in such a cryptic fashion. . . .[its] silence as to the relator’s right to prosecute non-intervened claims leads to the conclusion that no such right exists.”

Analyzing the portion of the FCA that deals with awards to relators, 31 USC 3730(d), the Court found that “[n]either the statute nor the legislative history suggests that a relator can pursue claims that are separate from the Government’s to recover an increased award” which “undermines the idea that the relators can pursue non-intervened claims.” Key to the Court’s conclusion was that the FCA provides only limited rights to the relator to “continue as a party to the [intervened] action” which the Court distinguished from the government’s right to “conduct the action” when it intervened. Once the government intervenes, the relator has only limited rights and according to the FCA, the Court can limit the relator’s “participation” in the intervened case. In sum, once the government intervened in the qui tam, its complaint “superseded the relators’ complaint and became the operative pleading. The relators then lost the right to add defendants and claims to the action” and “any pleading filed by the relators” thereafter “lacked legal effect.”

This interesting case and the Court’s exhaustive analysis sheds light on an area of FCA litigation that has long needed closer review:  just who controls FCA claims and what is the role of the relator? The FCA appears to provide that a relator’s qui tam must be moored to his or her original disclosure statement. Section 3730(b)(2) requires that at the beginning of the case, the relator “serve” the government with a “written disclosure of substantially all material evidence and information the person possesses.” Presumably when his or her claim is filed, the relator is blowing the whistle on that alleged misconduct about which she or he has knowledge and is presenting their knowledge to government for its investigation.

When relators start bringing in new parties, asserting new theories and new claims beyond the scope of their disclosures, however, then relators are transforming the qui tam provision into an independent vehiclelike a search warrantthat they can use to search for and assert new claims and add new parties about which they may know little or nothing. That is what occurred in Wride. Relators essentially used their “right” to bring a qui tam to independently bring new claims that were unmoored from their original disclosure statement to the government and without first submitting their new claims under seal to the government. When the government argued that relators’ new complaints simply “added detail to the fraudulent schemes already described and thus did not have to filed under seal,” the Court described that argument as “at best, a misstatement.” Indeed, ruling on alternative basis, the Court struck the relators’ fourth amended complaint as a sanction for the relators’ failure to first file it under seal in violation of 31 USC 3730(b)(2).

Unfortunately, I give the Court’s decision in Wride a 50/50 chance of surviving. My prognosis does not result from the decision running afoul of any case law already out there, but simply because it violates that most powerful rule, “this is the way we’ve always done things.”

A. Brian Albritton
January 23, 2019

Tuesday, December 25, 2018

U.S. Department of Justice 2018 False Claims Act Statistics -- not a banner year for DOJ or Relators

Dear Readers:

Happy holidays and best wishes to you for 2019.

Just in time for Christmas, the Civil Division of the U.S. Department of Justice ("DOJ") released its
2018 annual statistics for False Claims Act ("FCA") filings and cases for fiscal year 2018 (10/1/17 - 9/30/18). The DOJ's press release highlights DOJ settlements and recoveries, and I will not repeat them here. Rather, as I have done for the last several years, I wish to focus on a few of the highlights revealed by the statistics.

2018 was not a banner year for DOJ and FCA cases. DOJ "obtained" $2.8 billion "in settlements and judgments" from civil cases involving fraud and false claims against the government, and of that amount, over $2.1 billion resulted from qui tams. That’s the lowest amount “obtained” since 2009, when DOJ “only” recovered $2.4 billion.

2018 was also not a banner year for qui tam relators who recovered “only” $301 million in relator share awards, down 37% from last year. This was the lowest amount recovered by relators in any single year since 2009.

767 FCA cases were filed in 2018, down from 825 in 2017 and the second lowest year for FCA filings since 2011. Last year, DOJ filed 122 "non-qui tam" or direct-filed cases and qui tams accounted for 645 matters.  DOJ does not say in which of the 645 cases it has intervened, declined, or is still “investigating.” Note: DOJ apparently revised 2017’s statistics: last year it published statistics showing 125/674 direct filed and qui tam matters and this year’s statistics now show 145/680 direct filed and qui tam matters for 2017. 

Healthcare related cases continue to predominate (almost 69%) all FCA cases filed: 506 healthcare FCA cases filed and $2.5 billion “obtained.” Direct-filed healthcare cases continued to be up at 60, tied with 2008, for the second most number of direct filed cases in a year since 1987. The record is 70 in 2016. Recoveries in direct filed FCA cases were up dramatically to $568 million, up from $32 million in 2017 and the third best year since 1987. A large portion of the healthcare FCA recoveries (almost 59%) is attributable to five cases: $625 million paid by AmerisourceBergen Corp., $210 million paid by United Therapeutics Corp., $270 million by HealthCare Partners Holdings LLC, $216 million from Health Management Associates, and $84.5 million by William Beaumont Hospital.

The "other" category of FCA cases accounted for almost 28% of all FCA cases filed in 2018.  That is down from 225 last year and is the lowest overall since 2010 when 211 cases were filed.  The big news here is that recoveries were only $259 million, a dramatic drop from the $106 billion last year and the lowest since 2010.  Relator shares, not surprisingly, dropped as well: $14.9 million, which is down 78% from the prior year and is the worst year for relators in this category since 2008.

Department of Defense FCA cases continued to be small: 47 or 6% of all FCA cases, and they accounted for $107 million recovered.

A few observations about 2018:

  • Relator generated qui tams continue to hold strong in healthcare where 446 qui tams were filed. 2018 was the fifth best year since 2010. Relator recoveries in declined healthcare cases dropped from $445 million in 2017 to $80 million in 2018, with relator share awards in declined cases falling as well: $123 million in 2017 to $22 million in 2018. The $266 million in relator share awards in healthcare cases overall was the lowest since 2010.
  • The relator share awards in the “other” category (non HHS, non DOD) fell dramatically from $77 million in 2017 to $20.7 million in 2018.  That is the lowest amount collected in this category since 2008.  
  • Of the $2.8 billion “obtained,” DOJ does not tell us how much it actually recovered in cash as opposed to "judgments” in 2018 or any other year.  For example, DOJ cites as an example a “judgment totaling more than $114 million” that it obtained against three individuals that allegedly paid kickbacks to two labs.  However, the title of its press release proclaims that it “recovered” $2.8 billion. 
  • DOJ’s press release heralded its commitment to “holding individuals accountable” in FCA cases.  Several examples are cited, including DOJ’s FCA settlement with Lance Armstrong who agreed to pay $5 million.  Given where the government started in that case with its demands, however, that settlement effectively was a win for Armstrong. With the new revisions to the Yates policy, it will be interesting to see how that affects DOJ’s efforts to hold individuals accountable going forward.

Overall, a good year for DOJ direct filed cases against healthcare defendants, and a bit of a decline in all other areas. 

Finally, a plea to DOJ and U.S. Attorneys:  when are you going to release the FCA statistics for each individual U.S. Attorney Office? And, why not provide a breakdown of all FCA settlements and judgments “obtained” for each district?

A. Brian Albritton
December 26, 2018

Tuesday, December 18, 2018

Maybe That Wasn’t Such a Good Idea After All – DOJ takes a “common sense” approach in applying Yates Policy in civil cases


Dear Readers:

In June 2016, I reported how the U.S. Department of Justice (DOJ) planned on implementing its Yates policy of stressing the accountability of corporate executives and employees in False Claims Act (FCA) cases. In FCA investigations of corporate wrongdoing, DOJ’s Yates policy instructed its attorneys to “focus on both the company and individuals who may be responsible for bad conduct” and, charged its attorneys in any investigation of corporate misconduct to proceed “in tandem” with an inquiry into individual misconduct. Indeed, DOJ stated that settlements of FCA claims with corporations will not end DOJ’s “inquiry into whether and which individuals will be pursued.” DOJ went so far as to claim that it was “threshold requirement” for any corporate defendant seeking “credit” for its “cooperation” in settling a FCA case to “disclose all facts related to individuals involved in the wrongdoing.” (emphasis added).

As with many of its initiatives, DOJ’s Yates policy sounded good in theory: pursue every avenue of corporate and individual civil liability. I predicted, however, that as a result of the new focus on individual accountability, “FCA investigations and cases are likely to become more complicated.” In fact, I wondered if “DOJ and U.S. Attorneys will follow through in promoting this policy of individual accountability given that FCA investigations and cases often move quite slowly and this policy will require more time and substantial resources to enforce.” And, I was right.

Two years later, Deputy Attorney General Rod Rosenstein (“Rosenstein”) announced “common sense reforms” in applying the Yates policy stressing individual accountability in civil cases. “Civil cases,” Rosenstein pointed out, “are different” than criminal cases.  The “primary goal of civil affirmative cases,” such as FCA cases, are to “recover money,” and as a result DOJ needs to use its resources “efficiently.” To that end, Rosenstein observed that the “all or nothing approach to [awarding] cooperation” for civil cases was “counterproductive.” “[O]ur attorneys,” Rosenstein explained, “need flexibility to accept settlements that remedy the harm and deter future violations, so they can move on to other important cases.” In a seldom seen acknowledgement by DOJ of how things should work in the real world, Rosenstein noted that “[o]ur civil litigators simply cannot take the time to pursue civil cases against every individual employee who may be liable for misconduct and we cannot afford to delay corporate resolutions because a bureaucratic rule suggests that companies need to continue investigating until they identify all involved employees and reach an agreement with the government about their roles.”

So what does this mean? In part, the revised Yates policy is intended to restore “some of the discretion that [DOJ] civil attorneys traditionally exercised” though with “supervisory review,” of course. Also, in part, it means that companies no longer need to cooperate to the Nth degree in order to obtain any credit for their cooperation. To be sure, the gold standard for obtaining “maximum credit” remains that a corporate defendant must “identify every individual . . . substantially involved in or responsible for the misconduct.” But, whereas that was the requirement for a corporate defendant to receive any credit under the previous Yates policy, now DOJ counsel may award some credit as long as a “company honestly did meaningfully assist the government’s investigation.” Of course, the other extreme from the gold standard for which no credit will be awarded are companies who seek to “conceal wrongdoing by senior officials” or who fail to “act in good faith.” 

Rosenstein provided an example of how this new policy might be applied in an FCA case. A defendant who made a “voluntary disclosure” to DOJ and provided “valuable assistance” is entitled to “some credit even if the company is unwilling to stipulate about which non-managerial employees are culpable or . . . to identify every individual who might face civil liability in theory, but in reality would not be sued personally.”

Again, in an uncharacteristic admission as to how things really work at U.S. Attorney’s offices, Rosenstein acknowledged that the “civil policy was not strictly enforced in many cases” and that as a result he prefers “realistic internal guidance.”

Finally, DOJ’s new pragmatism endorses considering “an individual’s ability to pay in deciding whether to pursue a civil judgment.” DOJ does not want its “attorneys to spend time pursuing civil litigation that is unlikely to yield any benefit; not while other worthy cases are competing for [its] attention.” Translating this for the defendant, being broke really can be a benefit when the government is trying to determine whether to pursue FCA liability against your individual client.

Rosenstein is to be commended for this change which takes into account -- for once – the “practical implications of [DOJ] policies” and whether a policy actually “inhibit[s]” or promotes DOJ’s goals.  His enthusiasm for such a change of policy, I suspect, comes from serving as a U.S. Attorney in a medium sized district (Maryland) over many years.  DOJ priorities, mandates, and initiatives frequently enjoin U.S. Attorneys to investigate every last detail or person who could possibly be responsible, even on the civil side.  Being 100% faithful to the letter and spirit of such mandates, as I am sure Rosenstein experienced, is frequently an impossible task, if your goal is to keep pace with the pressing number of cases, criminal and civil, that continually come before a U.S. Attorney.  “Common sense” policies that restore discretion to line assistants and that promote realistic goals in FCA cases are long overdue.

A. Brian Albritton
December 18, 2018

Sunday, April 29, 2018

Deducting False Claims Act Damages

Dear Readers:

Among the nuggets contained in the recent Tax Bill passed by Congress is a provision that will have a tremendous impact on how damages in False Claims Act ("FCA") settlements must be characterized in the settlement documents if a defendant seeks to deduct any portion of its payment on its taxes.

As many of you have experienced, FCA settlements usually just list a settlement amount for the defendant to pay and normally do not attribute which portion constitutes damages and penalties. In fact, among the many provisions that the government insists on including in an FCA settlement, the government usually includes a provision stating that "nothing" in the FCA settlement "constitutes an agreement by the United States concerning the characterization of the Settlement Amount for purposes of the Internal Revenue laws, Title 26 of the United States Code." Stated simply, the government previously did not comment on whether the defendant could deduct any portion of an FCA settlement. To deduct the damages or restitution portion of an FCA settlement was something worked out between a defendant and its accountant.

As my colleague and friend Bob Warchola recently brought to my attention, the Tax Act changed the rules for deducting the damages portion of any FCA settlement by amending 26 U.S.C. § 162 which governs deductions of trade and business expenses.  

Previously, Section 162 of Title 26 prohibited the deduction "of any fine or similar penalty paid to a government for the violation of any law.” The Tax Act, however, expanded that prohibition, and it now generally prohibits "a taxpayer from deducting any amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry by such government or entity in to the potential violation of any law."  With this general prohibition as a backdrop, Congress then carved out an exception for deducting restitution, so long as the taxpayer establishes that the amount at issue (1) "constitutes restitution . . . for damage or harm which was or may be caused by the violation of any law or the potential violation of any law, or . . . is paid to come into compliance with any law which was violated or otherwise involved in the investigation or inquiry . . . "; and (2) "is identified as restitution or as an amount paid to come into compliance with such law, as the case may be, in the court order or settlement agreement."(emphasis added). In addition, the revisions to Section 162 specifically prohibit a defendant from deducting "any amount [paid] as reimbursement to the government or entity for the costs of any investigation or litigation." Finally, the Tax Act imposed a requirement on the affected government agency to report to the IRS the settlement (or judgment) and to specify what portion of it is restitution or the costs to come into compliance with the law at issue in the settlement.

Latham & Watkins and Fried Frank have both done a helpful analysis of these changes arising from the Tax Bill which I commend to you as required reading if you are thinking about settling an FCA case.

A. Brian Albritton
April 29, 2018