Highlights of U.S. Department of Justice 2017 False Claims Act Satistics

Dear Readers:

Happy New Year. 

As we come to the close of 2017, the Civil Division of the U.S. Department of Justice ("DOJ") recently issued its 2017 annual statistics for False Claims Act ("FCA") cases filed and settled in fiscal year 2017 (10/1/16 - 9/30/17). The DOJ's press release highlights many of the Department's achievements (which I will not repeat here). I wanted to take a few moments to focus further on what DOJ's statistics reveal.

The DOJ publishes yearly statistics for FCA cases (i) overall ("the overview"); (ii) Department of Defense related cases; (iii) Department of Health and Human Services (healthcare) related cases; and (iv) all "other" FCA cases. DOJ "obtained"  --that does not mean collected -- $3.7 billion in "in settlements and judgments from civil cases involving fraud and false claims against the government." DOJ does not say how much it actually netted in cash as opposed to "judgments."  

As shown in its "overall" statistics, 799 False Claim Act cases were filed in 2017: roughly 50 cases less than last year but more than 2015. Generally, though, the total number of cases filed has been generally consistent for several years. In 2017, DOJ filed 125 "non-qui tam" or direct-filed cases and qui tams accounted for 674 matters. Of these 674 cases, DOJ does not say in which it has intervened, declined, or is still considering what to do nor does it tell us in which districts they were filed.  

Healthcare/HHS cases predominated in 2017: 544 cases, almost 68% of all FCA cases filed, and most of these were qui tams. 491 or almost 61% of all FCA cases were health care qui tams. In direct-filed healthcare cases, this was DOJ's third highest number of cases filed ever, and for qui tams, it was the second best year --surpassed only by 2016's 503 qui tams filed.

As it has for many years, the "other" category of FCA cases continues to have the second most number of FCA cases: 208 or 26%, and of these, 155 were qui tams, which is the lowest number of "other" qui tams filed since 2010.

Department of Defense ("DOD") related filings continued to be small: 47 or 5.8% of all FCA cases. Of note: relators filed only 28 DOD related qui tams, which is the smallest number since 1988. DOJ direct-filed 19 DOD-FCA cases, which is the most since 2011  --up from 9 in 2016 and 7 in 2015.

Of course, we have no idea if any of these newly filed cases were resolved or dismissed, as DOJ purportedly says it may do for qui tam cases lacking merit.

Turning to the settlement/judgments DOJ collected in 2017, a few observations:

• Nearly $428 million was collected in FCA cases where DOJ declined to intervene. That is the second highest amount collected in declined cases since stats were kept. 2015's $512 million in declined case settlements is the best year.  Relators collected $43.593 million in relator share awards in these 2017 declined cases -- the third best year ever.

• Not surprisingly, a large portion of relators' success in declined cases was driven by healthcare settlements. Relators  collected $380 million in HHS/healthcare declined cases in 2017 and collected $32.5 in relator share awards  -- the second best year ever in both of these categories.  

• As with declined healthcare cases, relators had a successful year in declined cases in the "other" category, obtaining $45 million in settlements and $10.9 million in relator share awards: the third best year ever.

• These stats continue to bear out what many defense attorneys have been experiencing for some time: relators increasingly are willing to aggressively pursue cases when the government has declined to intervene.  

• The $265.5 million DOJ collected in overall direct-filed cases was the lowest amount it collected since 2013 and the third lowest year since 2004. Clearly, the reason for this is that DOJ collected only $32.6 million in direct-filed HHS/healthcare cases  -- down from $97.5 million in 2016. DOJ has not had such a poor collections year in this category since 1993.

• Overall,it should be no surprise that qui tam filings are strong overall and in healthcare cases. DOJ paid $349 million to relators in intervened cases overall last year, of which $250 million was paid in intervened healthcare cases.

DOJ stats continue to show that to generate False Claims Act cases the Department continues to rely heavily on relators and that huge awards in qui tams and declined cases continue to serve as as a powerful incentive to relators and their counsel to file FCA claims.  Since 1987, DOJ has paid relators $6.584 billion in relator share awards.

A. Brian Albritton

January 1, 2018

Limiting Discovery and Preventing Claim Smuggling in False Claims Act Cases

Dear Readers:

Joining the growing number of courts that limit or phase discovery in False Claims Act cases ("FCA"), the Southern District of Mississippi recently rejected attempts by the relators to obtain "unfettered discovery" so that they may search for new claims beyond the single claim for which they were an original source and on which they won at trial. See United States ex rel. Rigsby v. State Farm Fire and Casualty Co., 2014 WL 691500 (S.D. Miss., Feb. 21, 2014).

In Rigsby, two relators sued State Farm alleging that it engaged in a massive scheme to defraud the National Flood Insurance Program ("NFIP") in its administration of flood claims arising from Hurricane Katrina and they filed a list of 18 properties in which they asserted that State Farm had defrauded the NFIP. When initially considering case, the Court found that only one of the properties, the "McIntosh claim," was the sole "instance of State Farm's having submitted an allegedly false claim of which either relator had first hand knowledge." Having first hand knowledge of a single claim, the Court initially permitted the relators to obtain discovery about and proceed to trial on the McIntosh claim. The Court reserved ruling on whether to permit the relators to expand their suit and obtain additional discovery until after the trial of the McIntosh claim, stating it would "consider [then] whether additional discovery and further proceedings are warranted." The jury found that State Farm had presented a false claim for payment to the NFIP in connection with its processing of the McIntosh flood claim. Relators then asked the court to "initiate expanded discovery into claims on other properties insured by State Farm."

The Court refused to permit the relators additional discovery in order to expand their claims into areas where they did not have knowledge and when it was unclear whether other claims really existed. Relying on the 5th Circuit's decision in US ex rel. Grubbs v. Kanneganti, 565 F.3d 180 (5th Cir. 2009), the Court noted that satisfying Rule 9(b) with "sufficient detail" and defeating a motion to dismiss permits a relator access to the discovery process, but discovery should be "targeted" only to "the claims alleged, avoiding a search for new claims." Applying Grubbs, the Court observed: "Armed with knowledge of a purported scheme and evidence related to the single Mcintosh claim, Relators seek far-reaching, unfettered discovery in order to search for new claims beyond the Mcintosh claim, the only false claim which they have firsthand knowledge. Grubbs states that even if a complaint survives a Rule 9(b) challenge, discovery should be tailored to the claims alleged, so as to avoid a search for new claims. To allow expanded discovery in the fashion Relators seek would permit improper smuggling of additional claims beyond the single claim to which Relators have personal knowledge."

In short, the Court showed that simply satisfying Rule 9(b) as to one claim does not open the door for relators to go in search of other claims to which they do not have personal knowledge, even if they have broadly described a scheme to defraud for which they have only one example. Since "Relators have not pleaded sufficient details regarding any other claims to survive a Rule 9(b) challenge . . . . . discovery would necessarily be overly broad because the Amended Complaint lacks enough detail to permit the Court to craft reasonable discovery parameters."

A. Brian Albritton
March 19, 2014

DOJ Announces $3.8 Billion in False Claim Act Recoveries for FY 2013

The US Department of Justice recently announced another historic year in FY 2013 for False Claims Act (FCA) recoveries and judgments: a total of $3.8 billion, falling short of 2012's nearly $5 billion in FCA recoveries. Among the highlights featured in the DOJ's press release are:

• Heath care fraud continued to constitute the largest portion of FCA recoveries: $2.6 billion, not including $443 million in recoveries by state Medicaid programs.
• Of the $2.6 billion in health care related fraud recoveries, $1.8 billion resulted from claims relating to drug and medical devices. 
• Abbott Labs alone paid $1.5 billion to resolve allegations that it illegally promoted the drug Depakote. $575 million of that amount related to FCA claims.
• Amgen paid $762 million to settle allegations that it illegally promoted the drug Aranesp. $598.5 million of that related to FCA claims.
• Procurement fraud, relating primarily to defense contracts, accounted for $890 million recovered.
• The largest component of the procurement fraud recoveries arose from the $664 million judgment that USDOJ obtained against United Technologies Corp. "based on allegations of false claims and corruption involving government contracts."
• Qui tam suits "soared" to 752, an increase of 100 from FY 2012, and 74% increase over 2009, when 433 qui tam suits were filed.
• Of the total $3.8 billion in FCA recoveries, $2.9 billion or 76% arose from qui tam filings, and of that amount, Relators or what the DOJ refers to as "courageous individuals who exposed fraud" recovered $345 million.
• Last year also saw one of the largest FCA recoveries against a single individual/physician: $26.3 million against a dermatologist, Steven J. Wasserman, M.D., relating to illegal kickbacks.

A. Brian Albritton
January 6, 2014

False Claims Act and Excessive Fines Clause: 4th Circuit Upholds Relator's Decision to Accept Smaller Judgment to Avoid Unconstitutional Result

Just recently, the U.S. Circuit Court of Appeals for the Fourth Circuit addressed whether the penalties assessed against a defendant under the False Claims Act ("FCA") can ever violate the 8th Amendment's protection against "excessive fines" in the appeal, United States ex rel Kurt Bunk & Daniel Heuser v. Birkart Globistics GmbH & Co et al., Case No. 12-1369 (4th Cir. 12/19/2013), a case about which I previously blogged. The 4th Circuit overturned the District Court's decision which had  found the $50 million in penalties to be an excessive fine in light of the government's lack of damages. Essentially, the 4th Circuit avoided the constitutional issue by agreeing to the Relator's offer to accept $24 million in penalties in lieu of the entire $50 million that the District Court believed the FCA required to be imposed on the defendant. A few observations about the decision:

• This FCA case concerned defendant contractors who moved the furnishings of U.S. military service personnel overseas to Europe and whether they colluded with subcontractors, resulting in the defendants charging inflated moving prices to the military. The Court began its opinion by observing, "An army may march on its stomach, but when a fighting force is deployed to a foreign front, familiar furnishings also serve to fuel the foray." These personnel whose goods were being transported were going to "encamp" in Europe. Once the Court characterizes these military personnel as "fighting forces deployed to a foreign front," you know for certain that the defendants will be losing and the court will fudge the constitutional issue.

• One of the Relators, Bunk, who actually prevailed in this action never pled or proved any monetary damages caused by the defendants. The defendants sought to challenge Bunk's standing to bring this action in the absence of any damages, but the 4th Circuit found Bunk had standing.

• Other settling defendants had already paid the government $14 million, which the District Court found "was far in excess of the presumptive damages" which were $895,000. The defendant had already paid that as restitution in a parallel criminal case.

• The 4th Circuit affirmed that penalties were to be imposed on the basis of the false certifications contained in a defendant's claims for payments submitted to the government and that each certification qualified as a false claim giving rise to a penalty. Unfortunately for this defendant, there were 9,136 false claims or bills, and that amount multiplied by the minimal $5,500 penalty came to just shy of $50 million.

• The Court acknowledged that the "perceived tension between the FCA and the Excessive Fines Clause of the 8th Amendment . . . is a monster of our own creation." To its credit, the Court candidly stated that "the FCA as enacted could arguably have been construed as authorizing a total civil penalty not to exceed $11,000." But, the Court observed further that it was following precedent -- bereft of any "our hands are tied" complaints -- in concluding that "FCA liability . . . attaches to the claim for payment."

• The Court avoided a finding that the $50 million in penalties qualified as an excessive fine because the Relator agreed to accept only $24 million. The Relator's "voluntary remittitur," the Court observed, was "just the sort of arrow that a plaintiff is presumed to possess within his quiver" and that a plaintiff's discretion to take a "lesser judgment . . . is virtually unbounded." Here again, the Court relied on a prior FCA case, U.S. v. Mackby, 339 F.3d 1013 (9th Cir. 2003), in permitting this remittitur.

• Essentially, the Court states that a District Court "must permit the government or its assignee [the Relator] the freedom to navigate its FCA claims through the uncertain waters of the Eighth Amendment."

• As for the $24 million, the Court upheld the constitutionality of that amount by apparently disregarding the lack of evidence of any harm and finding that the "notion [that the government suffered no injury] seemingly inconsistent with [defendant's] apparent profit motive in making the statements at issue." The Court went on that "there is no doubt" -- even though the Court cites no evidence otherwise -- that "the government has suffered significant opportunity costs from being deprived of the use of those funds for more than a decade."  

• Finally, as mentioned above, the $24 million was not viewed as violating the Excessive Fines clause because it was not "grossly disproportionate" to the crime against the military. "The prevalence of defense contractor scams . . . shakes the public's faith in the government's competence and may encourage others similarly situated to act in a like fashion."

In short, given that the victim was the military, there was no way the Court was going find the FCA's penalties to be unconstitutional or use this decision as a vehicle to curb the FCA's excesses. Moreover, there is just something vaguely unsettling about hinging a court's determination of this statute's constitutionality not on its application and consequences, but on what the government and Relator will accept.

A. Brian Albritton

January 1, 2014

The First Circuit Strictly Applies False Claims Act's First-to-File Rule to Bar Subsequent Qui Tam Suits Based on Same Facts

The First Circuit recently followed the D.C. Circuit's decision in United States ex rel. Batiste v. SLM Corp., 659 F.3d 1204 (D.C. Cir. 2011) in holding that a relator's qui tam complaint does not have to satisfy the heightened pleading requirement of Federal Rule of Civil Procedure 9(b), which requires that fraud be pled with particularity, in order to bar qui tam suits based on the same facts filed by subsequent relators: U.S. ex rel Heinman-Guta v. Guidant Corp., 2013 WL 2364172 (1st Cir., May 31, 2013).  

Referred to as the "first-to-file rule," 31 USC 3730(b)(5) of the False Claims Act provides that "when a person brings an action under this subsection, no person other than the Government may intervene or bring a related action based on the facts underlying the pending action." In interpreting the first-to-file rule, the Sixth Circuit held in Walburn v. Lockheed Martin Corp., 431 F.3d 966, 972 (6th Cir. 2005) that in deciding whether a second or subsequently filed qui tam complaint was barred, the initial relator's complaint concerning the same matter must satisfy the heightened pleading standard of Rule 9(b). If the initial relator's qui tam complaint does not plead fraud with sufficient particularity to satisfy Rule 9(b), then section 3730(b)(5) does not apply and will not bar a subsequent relator's suit based on the same facts.

The First Circuit's Guidant decision, along with Batiste, rejects Walburn, and it essentially holds that Rule 9 has no bearing on whether to bar or allow a subsequently filed qui tam complaint. Rather, according to the "plain language" of 3730(b)(5), "if the earlier filed complaint contains enough material facts to alert the government to a potential fraud, a later-filed complaint . . . containing the same essential facts but incorporating additional or somewhat different details is  . . . barred."

The First Circuit was certainly not troubled by the policy concern that guided the Sixth Circuit's Walburn decision: "failing to impose Rule 9's particularity requirements on earlier filed complaints . . . would encourage would be qui tam relators to file overly broad, vague and speculative complaints simply to prevent other potential relators from filing more-detailed complaints." In fact, the Court could not imagine "how an overly broad and speculative complaint lacking essential material facts would be sufficient in the first instance to notify the government of a fraudulent scheme under the FCA." The Court stated further that "[a] first-filed complaint that failed to [allege essential facts] would not preclude a later-filed complaint . . ." Yet, the Court does not really provide any instruction as to what this means. Apparently, it does not take much to preclude subsequently filed qui tam complaints because the "purpose of the first-filed complaint under section 3730(b)(5) is to provide notice of the potential fraud to the government so that it may initiate its investigation into the fraudulent scheme, nothing more."   

In reality, the "purpose" of section 3730(b)(5) is not so clearly reflected in the statute's plain language and the identified policy of simply "providing notice" does not reflect how important the quality of a relator's information is to the government. In order to prosecute the False Claims Act and to effectively employ the government's limited investigative resources, the government needs factually intensive, well pled, investigated, and supported qui tams. If valuable information is provided by a subsequent relator, what incentive does that person have to file or cooperate, often at risk to themselves, if their subsequent complaint is barred?

A. Brian Albritton
June 6, 2013

Contract Damages in False Claims Act Cases: the 7th Circuit Adopts a Net Trebling Approach to Calculating Damages

The Seventh Circuit recently adopted a common sense "contract damages" approach in assessing damages in False Claims Act cases: United States v. Anchor Mortgage Corporation, 2013 WL 1150213 (7th Cir. March 21, 2013). Essentially, the Court counseled that in awarding damages in a False Claims Act case, the "net damages," or damages from which the value of any collateral or mitigation are subtracted, should first be calculated before the damages are trebled as provided for by the False Claims Act.

In Anchor, the District Court found the defendants, a corporation and its CEO, liable under the False Claims Act for lying in connection with applying for federal loan guarantees. Pursuant to 31 U.S.C. 3729(a)(1), the Court imposed treble damages in the total amount of $2.7 million. Using one loan guarantee as an example, the District Court began with the amount paid to the lender under the guarantee, $131,643.05, trebled it for a total of $394,929.15, and only then subtracted from that amount the value of the mortgaged security for the failed loan,$68,000, for a final trebled damage figure of $326,729.15, to which the Court added the $5,500 statutory penalty. The Court followed this same method for each of the 11 loan guarantees at issue.

The Seventh Circuit characterized this method as a "gross trebling approach" and it contrasted this method of calculating damages with what it called a "net trebling approach." In a net damage calculation, the value of the security is subtracted from the loss before it is trebled. Applied to the guarantee above, the net trebling approach would subtract the value of the security, $68,000, from the amount of the overall loss, $131,643.05, and then treble that net amount, to reach a total of $190,329.15 to which the $5,500 penalty would then be added.

The Seventh Circuit observed that while the "False Claims Act does not specify either a gross or a net trebling approach," the FCA also does not "signal a departure from the norm [for damages] -- and the norm is net trebling." Adopting the method used for calculating breach of contract damages, the Court stated: "Basing damages on net loss is the norm in civil litigation. If goods delivered under a contract are not as promised, damages are the difference between the contract price and the value of what arrives. If the buyer has no use for them, they must be sold in the market in order to establish that value. If instead the seller fails to deliver, the buyer must cover in the market; damages are the difference between the contract price and the price of cover. If a football team fires its coach before the contract's term ends, damages are the difference between the promised salary and what the coach makes in some other job (or what the coach could have made, had he sought suitable work). Mitigation of damages is universal."

The Court acknowledged that the Supreme Court's decision in United States v. Bornstein, 423 U.S. 303 (1976) is generally cited for adopting a gross trebling approach in False Claims Acts cases. The Seventh Circuit, however, cited Footnote 13 in Bornstein where the Supreme Court appeared to adopt the "contract measure of loss" which supports a net trebling approach.

In reversing the District Court's damage calculation, the Seventh Circuit instructed the District Court to adopt a net trebling approach, and then explained further that the "United States' loss is the amount paid on the guaranty less the value of the collateral, whether or not the agent has chosen to retain the collateral. The damages should not be manipulated through the agency's choice about when (or if) to sell the property it receives in exchange for its payments."

Overall, the Seventh Circuit has adopted a sensible approach to damages, sorely needed in False Claims Act cases. The Court essentially refused to deviate from the common law approach to damages when the False Claim Act's statutory language did not specify or require a gross trebling method for calculating damages.

A. Brian Albritton
April 1, 2013

Eighth Circuit Finds that Relators Are Entitled to Share of FCA Settlement Obtained by Government Because Their Suit Resulted in Defendant Making a Voluntary Disclosure on a Different Claim

In a rather remarkable case, the Eighth Circuit Court of Appeals in a split decision affirmed an estimated $6.9 million qui tam award to two relators who, the Government argued, did not actually allege a claim against the defendant, Hewlett-Packard Company (HP): US ex rel Roberts et al. v. Accenture, LLP, et al, 2013 WL 764734 (March 1, 2013, 8th Cir.) In that case, HP had conducted its own internal audit and voluntarily disclosed to the Government that it discovered "defective pricing" in one of its government contracts that was not identified in the relators' complaint. Nevertheless, the Court found that the relators were entitled to a "finder's fee" award because HP began its internal audit of its "pricing practices" after responding to subpoenas from the Government that were drafted by the relators. In making its ruling, the Court rejected the Government's argument that relators were not entitled to recover any portion of the settlement with HP relating to HP's voluntary disclosure since the relators' Complaint did not plead or identify the HP "defective pricing" scheme with particularity sufficient to satisfy Rule 9(b).

According to the relators' Complaint, Accenture was a "systems integration consultant" (SIC) that recommended computer systems and other related products to the federal government: sometimes it resold computer products from the manufacturer to the government and other times, it recommended products to the government and the computer manufacturer would sell the products directly. The relators alleged that Accenture was receiving kickbacks from HP and other computer vendors whose equipment Accenture either sold or recommended to the government. The relators charged in their complaint that HP and others defrauded the government out of "hundreds of millions of dollars" by exchanging kickbacks to consultants for government referrals. Additionally, the relators claimed that "Defendants failed to provide to the General Services Administration (GSA) and other governmental agencies current, accurate, and complete disclosure of their best pricing . . . thereby causing the defective GSA and other governmental pricing schedules."

The Court related in its opinion that the relators worked closely with the government, including drafting administrative subpoenas to issue from the GSA-Office of Inspector General to all potential defendants, including HP in 2006. In August 2008, HP informed the government of the results of an independent audit and admitted that it had not complied with the "price reductions clause in one particular government contract, GS-35F-066N." Subsequently, the government conducted its own audit and "determined that HP had not fully informed GSA of prices it had given to non-government end users, resulting in a 'defectively priced' GSA contract."

The Government intervened in the relators' action, and entered into a $55 million settlement agreement with HP: $9 million on the relators' kickback claims and $46 million for the defective pricing claim, which the government "attributed to HP's voluntary disclosure and the government's own audit" rather than to the relators. The Government objected to the relators recovering anything from the $46 million on the grounds that the "relators' allegations of defective pricing failed to satisfy the requirements for pleading fraud under Rule 9(b)" and that "the discovery of defective contract 35F resulted from HP's voluntary disclosure . . . and was wholly unrelated to the relators' action."

The Court rejected the Government's Rule 9(b) argument and noted that "HP began its internal investigation just a few weeks after the seal was lifted [on the relators' complaint and] a copy of the relators' complaint was provided to HP." The Eighth Circuit affirmed the 15% "finder's fee" of the $46 million settlement for the relators in part because HP began "the internal audit of its pricing practices only after becoming aware of the allegations in the relators' complaint, and only after responding to the extensive subpoenas drafted by the relators at the government's request." The Court observed further: "Thus, the government's claim that HP's disclosure of its defective pricing on Contract 35F was purely 'voluntary,' and that the relators' pending action and assistance in prosecuting the action played no role in uncovering the defective pricing scheme, is disingenuous."

Additionally, following the D.C. Circuit in U.S. ex rel. Batiste v. SLM Corp.,659 F.3d 1204, 1210 (D.C. Cir. 2011), the Eighth Circuit stated: "We reject the contention that Rule 9(b) plays a part in determining whether a relator is entitled to share in the settlement proceeds resulting from a qui tam action in which the government elects to intervene. Rule 9(b)'s standards are meant to test the sufficiency of a complaint at its outset. If a defendant challenges the sufficiency of a complaint's allegations at the outset of a case, a plaintiff still has the opportunity to cure the deficiency.  . . . . . at least with respect to those qui tam actions in which the government elects to intervene, a relators' initial allegations need not satisfy Rule 9(b)'s heightened pleading requirements in order to accomplish the purpose they were meant to serve, which is to provide the government sufficient information to launch an investigation of a fraudulent scheme." (internal citations omitted).

In a lengthy dissent, Judge Colloton essentially found that the proceeds of the HP's voluntary disclosure were simply not part of any claim brought by the relators and that the "better view . . . is that the relator may recover only from the proceeds of the settlement of the claim that he brought." According to the dissent, the District Court found that the relators were entitled to a recovery from HP not because they had brought such a claim against HP but "because the relators caused HP to disclose additional information that led the government to achieve the settlement of a different claim." "Whatever the merit of this theory as a policy matter," observed the dissent, "it is not derived from the statute . . . [that] allows relators to recover a percentage of the proceeds of the settlement of the claim brought by the relators, and only that claim." Stated simply, the dissent found it was not enough for the relators' suit to simply serve as a "catalyst" that led eventually to a settlement. To share in that settlement, the relators need to have brought or pled the claim that the Government settled.

Overall, US ex rel Roberts seems to be saying that "but for" the relators' complaint, there would have been no recovery, and since there was a recovery, relators are entitled to share in it, even if they did not actually state a legal claim that would have brought about such a recovery. Moreover, this case further tilts the circuit split in favor of United States ex rel. Batiste v. SLM Corp., and against, Walburn v. Lockheed Martin Corp., 431 F.3d 966, 971 (6th Cir. 2005) which held that “[o]nly a complaint that complies with Rule 9(b) can have preemptive effect under [31 U.S.C]. § 3730(b)(5).”

A. Brian Albritton
March 11, 2013

False Claims Act Complaint Against Armstrong Unsealed

Kudos to the Pietragallo firm blog that first posted the Landis qui tam/False Claims Act Complaint against Lance Armstrong:  US ex rel Floyd Landis v. Tailwind Sports Corporation, et al, Case 1:0-cv-976 (D. D.C.).  Here is the complaint.  The complaint does not reflect that the U.S. Department of Justice has intervened.    Along with Lance Armstrong, the complaint lists 8 other defendants, including unidentified defendants, "Does 1 -50."

A. Brian Albritton
January 18, 2013

Using the False Claims Act to Enforce Antidiscrimination Laws Against Local Governments

Relator counsel are continuing to find creative applications for the False Claims Act and to expand its reach. A recent Note by University of Texas law student Ralph C. Mayrell, Blowing the Whistle on Civil Rights: Analysing the False Claims Act as an Alternative Enforcement Method for Civil Rights Laws, 91 Tex. L. Rev. 449 (2012), advocates the use of the False Claims Act (FCA) to enhance the enforcement of antidiscrimination laws against local governments. In this thoughtful Note, the author asserts that the "FCA provides civil rights litigators with another avenue for enforcing antidiscrimination laws," and he sets out to "explain the legal theory through which civil rights litigators can effectively litigate claims against local government discriminators using the FCA." The author explains that civil rights laws frequently limit damages from local governments and require that a litigant be injured by a discriminatory practice in order to obtain standing. The FCA, he notes, is not hampered by such limitations.

It should come as no surprise that the article advocates basing FCA liability against local governments on the certifications of compliance with antidiscrimination laws that are commonly found in federal grants to local governments. As a concrete example, the Note focuses on "Community Oriented Policing Services" (COPS) grants that are given by the U.S. Department of Justice to local governments for the hiring of police officers and the creation of crime prevention programs. As is common with most federal grants, the COPS grants require that the grantee will not deny benefits or employment or discriminate against any person based on "race, color, religion, national original, gender, disability, or age" and make compliance with this condition a basis for termination of the grant or suspending funding. The grantee's failure to adhere to these conditions serves as the basis for the false claim, i.e., the relator alleges that the grantee defrauded the federal government of grant funds when it falsely certified that it was in compliance with the grant's antidiscrimination provision. 

The Note observes that in a "few limited situations, litigators have attempted to use the FCA, with varying degress of success" to enforce civil rights and antidiscrimination laws. The largest settlement to date appears to be a $52 million Fair Housing Act case against a local municipality, but that appears to be the high point thus far in these cases. Still, the author argues that "FCA liability based on violations of antidiscrimination laws gives another tool to litigators both for individually injured plaintiffs as well as groups interested in institutional-change litigation."

Overall, the Note rightfully points out that the FCA may be employed in the fight against discrimination by local governments. At the same time, it also illustates the common complaint by the defense bar that the FCA is becoming an heavy handed enforcement mechanism for compelling compliance with governmental regulations.

A. Brian Albritton
January 3, 2013

DOJ Announces Nearly $5 Billion in False Claims Act Recoveries for FY 2012

The U.S. Department of Justice announced yesterday that it had secured $4.9 billion in settlements and judgments in civil cases involving fraud against the federal government for fiscal year 2012. Highlights of DOJ's announcement include:

• $4.9 billion for 2012 is a "record recovery" for a single year, eclipsing the previous record by more than $1.7 billion.
• Total recoveries under the False Claims Act since January 2009, when President Obama took office, is $13.3 billion.
• 647 qui tam actions were filed in 2012.
• Of the $4.9 billion in recoveries, $3.3 billion resulted from suits filed by qui tam relators.
• Of the $4.9 billion, health care fraud recoveries accounted for more than $3 billion and housing and mortgage fraud recoveries accounted for $1.4 billion.
• Enforcement actions against the pharmaceutical and medical device industry were the source of the largest recoveries, such as the $1.5 billion paid by GlaxoSmithKline and $441 million paid by Merck.
• The mortgage fraud recoveries included a $900 million settlement with five mortgage companies to address mortgage loan servicing and foreclosure abuses.
• Procurement fraud recoveries totaled $427 million, bringing the total of procurement fraud recoveries to $1.7 billion since January 2009.
• Nearly 8,500 qui tam suits have been filed since 1986; 2,200 were filed since January 2009.

As Acting Associate Attorney General Tony West stated in announcing these False Claims Act recoveries, the "recovery of taxpayer dollars" is "a high enforcement priority" that has been brought about in part by the "aggressive use of [the False Claims Act]. . . . . The False Claims Act is, quite simply, the most powerful tool that we have to deter and redress fraud." The statements made by Associate Attorney General West and Principal Deputy Assistant Attorney General Delery in announcing these recoveries can be found here and here.

A. Brian Albritton
December 5, 2012

Government May Not Issue Civil Investigative Demand After Underlying False Claims Act Case Dismissed With Leave to Amend

Ben Vernia at False Claims Counsel blog has highlighted a recent False Claims Act case involving a matter of first impression: whether a District Court may quash a Government’s Civil Investigative Demand (CID) that was issued after the underlying case was dismissed without prejudice. United States v. Kernan Hospital, 2012 WL 5879133 (November 20, 2012, D. Md).   

“[B]efore commencing a civil proceeding” pursuant to the False Claims Act, section 3733 of the False Claims Act (31 U.S.C. 3733(a)(1)) permits the Attorney General or his designee to issue a CID to a person and/or entity “who may be in possession of information relevant to a false claims investigation.” The CID may compel the recipient to “produce information that is in the form of documents, answers to interrogatories, or oral testimony.” The question before the Kernan Hospital Court was whether the Court's previous dismissal of a False Claims Act case, though without prejudice to the Government to file an amended complaint, puts the Government “in the same position as though [a] suit had not been filed” -- as if it had not commenced a civil proceeding. 

For three years prior to filing suit, the Government investigated Kernan Hospital for allegedly violating the False Claim Act as well as committing other common law torts. As part of its investigation, the Government obtained thousands of pages of documents from Kernan pursuant to a subpoena issued by the Office of Inspector General and, pursuant to a CID, testimony from Kernan Hospital’s Director of Health Information Management. After filing suit, Kernan Hospital moved to dismiss due to the Government’s failure to plead fraud with particularity pursuant to Fed. R. Civ. P. 9(b) and the Court agreed, dismissing the case, though with leave for the Government to amend to restate its claims. After its suit was dismissed, the Government issued another CID requesting additional documents from Kernan.

The Court found that section 3733 did not permit the Government to serve a CID after the False Claims Act case has been filed, even though it was later dismissed with leave to amend. The Court observed that “the civil investigative demand is a prefiling investigative tool that Congress created to aid the Government in deciding whether to file suit in the first place.”  Additionally, the Court rejected the Government’s argument that quashing its most recent CID “would prevent it from obtaining the information it needs to cure pleading deficiencies.” Essentially, the Court found that the Government had a complete and thorough opportunity to investigate the case before it filed suit, and that the Government had taken “full advantage” of its powers to investigate pre-suit. Hence, while the Government may amend its complaint, the Court noted that “this opportunity does not grant the Government the right to rehash the prefiling investigation that it conducted for over three years.”

 

A. Brian Albritton 

November 26, 2012

Wells Fargo Seeks to Enforce Forclosure Settlement and Stop Government False Claims Act Suit

In October of this year, the U.S. Attorney for the Southern District of New York (SDNY) sued Wells Fargo Bank, N.A. pursuant to the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). In the suit, the government alleged that for 10 years while participating in the Federal Housing Administration (“FHA”) Direct Endorsement Lender Program, Wells Fargo falsely certified thousands of loans to be eligible for FHA insurance and that as a result of Wells Fargo’s false certifications, “FHA has paid hundreds of millions of dollars in insurance claims on thousands of mortgages that defaulted.” Specifically, the suit alleges that “between May 2001 and October 2005 . . . . . although Wells Fargo certified to Housing and Urban Development (HUD) that its retail FHA loans met HUD’s requirements for proper origination and underwriting, and were therefore eligible for FHA insurance, the bank knew that a very substantial percentage of those loans – nearly half in certain months – had not been properly underwritten, contained unacceptable risk, did not meet HUD’s requirements, and were ineligible for FHA insurance.  . . . . . The extremely poor quality of Wells Fargo loans was a function of management’s nearly singular focus on increasing the volume of FHA originations – and the bank’s profits – rather than on the quality of the loans being originated." According to the Complaint, the bank further compounded its misconduct by failing to comply with HUD self reporting requirements and reporting only 300 of the 6,558 “seriously deficient loans that it was required to report.” The case is U.S. v. Wells Fargo Bank N.A.,12-cv-7527, U.S. District Court, Southern District of New York, and a copy of the complaint is found here.

In an interesting twist just last week, Wells Fargo sought to forestall the SDNY’s False Claims Act case by filing a Motion to Enforce Consent Judgment in a case previously brought by the Department of Justice and 49 attorneys general against Wells Fargo and other banks alleging abusive foreclosure practices. That case was settled in April of this year, and Wells Fargo reported that it “committed over $5 billion and, in exchange, obtained a broad written release which the court entered as part of its Consent Judgment. According to Wells Fargo, the release provided, among other things, that the government “cannot bring a claim against Wells Fargo based on conduct covered by Wells Fargo’s annual certifications to HUD regarding its FHA program participation, such as conduct related to Wells Fargo’s quality control (including self-reporting), underwriting, and due diligence programs,” which would include the conduct at issue in the New York case. The Motion argues that the government violated the terms of its settlement by filing the False Claims Act suit against it. Wells Fargo filed its Motion in U.S. v. Bank of America Corp., et al., 12- cv-00361 (U.S. District Court, District of Columbia). A copy of the motion and memorandum authored in part by Douglas Baruch of Fried, Frank are found here and here.

 

A. Brian Albritton

November 13, 2012

Relators Pursue False Claims Act Defendant Into Bankruptcy

The Wichita Business Journal and the blog from Greene LLP have both highlighted an adversary case recently brought in U.S. Bankruptcy Court in the Southern District of New York (Case no. 12-11873-smb) by two relators against Hawker Beechcraft Corporation. The relators had brought a False Claims Act qui tam in U.S. District Court in Kansas (Case no. 07-1212-MLB) against Hawker, its subcontractor, TECT Aerospace, Inc., and other defendants that had  been pending for five years at the time Hawker sought bankruptcy protection. The suit arose from a government defense contract with Hawker to produce parts for military training aircraft. The suit alleges, according to the Greene blog, that "TECT used unapproved production processes that rendered the parts brittle and susceptible to corrosion . . . . .[and] that Hawker Beechcraft knew about these defects and yet failed to notify the government of the problems, inducing the government to accept defective merchandise. . . . .  [T]he relators have consequently claimed damages of more than $763 million in the case."  Hawker has sought to discharge its False Claims Act liability in bankruptcy. The relators, however, have filed an adversary proceeding alleging that Hawker's False Claims Act liability is not dischargeable in bankruptcy since the claims allegedly arose as a result of Hawker's fraudulent conduct and because the claim is owed to a "domestic governmental unit", both of which are exceptions to discharge in bankruptcy. The relators' adversary complaint can be found here.


A. Brian Albritton
October 22, 2012

United States ex rel Williams v. Renal Care Group: 6th Circuit Refuses to Impose FCA Liability on Company that Took Lawful Advantage of Medicare Loopholes

In a startling reversal of a summary judgment entered in favor of the government in a False Claims Act (FCA) case, the 6th Circuit recently rejected attempts by the government to establish FCA liability simply because a company, Renal Care Group, Inc. (“RCG”), a dialysis provider, had “created a wholly-owned subsidiary to take advantage of loopholes in the Medicare regulatory scheme that would permit it to increase profits.” United States ex rel Williams v. Renal CareGroup, 2012 WL 4748104 (6th Cir.) In the absence of regulations and statutes clearly prohibiting such an arrangement, the Court found that RCG had not acted with reckless disregard of the truth or falsity of the claims submitted by its subsidiary to Medicare because RCG had taken several steps to try to determine whether its subsidiary relationship violated applicable statutes and had not made a secret of its corporate arrangement.  

RCG was a dialysis provider that provided dialysis services at more than 260 facilities and in addition provided “dialysis supplies and services to home dialysis patients.” RCG created a subsidiary, RCGSC, that only provided dialysis equipment, but not services, to home dialysis patients. Medicare reimbursed dialysis providers according to two different methods: Method I applied to dialysis providers who operated dialysis facilities and who also provided home dialysis and services. Method II applied to providers who provided equipment and supplies to home dialysis patients but who did not provide dialysis services. Medicare reimbursed Method II providers at a higher rate than those of Method I, and further provided that “Method II payments may only go to an entity that is not a ‘provider of services [or] a renal dialysis facility . . . '”

RCG created RCGSC for the purpose of obtaining the higher Method II Medicare reimbursements. Moreover, RCG controlled RCGSC’s operations. The two companies shared RCG’s employees, officers, and directors, all of whom "held key roles in RCGSC’s corporate structure” as well as shared “office space, payroll, insurance benefits, contracts, and human resource services.”

The government alleged that RCG and RCGSC violated the False Claims Act by submitting false claims “while knowing that RCGSC was a sham corporation created for the sole purpose of increasing Medicare reimbursements” and “while knowing that RCGSC was not in compliance with Medicare rules and regulations.” The government moved for partial summary judgment on the issues of falsity and materiality, which the Court granted. The Court went a step further, however, and later found that the defendants had acted with the requisite knowledge to violate the False Claims Act as well, and it entered judgment against the defendants in the amount of $82,000,000.

The 6th Circuit reversed the judgment on all counts and instead entered summary judgment for the defendants on the two False Claims Act counts. First, the Court rejected the government’s argument that the RCG’s subsidiary was an alter-ego of RCG, observing that “[t]he corporate form need not be disregarded when its adoption was meant to 'secure its advantages and where no violence to the legislative purpose is done by treating the corporate entity as a separate legal person.'” (citation omitted). RCG, the Court went on, had not acted with an unlawful purpose simply because it sought to “maximize profits,” saying “[w]hy a business ought to be punished solely for seeking to maximize profits escapes us.” Analyzing the statutory and regulatory basis underlying the differences in reimbursement, the Court concluded “[a]ll of this points to the conclusion that the structure of RCG and RCGSC is not obviously inconsistent with Congress's goals for the payment scheme.”

Recents Blog Posts and Articles of Interests

I have recently come across of a number of blog posts and articles which I commend to you:

• Seventh Circuit Rejects Constructive Knowing As Basis for Retaliation Claim

Scott Stein at Sidley Austin's Original Source blog writes about the case Halasa v. ITT Educational Services, Inc., 8/14/12, wherein the Seventh Circuit recently dismissed a False Claims Act retaliation claim and rejected the plaintiff's claim that "constructive knowledge" on the part of those who discharged him was sufficient to prove retaliation. The Court found that without actual knowledge of plaintiff's protected activities, plaintiff had not established a "causal link" between the plaintiff's reports of irregularities and his termination. 

• DOJ Brings Suit Against Gallup Organization

 Under the column of interesting qui tams, the Department of Justice recently announced it had intervened in a qui tam suit filed against none other than the polling organization, Gallup.  "According to the whistleblower’s complaint, Gallup violated the False Claims Act by giving the government inflated estimates of the number of hours that it would take to perform its services, even though it had separate and lower internal estimates of the number of hours that would be required.   The complaint further alleges that the government paid Gallup based on the inflated estimates, rather than Gallup’s lower internal estimates."

• Qui Tam Relator Not Original Source; U.S. ex rel. Repko v. Guthrie Clinic

Ellyn Sternfield at MintzLevin's Health Law & Policy Matters blog writes about the Repko case, wherein the Third Circuit dismissed the qui tam brought against Guthrie Healthcare System by its former general counsel and executive VP, Rodney Repko, on the grounds that Repko was not an original source such that he could avoid the public disclosure bar of the False Claims Act.  Repko had been charged with trying to steal two million dollars from Guthrie after he left the company and had pled guilty.  As part of his plea agreement, he was required to provide the government with "information concerning the unlawful activities of others."  As the article points out, the Third Circuit "was persuaded by the fact Repko had initially disclosed the challenged arrangements to the government under his plea agreement; the disclosure was bargained-for consideration which enabled Repko to obtain a lower sentence on his bank fraud charges.  While never mentioning the word 'voluntarily,' the court found that since the plea agreement compelled his disclosures to the government, Repko was essentially estopped from invoking the original source exception."

•  District Court Rules That Wartime Suspension of Limitations Act Suspends False Claims Act's Six-Year Statute of Limitations

Douglas Baruch and John Boese of Fried Frank recently wrote a "FraudMail Alert®" on the case of United States v. BNP Paribas SA, No. H-11-3718, 2012 WL 3234233 (S.D. Tex. Aug. 6, 2012), wherein a federal court in Texas applied the Wartime Suspension of Limitations Act, 18 U.S.C. § 3287 (2008) (“WSLA”) and held that the statute of limitations in a False Claims Act case had been suspended  due to the Iraq and Afghanistan conflicts. In addition, Baruch and Boese write "the district court’s ruling makes clear that the WSLA’s suspension is not limited to FCA cases arising out of wartime contracting or even Defense Department contracting in general, meaning that the FCA’s statute of limitations would be rendered ineffective in all sorts of cases, including those involving allegations arising out of the financial and healthcare industries."  Finding the case to run "counter to the plain meaning of the WSLA as well as the clear intent of Congress," they analyze the case in detail and declare it to be just plain "wrong."

A. Brian Albritton
August 30, 2012









 

Can Government Employees Be Relators? The 5th Circuit says, Yes.

In a case of first impression for the circuit, the 5th Circuit Court of Appeals recently held that government employees who learn of alleged violations of the False Claims Act within the scope of their employment may nevertheless file a qui tam and are not precluded from acting as relators even though their job as a government employee was "to investigate a fraud." Randall Little  and Joel Arnold on behalf of the United States v. Shell Exploration and Production Co., et al., Case no. 11-20320, (5th Cir. July 31, 2012).

In this case, the relators were auditors with the Minerals Management Service ("MMS"), an agency of the Department of Interior, and part of the mission of their agency was "to uncover theft and fraud in the royalty programs" for offshore drilling.  The relators alleged that Shell failed to pay the United States $19 million in royalties due it from Shell's offshore drilling. The Court noted that it was "undisputed that the Shell allegations came to light during the course" of the relators' "official duties" and that reporting their findings was "a job requirement."  The relators reported their requirements and then subsequently filed two different qui tams.  The government did not intervene.

Overturning the District Court's grant of summary judgment, the 5th Circuit found that government employees, such as the relators, qualified as "persons" under the False Claims Act. 31 U.S.C. 3730(b)(1)("A person may bring a civil action for a violation of section 3729 . . . ").  In making its decision, the Court declined a number of policy and statutory construction arguments offered by the government in an amicus and the defendant as to why government employees cannot be relators, including arguments based on the text of the statute; the "absurdity" of having government employees as relators, and that government employees serving as relators would violate "ethics guidelines" applicable to government employees.  The Court also noted that the 10th and 11th Circuits also permit government employees to be relators.  U.S. ex rel Williams v. NEC Corp., 931 F.2d 1493, 1501-02 (11th Cir. 1991) and U.S. ex rel Holmes v. Consumer Ins. Grp., 318 F.3d 1199, 1208-12 (10th Cir. 2003); but see U.S. ex rel. LeBlanc v. Raytheon Co., 913 F.2d 17, 19-20 (1st Cir. 1990)(some federal employees may not be qui tam claimants.)

Additionally, the Court remanded the case for the District Court to properly apply the 2006 version of the "public disclosure bar," 31 U.S.C. 3730(e)(4), which has been subsequently amended, as defendants  had alleged that the "scheme" alleged by the relators had been the source of several public disclosures.  The Court did note, however, that if public disclosure had occurred, the relators cannot be an "original source" and the action must be dismissed.  To be an original source, a relator must have "direct and independent knowledge" of the allegations of his or her complaint and must have "voluntarily provided the information to the government." 31 U.S.C. 3730(e)(4).  Following other courts, the 5th Circuit held that a relator who was "employed specifically to disclose fraud is sufficient to render his disclosures nonvoluntary."

Overall, this opinion is somewhat of a monument to plain language statutory interpretation.  The Court appears to acknowledge that having government employees as relators may be problematic ("we are are of the dilemmas identified").  But, it refuses all invitations on the basis of policy to create an exception to what it characterizes as clear statutory language.

A. Brian Albritton
August 2, 2012

Are State Organized Corporations Subject to the False Claims Act?

The U.S. Court of Appeals for the Fourth Circuit recently addressed the question of what legal test should be applied to determine whether and when state organized corporations are in fact "state agencies" and thus not subject to suit under the False Claims Act. See US ex rel Oberg v. Kentucky Higher Education Student Loan Corporation et al, No. 10-2320, June 18, 2012.  In Oberg, the relator brought suit against against four state created corporations (the Kentucky Higher Education Student Loan Corp., Pennsylvania Higher Education Assistance Agency, Vermont Student Assistance Corp., and Arkansas Student Loan Authority) alleging that these entities made fraudulent claims to the U.S. Department of Education ("DOE") "by engaging in various non-economic transactions" in order "to inflate their loan portfolios" and make these entities "eligible for federal student loan interest subsidies."  The relator claimed that the DOE had overpaid "millions" to these entities.

The state created corporations moved to dismiss the FCA claims against them on the grounds that they were "state agencies" and thus not "persons" subject to FCA claims.  The FCA provides an action against "any person" who "undertakes certain fraudulent behavior, including 'knowingly present[ing], or caus[ing] to be presented, a false or fraudulent claim for payment or approval' to an officer, employee, or agent of the United States." 31 U.S.C.  sec. 3729(a)(1)(A).  In Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 780, 787-88 (2000), the Supreme Court held that the FCA "does not subject a State (or state agency) to liability" due to the "longstanding interpretive presumption that 'person' does not include the sovereign." Corporations, the Court observed, are "presumptively covered by the term 'person," id. at 782, and in Cook County v. U.S. ex rel Chandler, 538 U.S. 119, 125 (2003), the Court went further and found that municipal corporations are also persons subject to qui tam suits under the FCA.  The District Court in Oberg dismissed the case, finding that the state created corporations were state agencies. In so doing, the Fourth Circuit observed, it "did not apply any stated legal test" and instead "looked to state statutory provisions" to determine "each entity's status as a 'state agency.'"

The Fourth Circuit reversed the District Court's dismissal, and remanded the matter, saying "the critical inquiry is whether appellees are truly subject to sufficient state control to render them a part of the state, and not a "person," for FCA purposes."  To determine whether an agency is part of the state, the Court employed what it called the "arm-of-the-state-analysis used in the Eleventh Amendment context" and analyzed four "non-exclusive factors:"  (i) whether the state would pay any judgment rendered against the agency; (ii) the degree of autonomy exercised by the entity, including whether the state can veto the entity's actions; (iii) whether the entity is "involved with" state concerns as opposed to non-state or local issues; and (iv) and how the entity is treated under state law.  Applying these factors, the Court explained, should assist in determining whether the state-created entity functions independently of the state or functions as an arm or alter-ego of the state.

Overall, the decision is short and straightforward.  The Fourth Circuit does not claim to be breaking new ground in applying this test to FCA claims and state organized corporations, as it cites the 9th, 10th, and 5th Circuits for support.

A. Brian Albritton
July 26, 2012

Recent False Claims Act Articles That Are Worth A Read

This week I came across two articles on the web concerning the False Claims Act which I commend to readers.

First, I recommend the "2012 Mid-Year False Claims Act Update" recently published by Gibson Dunn as it provides a good, succinct summary of False Claims Act highlights thus far in 2012.  The Update addresses such topics as (i) legislative action, both federal and state, and discusses several states that recently amended their statutes as well as numerous other proposed state bills; (ii) surveys recent significant False Claims Act settlements in health care, mortgage and financial services, and procurement and defense industries; and (iii) case law developments and trends, discussing many of the cases highlighted in the blog such as Davis and Schweizer along with recent cases addressing the False Claims Ac "first to file" bar and "public disclosure" bar.

Second, I commend to you the article,"False Claims Act Investigations:  Time for a New Approach?" published in October 2011 by John Bentivoglio, Jennifer Bragg, Michael Loucks, and Gregory Luce, all partners at Skadden Arps.  The article observes that companies subject to False Claims Act investigations are hampered in their ability to defend themselves since most such investigations are conducted under seal, and the government is able to investigate and use its limited resources at a timetable that suits it.   While a qui tam is under seal, the article point out "the government and the whistle-blower have an advantage" because "a company does not know the precise nature of the allegations pending against it and does not have the power of discovery and the right to defend that it is afforded by the federal court system once the suit has been disclosed and the litigation engaged."  During this time, the article argues, government and the whistleblower can use the all-to-common extended seal period to keep the defendant in the dark as to precise nature of the allegations against it and to gather the evidence they need. 

Given the advantages to the government and whistleblower of an extended seal period, the article asserts that "companies presently faced with a pending false claims investigation might consider whether a more aggressive strategy of forcing the government’s disclosure of the litigation (the unsealing of the complaint and other documents in the file) will better inform the company’s ability to defend itself: to engage in the process of discovery permitted by the Federal Rules of Civil Procedure."  In turn, the article contends that several cases and legislative history permit defendants to challenge the government's justification for keeping  a qui tam matter sealed.

Companies faced with False Claims Act investigations have a hard choice, and most prefer, as the article acknowledges, to settle or where possible, to dispose of the matter while under seal, thereby controlling the effects of bad press as well as other collateral damage.  At the same time, I think that every False Claims Act defense counsel has experienced the frustration of trying to defend a qui tam that is under seal because they are in the dark as to the allegations against the client and the government refuses to disclose the substance of the alleged fraud it is investigating.  From the vantage of the defendant, the government appears to employ a lengthy seal period to build a case at its leisure and to avoid having to actually litigate the matter.  I would certainly be interested in hearing of any instances where defendants sought to unseal a matter on behalf of their client in order to force the matter into civil litigation as the article suggests.

A. Brian Albritton
July 18, 2012

GlaxoSmithKline to Pay Largest Health Care Fraud Settlement in US History

In the largest health care fraud settlement in U.S. history, the U.S. Department of Justice announced today that "global health care giant" GlaxoSmithKline LLC ("GSK") agreed to plead guilty and to pay $3 billion to resolve "its criminal and civil liability arising from the company’s unlawful promotion of certain prescription drugs, its failure to report certain safety data, and its civil liability for alleged false price reporting practices."

Deputy Attorney General James Cole described the plea and settlement with GSK as follows:  "GSK will plead guilty to criminal charges and pay $1 billion in criminal fines and forfeitures for illegally marketing and promoting the drugs Paxil and Wellbutrin for uses not approved by the FDA – including the treatment of children for depression, and the treatment of other patients for ailments ranging from obesity, to anxiety, to addiction and ADHD – and for failing to report important clinical data about the drug Avandia to the Food and Drug Administration.  GSK will pay an additional $2 billion to resolve civil allegations that it caused false claims to be submitted to federal health care programs for these and other drugs as a result of the company’s illegal promotional practices and payments to physicians.  This settlement also resolves a civil investigation of the company’s alleged underpayment of rebates that were required under the Medicaid Drug Rebate Program."

As with previous criminal and False Claim Act settlements with Big Pharma discussed in the blog, GSK's conduct as detailed in the plea and the allegations of the False Claim Act complaint is disturbing and reprehensible.  For example, the factual allegations of the Information detail GSK's marketing of the prescription drug Paxil for use in treating depression in children and adolescents even though the drug had not been found to have any efficacy for such a population. 

Paxil had been approved by the FDA for the treatment of depression in adults, and it was one of the top 10 selling drugs in the U.S., with sales surpassing $1.8 billion a year in 2001-2002.  Paxil, however, was never approved by the FDA "for any purpose" in the treatment of children and adolescents.  In fact, GSK conducted three placebo-controlled studies in the safety and efficacy of using Paxil to treat depression in children and adolescents, and those studies failed to demonstrate any "efficacy" for the treatment of this population between the "patients in the study who received the drug being studied and patients in the study who received a placebo."  After these studies, a GSK contractor hired to write an article about one of the studies misrepresented the study's findings as being favorable for the treatment of children and adolescents with Paxil, going so far as to say that "the findings of this study provide evidence of the efficacy and safety of [Paxil] in the treatment of adolescent depression."

With the article in hand, GSK then forwarded it to its 1900 sales representatives who sold Paxil with a cover letter stating, "Paxil demonstrates REMARKABLE efficacy and safety in the treatment of adolescent depression." This was just the beginning of GSK's marketing of Paxil.  In addition, the Information reflects that GSK created a "150 person neuroscience specialty sales force to promote Paxil to psychiatrists."  The Company also promoted Paxil's use in adolescents at Paxil "Forum Events," dinner programs, lunch programs, and spa programs. GSK had their sales personnel target those physicians --including physicians who only treated patients under age 18-- who prescribed the most antidepressants and provide free samples of Paxil in the hope that they would shift their patients to using Paxil.

GSK, however, did not inform its sales personnel that the FDA had not approved Paxil for the treatment of children or adolescents, and it continued to conceal that its studies did not support its claims for Paxil's efficacy in this population.  In fact, the FDA later recommended that Paxil "not be used to treat depression in patients under 18" and later recognized that antidepressants, such as Paxil, "increased the risk of suicidal thinking and behavior in . . . patients under age 18." 

Paxil was not the only drug that GSK unlawfully promoted:  it unlawfully promoted Wellbutrin and Avandia as well.  As a result of the criminal plea, GSK will pay fines and forfeiture totaling $1 billion.  The "civil settlements" resolve claims relating to these three drugs and others and will require GSK to pay $2 billion. 

One of the civil settlements reported that relators had filed 4 qui tams against GSK and that the U.S. had intervened in them in 2011.  The settlements explicitly did not address the whether any relator was entitled to any share of the proceeds or whether in fact they had filed valid qui tams.

DOJ has posted the  key documents in the criminal and civil matters, and they can be found here.

A. Brian Albritton
July 2, 2012