Under the “implied certification” theory of liability, a government contractor can violate the False Claims Act (“FCA”) by submitting a mere invoice for payment.  The theory is that the invoice’s submission impliedly certifies compliance with contract conditions.  If a contractor is not complying with material contract requirements and — despite the contractor’s noncompliance — submits an invoice for payment, then the Government or a relator might argue that the contractor has violated the FCA. 

Distinguishing an ordinary breach of contract from a false claim of compliance with contract terms is not easy.  A recent case decided by the United States Court of Appeals for the Fourth Circuit exemplifies this difficult distinction in a way that is very concerning for companies that do business with the Federal Government.  United States v. Triple Canopy, Inc., No. 13-2190, 2015 WL 105374 (4th Cir. Jan. 8, 2015).

In 2009, Triple Canopy was hired by the Government to provide security services for Coalition forces at Al Asad Airbase in Iraq.  The contract required Triple Canopy’s guards to receive initial firearms training and qualify on a U.S. Army qualification course to hit a target from a distance of 25 meters with an accuracy rate of at least 23 rounds out of 40.  To meet this requirement, Triple Canopy hired approximately 332 Ugandan guards to serve at Al Asad under the supervision of 18 Americans.

Although the guards’ personnel files showed qualifying marksmanship scores from a course in Kampala, Uganda, the guards could not demonstrate such proficiency in the field.  Upon arrival in Iraq, Triple Canopy supervisors learned that the guards could neither “zero” their rifles nor satisfy the qualifying score of 23 rounds out of 40.  After a failed training attempt, a Triple Canopy supervisor directed the creation of false scorecards for the guards that were placed in their personnel files.  Additional replacement Ugandan guards, who, similarly, were unable to satisfy the marksmanship requirement, resulted in additional false scorecards.  In May 2010, a Triple Canopy supervisor ordered a medic to prepare false scorecards for 40 Ugandan guards who failed to qualify in marksmanship.  Triple Canopy’s site manager then signed and post-dated the scorecards showing qualifying scores in June 2010.

The Triple Canopy medic, Omar Badr, later filed a qui tam action under the Federal False Claims Act, 31 U.S.C. § 3729, et seq., and the Government intervened in the case, bringing the full resources of the Department of Justice to bear against Triple Canopy.  The Government and Badr alleged violations of the FCA under an “implied certification” theory.  Under this theory, the Government and Badr argued that Triple Canopy violated the FCA by merely submitting a request for payment.  It was irrelevant, in the Government and Badr’s view, that Triple Canopy never explicitly certified compliance with the contract’s marksmanship requirement on its invoices, nor did Triple Canopy ever make any certification of any kind on the Government’s Material Inspection and Receiving Report (form DD-250).

Triple Canopy prevailed at the district court.  In regards to the Government’s claim, Triple Canopy convinced the court (1) that it never submitted a demand for payment containing an objectively false statement and (2) that the Government never reviewed and therefore never relied on the false scorecards.

The Fourth Circuit reversed the district court’s dismissal of the Government’s claim, explaining as follows:

[C]ommon sense strongly suggests that the Government’s decision to pay a contractor for providing base security in an active combat zone would be influenced by knowledge that the guards could not, for lack of a better term, shoot straight. . . . If Triple Canopy believed that the marksmanship requirement was immaterial to the Government’s decision to pay, it was unlikely to orchestrate a scheme to falsify records on multiple occasions.

. . .

Distilled to its essence, the Government’s claim is that Triple Canopy, a security contractor with primary responsibility for ensuring the safety of servicemen and women stationed at an airbase in a combat zone, knowingly employed guards who were unable to use their weapons properly and presented claims to the Government for payment for those unqualified guards.  The Court’s admonition that the FCA reaches “all types of fraud, without qualification” is simply inconsistent with the district court’s view of the FCA that Triple Canopy can avoid liability because nothing on the “face” of the invoice was objectively false.

The Fourth Circuit also reversed the district court as to whether it was relevant that the Government never reviewed Triple Canopy’s false scorecards.  According to the Fourth Circuit, “[t]he district court . . . erred in focusing on the actual effect of the false statement rather than its potential effect.  A false record may, in the appropriate circumstances, have the potential to influence the Government’s payment decision even if the Government ultimately does not review the record.”  Id. at *7.

The Fourth Circuit’s reversal sends Triple Canopy’s case back to the district court for further litigation and strengthens the “implied certification” theory of FCA liability in a way that will embolden relators and the Department of Justice to further pursue FCA claims against government contractors.  Many government contracts attorneys are hopeful, however, that future Courts that face this same question will take a close look at the facts of the alleged conduct of Triple Canopy and properly limit the application of this decision to similar factual circumstances.

In an opinion released May 26, 2015, Kellogg Brown & Roots Services, Inc. v. United States ex rel. Carter, the U.S. Supreme Court unanimously held that whistleblowers cannot extend the statute of limitations for war-related civil false claims under the Wartime Suspension of Limitations Act (“WSLA”), reinstating an already generous statute of limitations period under the civil False Claims Act (“FCA”).  The Court also settled a split between the U.S. Courts of Appeals for the D.C. Circuit and the Fourth Circuit.  For purposes of the FCA’s “first-to-file” bar, the FCA only limits a lawsuit based on the same underlying facts as another case that is actually open and pending when the later lawsuit is filed.  In reaching these holdings, the Court relied heavily on the plain meaning of the statutory language, simultaneously handing a victory to both Defendants (on the statute of limitations issue) and Plaintiffs (on the first-to-file issue).  But, the holding relating to the WSLA may prove to be the greatest legacy from the KBR decision, reigning in aggressive whistleblowers and government lawyers who would try to allege a case of “fraud” decades after the conduct occurred, and long after a Defendant is able to defend itself effectively.

Statute of Limitations and the WSLA

The qui tam complainant, Benjamin Carter, a former contractor in Iraq in early 2005, alleged that Kellogg Brown & Root Services, Inc. (“KBR”) and Halliburton Company fraudulently billed the Government for unperformed or improper water purification services.  While the relator first filed his qui tam action in 2006, his fourth and final complaint was filed in 2011.  Notably, the FCA provides a six-year limitations period, with a ten-year maximum.  31 U.S.C. § 7371(b).

The WSLA, 18 U.S.C. § 3287, was originally enacted during the First and Second World Wars to extend the statute of limitations for war-related criminal fraud that the Government was unable to prosecute because of the war-time conditions.  The current version of the WSLA suspends the statute of limitations for “any offense against the laws of the United States.”  Concluding that this does not suspend the statute of limitations forcivil fraud claims, the Court noted that the term “offense” commonly refers to crimes.  Given this plain meaning, the Court concluded that the WSLA does not suspend indefinitely the statute of limitations under the civil FCA, reversing (in part) the Fourth Circuit.

First-To-File and What it Means to Be “Pending”

The Supreme Court also interpreted the FCA’s first-to-file bar, which limits a person’s ability to “bring a related action based on the facts underlying [a] pending action.” 31 U.S.C. § 3730(b)(5).  Applying the ordinary meaning of the term “pending,” the Supreme Court agreed with the Fourth Circuit that the first-to-file bar applies only to cases presently open and awaiting decision.  The Court held that “pending” does not have the “peculiar” use posited by the contractors – “a short-hand for the first filed action” – a result that might allow the first-to-file bar to operate in perpetuity.  Rather, the first-to-file bar does not create a permanent prohibition on any subsequent related action because an action is no longer “pending” upon dismissal.  Justice Alito, writing for the unanimous majority, joked that under the interpretation advanced by defendants, both the famousMarbury v. Madison and the trial of Socrates would still be “pending.”  Thus, the Court explained, a later FCA action is not barred simply because an earlier, but now dismissed, FCA action based on the same underlying facts had been filed.  If the prior case was still open, however, then the first-to-file bar would likely prohibit the second action.

Despite the fact that the Court applied the ordinary meaning of the term “pending,” the Court’s decision is still a bit novel, upending much of the jurisprudence on this topic.  Until this decision, most of the lower courts in the United States interpreted the first-to-file provision as a bar of all later filed qui tam actions that were based on the same facts as an earlier filed lawsuit.  These lower courts reasoned that the first-to-file bar should limit further qui tam litigation regarding alleged false claims once the Government has been put on notice of the potential fraud.  Once the Government was on notice, there was no reason to permit relators to claim a bounty on an alleged fraud the Government was fully able to obtain for itself.  It will be interesting to see how case law will evolve to address this new decision from the Court.  At the very least, this creates an opportunity for parasitic “whistleblowers” and it increases the risk that companies may have to litigate serially similar allegations of misconduct.

Conclusion

While the KBR decision is a mixed bag for both defendants and plaintiffs, perhaps the best result of this decision is that it protects government contractors from exposure to never-ending claims of civil fraud stemming from wartime activities.  The FCA’s statute of limitations period now firmly requires whistleblowers to bring an action within six years (with a ten-year absolute cap).  On the other hand, government contractors and government contracts attorneys alike will have to take the Court’s first-to-file decision into account when considering settlements and dismissals of qui tam actions.  As soon as a case is no longer pending, a related action may properly be brought—opening the door for additional opportunistic actions upon settlement or dismissal.

For Carter (the whistleblower in the KBR case), the case may offer limited hope.  While his claims may not necessarily be barred under the first-to-file rule, the question remains as to whether a firm statute of limitations will otherwise bar his claims.  In the end, it seems likely that KBR will come out on top of this “mixed bag” of a decision.

On June 8, 2015, the U.S. Court of Appeals for the Seventh Circuit rejected the doctrine of implied false certification in a False Claims Act (“FCA”) lawsuit, U.S. ex rel. Nelson v. Sanford-Brown Ltd.  No. 14-2506, 2015 WL 3541422.  In a welcome decision for government contractors, the Court held that the FCA is “not the proper mechanism” for Government enforcement of regulations.  Instead, regulatory violations should be handled by the appropriate Government agency–not the courts.

Under the implied false certification doctrine, an invoice submitted to the Government impliedly certifies compliance with applicable laws and regulations.  A number of circuits, including the Fourth, Ninth, Tenth, and D.C. Circuits, have adopted the implied false certification theory.  In Sanford-Brown, the Seventh Circuit joins the Fifth Circuit in rejecting the theory and more clearly differentiating a breach of contract from the submission of a false claim.

Qui tam relator Brent Nelson was the previous Director of Education at Sanford-Brown College, a for-profit educational institution in Wisconsin.  He alleged that Sanford-Brown and its corporate parent defrauded the Government by receiving federal subsidies even though it was violating the Higher Education Act and the Program Participation Agreement (“PPA”) it had signed with the U.S. Secretary of Education.  The United States declined to intervene in the case and many of the relator’s claims were dismissed due to the public disclosure bar or the first-to-file rule.  Ultimately, the district court granted defendant’s motion for summary judgment, rejecting the implied false certification theory.

Nelson appealed to the Seventh Circuit, challenging, among other issues, the district court’s rejection of implied false certification.  The United States, though it had declined to intervene, filed an amicus brief supporting the relator and arguing that a violation of the Program Participation Agreement caused Sanford-Brown to present false claims, because compliance with the agreement was a condition of payment.

The Seventh Circuit found the relator and the Government’s position to be “untenable” and lacking a “discerning limiting principle:”

[W]e conclude that it would be…unreasonable for us to hold that an institution’s continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference into the PPA are conditions of payment for purposes of liability under the FCA…The FCA is simply not the proper mechanism for government to enforce violations of conditions of participation contained in—or incorporated by reference into—a PPA.

The Court declined to join the circuits that adopted the doctrine of implied false certification, instead joining the Fifth Circuit, which rejected the theory in U.S. ex rel.Steury v. Cardinal Health, Inc., 625 F.3d 262, 270 (5th Cir. 2010).  The Sanford-Browncourt cited the Second Circuit’s decision Mikes v. Straus, 274 F.3d 687, 699 (2d. Cir. 2001), which noted “[t]he False Claims Act was not designed for use as a blunt instrument to enforce compliance with all [] regulations.”

The Court’s ruling makes clear that it was the U.S. Department of Education’s role to enforce the PPA through the administrative mechanisms provided by its regulations.  Noncompliance with federal regulations does not trigger FCA liability in the Seventh Circuit, unless there is proof that the original agreement was entered into fraudulently.

By deepening the circuit split on the theory of implied false certification, the Seventh Circuit introduced further complexity into FCA jurisprudence.  Now government contractors have varying degrees of FCA exposure, depending on their location.  Contractors in the Seventh Circuit should take comfort in the fact that they have a narrowed scope of potential FCA liability.  Regulatory compliance is to be evaluated and adjudicated by the appropriate agency and not by the courts. The Seventh Circuit’s ruling will protect contractors from opportunistic relators who may allege that mere breaches of implied certifications with respect to the myriad statutes and regulations affecting government contracts amount to false claims.

The last Supreme Court term was a big one.  Most observers will remember it as the term that upheld Obamacare, established a constitutional right to same-sex marriage, and introduced the American lexicon to “jiggery-pokery.”  Those staying abreast of developments in the civil False Claims Act (FCA) jurisprudence, however, will remember the 2014 term for settling some uncertainty in regard to the FCA’s first-to-file bar and statute of limitations in Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, 135 S.Ct. 1970, __ U.S. ___ (2015).  The full slip opinion can be found on the Supreme Court’s website, here; we previously covered the opinion, here.

The Carter holding on the Wartime Suspension of Limitations Act (WSLA) issue was welcomed by the government contracting community.  Going forward, companies should expect no further litigation of the WSLA in the context of the civil False Claims Act, given that the Court held that the WSLA is truly designed to toll the statute of limitations on crimes and “offenses,” not allegations of routine civil fraud.  Rather, litigation over the limitations period will be limited to whether the FCA’s six-year statute of limitations can be tolled for equitable reasons.  This is a significant victory for defendants, who faced nearly unbounded liability for any claim that a so-called whistleblower could cook up years in the past.  The prospect of a never-ending statute of limitations combined with the FCA’s potential for treble damages and civil penalties would have had ruinous consequences for industries submitting claims for payment of any kind to the federal government: government contractors would have been deterred from doing business with the federal government, health care entities would have been discouraged from accepting Medicare and Medicaid, and other industries would have faced significant risks for participating in federal programs or seeking federal dollars. So the unanimous ruling from the Court put a bit of common sense back in the FCA jurisprudence in regard to the WSLA.

The Court’s interpretation of the first-to-file bar, however, provides little comfort to FCA defendants in responding to allegations from so-called “whistleblowers.”  The first-to-file bar states “[w]hen a person brings an action under [the qui tam provision of the FCA], no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.”  31 U.S.C. § 3730(b)(5) (emphasis added).  Departing from several Circuit Courts that had previously ruled differently, the Court interpreted the word “pending” to mean that a later suit is barred only if the first-filed suit is actually pending.  The majority of Circuit Courts had previously considered “pending” to mean that a FCA case had been previously filed, and that the facts had been publicly disclosed.  But this new ruling from the Court means that a new, parasitic FCA lawsuit might be allowed to continue, even when another, substantially similar FCA suit has been filed and then dismissed.  The Court’s holding focuses on the procedural status of a particular case, not necessarily the key underlying facts.  The Court’s holding, as the Court itself acknowledged, will “produce practical problems.”  What will those practical problems look like?

The first potential problem is that of the previously dismissed case.  A case that has been dismissed under the first-to-file bar might be refiled (so long as it is still timely under the FCA’s six-year statute of limitations).  Carter might have opened the door to re-litigation of those previously dismissed matters.  That’s a boon to the plaintiff’s lawyers, to be sure.

The second problem is trying to determine when an earlier case is actually “pending.”  Imagine the following scenario: Let’s assume two qui tam cases share substantially the same facts.  Qui tam #1 is filed on January 1.  Qui tam #2 is filed on February 1.  Qui tam #1 is dismissed on March 1 for failure to plead fraud with particularity under Federal Rule of Civil Procedure 9(b).  The defendant in qui tam #2 moves to dismiss on April 1.  Does the first-to-file bar apply?  Although there would be no question that the first-to-file bar would apply between February 1 and March 1, the Supreme Court’s holding suggests that the answer is “no,” starting at the moment qui tam #1 is dismissed.  The Court’s holding in this regard seems clear: “a qui tam suit under the FCA ceases to be ‘pending’ once it is dismissed.”  The problem with this interpretation is that it diminishes the first-to-file bar’s jurisdictional character, thereby making it more likely that courts will begin to view the first-to-file bar as something other than a jurisdictional defense.  While this might seem like legal legerdemain, whether the first-to-file bar is jurisdictional has serious real world consequences for defendants.  Principal among them, the possibility that the first-to-file bar can be waived as a defense.  Expect courts to struggle with reconciling long-standing precedent on the first-to-file bar’s jurisdictional status with the Carter ruling.

The third and final problem will take place during the negotiation of settlements.  These days, the federal government is often declining to intervene and letting qui tam relators proceed with an action on its own.  When that happens, the question becomes, “who is the defendant actually settling with?”  The purpose of a settlement is to end a legal controversy once and for all.  Under the Carter ruling, however, one could imagine a scenario where the government declines to intervene in qui tam #1, the defendant settles with qui tam #1 plaintiff, but then the second relator files qui tam #2 based on the same facts as qui tam #1.  If the earlier case was settled, then does that bar the second relator?  Under the Carter ruling, the answer is unclear.

As of this writing, the Carter decision has been cited in four decisions.  None of those decisions have had to deal with these difficult interpretive issues regarding the FCA’s first-to-file bar.  Based on our reading of the Carter ruling, however, it seems likely that courts will diminish the potency of the first-to-file bar in the coming years and up-end much of the existing jurisprudence.  In the near term, litigants should not be surprised to see more cases asking these difficult questions.  As the Supreme Court said in Carter, “[t]he False Claims Act’s qui tam provisions present many interpretative challenges, and it is beyond our [the Supreme Court’s] ability in this case to make them operate together smoothly like a finely tuned machine.”

A relator bringing an action under the civil False Claims Act (FCA) is required to be an “original source” of the allegations.  31 U.S.C. § 3730(e)(4).  To qualify as an original source under the statute, the relator must (1) have “direct and independent knowledge” of the information giving rise to the claims and (2) “provide[] the information to the Government before filing the action.”  For the past 23 years, the Ninth Circuit also had a third requirement to qualify as an original source:  the relator must have had “a hand in the public disclosure of allegations that are a part of [the] suit.”  That third requirement, however, came to an abrupt end on July 7, 2015, when the Ninth Circuit in United States ex rel. Hartpence v. Kinetic Concepts reversed course, ruling that its holding in United States ex rel. Wang v. FMC Corp., 975 F.2d 1412 (9th Cir. 1992) was “wrongly decided” and that only the two requirements specified in the statutory language of the FCA must be satisfied for a relator to qualify as an original source.  Plaintiffs’ lawyers throughout the Ninth Circuit are rejoicing. 

In Hartpence, a consolidated qui tam case, former employees of Kinetic Concepts, Inc. and KCI USA, Inc. filed complaints alleging that the companies “engaged in fraudulent conduct by submitting claims to Medicare that did not comply with the [Durable Medical Equipment Medicare Administrative Contractors’] local coverage determinations.”  A local coverage determination that a claim satisfies the applicable payment criteria is required before the claim can be reimbursed.  The defendants filed motions to dismiss the complaints under Rule 12(b)(1) of the Federal Rules of Civil Procedure asserting, among other things, that the “Relators did not qualify as original sources.”  The District Court agreed and dismissed the complaints, finding that there had been public disclosures of the relators’ allegations “in the form of a 2007 federal audit report and at least one decision by an Administrative Law Judge.”  Because the relators “had not shown that they had a hand in those public disclosures,” they did not qualify as an original source under Wang.

The Ninth Circuit heard the Hartpence appeal en banc to determine whether the holding of Wang was valid.  On appeal, the relators argued that the “hand-in-the-public-disclosure rule” is not referenced anywhere in the FCA and that a relator is only required to meet the two requirements specified in the statutory language.  The Ninth Circuit eventually agreed and gave the third requirement established in Wang “a respectful burial.”  In Wang, the third original source requirement had been “inferred” based on the FCA’s legislative history.  The reference to “information” in the phrase “original source of the information” was interpreted in Wang to mean “the information underlying the publicly disclosed allegations that triggered the public disclosure bar, rather than the information which underlay the plaintiff’s complaint.”

In the new Hartpence decision, the Ninth Circuit examined the original source language in the FCA and concluded that it “contains no requirement that the relator have had a hand in the public disclosure of the fraud.”  Because the Ninth Circuit found no ambiguity in the statute, there was no need for the court to examine any “extrinsic material” like legislative history.  As a result, the court concluded that, to qualify as an original source, a relator need not have played a role publicly disclosing the alleged fraud.  The court was not persuaded by the defendants’ argument that eliminating the third original source requirement from Wang was “inconsistent with an overarching goal of the False Claims Act—to encourage private citizens to uncover fraud, not simply to report it.”  The court noted that such a goal must be considered by Congress “when enacting the Act, [and is] not for the judiciary” to create such a policy.

The Ninth Circuit’s recent decision in Hartpence will make it far easier for so-called “whistleblowers” to qualify as an original source (especially in the Ninth Circuit, but also in other regions of the country as well, which routinely look to the Ninth Circuit for guidance on these types of issues).  As a result of this decision, whether or not the relator had “a hand” in the public disclosure is no longer relevant to the original source analysis in the Ninth Circuit.  All that is required now for a relator to qualify as an original source in the Ninth Circuit is direct and independent knowledge of the information on which the allegations are based, and voluntarily providing that information to the government prior to filing suit.

With two recent False Claims Act cases (and six in the last decade), relators have taken aim at a new target for FCA enforcement and liability: Managed Care Plans. Managed Care providers should be aware of this growing threat and take steps to reduce their exposure.

Whistleblowers’ interest is understandable, with Managed Care enrollment numbers ever-increasing. As of May 2015, nearly 30 percent of Medicare patients, approximately 16 million people, were enrolled in Medicare Advantage, Medicare’s Managed Care plan.[1] That number is dwarfed by the millions currently enrolled in Medicaid Managed Care plans—estimated at 80 percent of more than 72 million Medicaid recipients in the U.S.[2]

Managed Care providers are paid a per-person (capitated) payment based on the health of population of beneficiaries, rather than on a fee-for-service basis. The capitated amount is determined by forecasting the amount of health care that the beneficiary pool will need, an assessment known as the risk score. The higher the risk score, the higher the capitated payment. At their introduction, Managed Care plans seemed less vulnerable to fraud than fee-for-service plans because the capitated payment system provided less incentive for excessive treatment. As with all human endeavors, however, incentives tend to influence behavior.

Risk scores for individuals on fee-for-service plans and Managed Care plans with the same diagnoses and characteristics should be identical. Risk scores for beneficiaries in Managed Care plans, however, tend to be higher than risk scores for those in fee-for-service plans with similar health and identical characteristics.[3] One reason may be that Managed Care providers have a greater incentive to document all possible medical diagnoses, which is not only appropriate (if accurate), but also critical to the plan’s financial viability. This incentive, however, could motivate unscrupulous physicians or plans to artificially inflate diagnoses in order to increase the risk score and resulting payments. Indeed, that is exactly what these two recent cases allege.

In U.S. ex rel Valdez v. Aveta, Inc.,[4] now pending in Puerto Rico, the Relator alleges that the health system “knowingly overstated, and/or concealed and failed to correct their overstatements of, risk adjustment scores.”[5] Similarly, in U.S. ex rel. Graves v. Plaza Medical Centers Corp., Humana, Inc., filed in Florida, Relator charges that Humana knew or should have known that the number of patients being diagnosed with diabetes and renal or circulatory complications increased dramatically when a new doctor took over a long-standing medical practice.[6] These inflated diagnoses, according to the Relator, led to increases in the capitated payments for those patients.[7]

Both of these cases, and at least four others filed in the last 5 years, indicate a trend towards this new enforcement focus. The Government has noticed the increasing costs associated with Managed Care plans. GAO has already published a report urging CMS to further adjust its capitated rates to account for this more complete documentation and prevent the overpayment of Managed Care providers.[8] There are few steps from these cases and GAO’s findings to many more FCA investigations and prosecutions of Managed Care providers.

Those who operate Medicare or Medicaid Managed Care plans, or may seek to do so in the future, must recognize that these plans are not immune from whistleblower lawsuits. Compliance policies and practices should be updated, if necessary, to include reasonable measures to prevent and detect any effort to inflate risks scores. These measures should include educating appropriate personnel as to the potential FCA risks and the importance of ensuring that documentation, especially email traffic, does not create the impression that risk scores are being inflated for financial gain.

When acquiring a new practice, it is important to analyze the practice’s patients, as part of due diligence, and to conduct follow-up review to detect unusual increases in the risk profile of the patient population. If irregularities are detected, the reasons should be thoroughly investigated. Most of the time, the reasons will be benign but, where red flags are found, providers must respond promptly by identifying, analyzing, and understanding the root causes.

If an investigation reveals improprieties, disclosure to the government may be necessary. Also important to keep in mind, under amendments to the False Claims Act, passed as part of the Affordable Care Act, any overpayments based on inaccurate risk scores must be refunded within 60 days of identification.

[1] U.S. Gov’t Accountability Office, GAO-15-710, Medicare Advantage: Actions Needed to Enhance CMS Oversight of Provider Network Adequacy 6 (2015). While this article focuses on Medicare, the Medicaid percentages are much higher. As of June 2009, the Office of Inspector General for the U.S. Dep’t of Health and Human Services estimated that 72 percent of Medicaid beneficiaries were enrolled in Medicaid Managed Care plans.

[2] U.S. Dep’t of Health and Human Servs., Office of the Actuary, 2014 Actuarial Report on the Financial Outlook for Medicaid 16 (2014). The 80 percent estimate is based on calculations by Medicaid.gov, taken from its Managed Care State Profiles and State Data, available at http://www.medicaid.gov/medicaid-chip-program-information/by-topics/delivery-systems/managed-care/managed-care-site.html (last visited Oct. 19, 2015).

[3] U.S. Gov’t Accountability Office, GAO-13-206, Medicare Advantage: Substantial Excess Payments Underscore Need for CMS to Improve Accuracy of Risk Score Adjustments 1-2 (2013).

[4] United States ex rel. José R. Valdez v. Aveta, Inc., et al., Case No. 15-cv-01140-CCC (D.P.R.).

[5] Valdez, Complaint at 4.

[6] United States ex rel. Olivia Graves v. Plaza Medical Centers Corp., Humana, Inc., et al, Case No. 10-23382-CIV-MORENO (S.D. Fl.).

[7] Id. at 8.

[8] GAO, Substantial Excess Payments at 11-13 (“Our work confirms that differences in diagnostic coding caused risk scores for MA beneficiaries to be higher than those for comparable beneficiaries…. [CMS’ current risk] adjustment was too low and resulted in estimated excess payments to MA plans of at least $3.2 billion.”).

457 hospitals (or, expressed differently, nearly 10% of all of the hospitals in the United States) have recently agreed to settlements worth more than a quarter of a billion dollars arising out of an investigation into Medicare billings for allegedly unnecessary cardiac implants known as implantable cardioverter defibrillators, or ICDs. ICDs regulate heart rhythms and cost about $25,000 per device.  Whether Medicare covers ICD implants is dependent on the National Coverage Determination (“NCD”).  The NCD states that ICDs should not be implanted in patients who recently suffered a heart attack or heart bypass surgery or angioplasty, and has set waiting periods for the procedure of 40 days after a heart attack and 90 days after a bypass or angioplasty.

All of the hospitals involved in the settlement were accused of implanting ICDs too quickly after heart attacks, bypass surgeries or angioplasties, thereby violating the NCD, which is prescribed to see if hearts heal enough on their own to make ICDs unnecessary.

There were a total of 70 settlements involving 457 hospitals.  Although the settlement ends the matter for some hospitals, others not covered by the settlement are still being investigated.  As a result of this settlement, the whistleblowers will receive more than $38 million.  The settlement is likely the largest in the history of the Southern District of Florida, a district known to be particularly active in combating health care fraud and abuse.

The settlements are a powerful reminder that quality of care issues have become an area of scrutiny for the OIG, whistleblowers, and of course the DOJ. Providers must exercise vigilance to avoid even the appearance that financial incentives, such as compensation arrangements and other performance metrics, are influencing clinical treatment decisions.  Educating financial, operational personnel and clinical personnel to the risks is an integral component of an effective compliance plan.  If questions or complaints are received reflecting a concern about how procedures are being performed they should be taken seriously and responded to promptly.

Nothing sends chills through a Compliance Officer or General Counsel faster than receiving an agency subpoena or civil investigative demand (CID). The first questions that immediately come to mind are “what does it mean” and “what should I do?”

What Does it Mean?

Fundamentally, an agency subpoena or CID is a demand by the Government for some of your company’s records and, possibly, a written response to specific questions. Subpoenas and CIDs can be issued for a number of reasons, but there are three reasons we come across most often.

First, the subpoena or CID is part of a routine audit of your company’s compliance with an agency’s regulations. Agencies such as GSA or DCAA perform routine audits of companies that do business with the Government to ensure their accounting and compliance systems are in order. Those audits usually begin with a subpoena, so the Government can review a company’s sales records, pricing, cost accounting systems, and other policies to ensure compliant systems are in place.

Second, the subpoena or CID is part of an industry-wide investigation by the agency. Investigations into industry-wide trends often begin with a subpoena or CID. For example, the agency could be looking to see whether your company (among others) is in compliance with a particular regulation, such as the Trade Agreements Act.

Third, the subpoena or CID is in response to claims made by a relator. Frequently, a subpoena or CID is the first indication that a False Claims Act (FCA) complaint has been filed against the company. Relators file FCA complaints under seal while the Government decides whether it will intervene in the case. As part of that process, the Government will often conduct an investigation. The tool of choice for that investigation often is an agency subpoena or CID. The government typically will analyze the documents and information produced in response to the subpoena or CID to determine whether it supports the relator’s claims.

Being proactive is the best policy if you receive a subpoena or CID. Retaining an experienced attorney can position your company to navigate its response to the Government. Experienced counsel also can assess the potential risks stemming from the subpoena or CID. Being prepared for the possibility that a relator is lurking is always a best practice. Even if the subpoena or CID is part of a routine audit, it could reveal hidden problems that might result in an FCA investigation.

In our next installment, we’ll explore “what should I do” when served with an agency subpoena or CID.

Now that you understand what prompts an agency subpoena or CID, the next step is to have a strategy, which involves answering the question, “what should I do?” Taking the right approach from the outset is critical to protecting your company’s interests.

What Should I Do?

Once a subpoena or CID is received, a company must actively take measures to ensure that all potentially responsive documents and data are preserved. Thus, the most immediate priority for a company served with a subpoena or CID is to institute a litigation hold. A litigation hold is an instruction to company employees to preserve documents. Preservation efforts should include, among other things, stopping any automatic deletion protocols of emails and other electronic data. Additionally, employees who may have responsive information promptly should be identified and provided with specific instructions (in writing) to preserve all potentially responsive documents and data. After issuing the litigation hold and confirming full compliance, you should periodically follow up with these employees to ensure they are continuing to abide by the litigation hold.

If a litigation hold is not implemented and responsive documents are destroyed, the company may face serious penalties, including the possibility of spoliation sanctions should the subpoena or CID be a precursor to a False Claims Act (FCA) lawsuit. In addition, any destruction of documents could undermine the company’s credibility with the Government and make it more difficult to convince it that further investigation is not warranted.

Retaining experienced outside counsel to assist the company in responding to a subpoena or CID is always a best practice. Counsel can assist the company with data preservation and can negotiate the scope of the subpoena with the Government. Agency subpoenas and CIDs often are overly broad. Experienced counsel can help negotiate a more targeted scope that reduces the company’s burden, while still providing the Government with the requested data and information. Negotiating with the Government also may provide the company with insight into the direction of the investigation, including whether a relator is lurking.

It also is important to “get ahead” of the Government’s investigation. If the subpoena or CID was issued in response to a FCA lawsuit or some other compliance issue, the company should identify and understand the source of these potential issues. This is another area where outside counsel can assist by conducting an internal investigation. Any investigation resulting from a subpoena or CID should be done at the direction of counsel so that it is privileged. Otherwise, information relating to the investigation may be discoverable. In the event an issue is identified during an investigation, counsel also can assist the company in choosing the most effective approach for any mandatory or voluntary disclosures to the Government.

If your company receives an agency subpoena or CID, hopefully it is just a routine audit and a FCA complaint is not on the horizon. Either way, if you follow the steps above, your company will be well-positioned to deal with any possibility.

Under the “implied certification” theory of liability, a government contractor can violate the False Claims Act (“FCA”) by submitting a mere invoice for payment.  The theory is that the invoice’s submission impliedly certifies compliance with contract conditions.  If a contractor is not complying with material contract requirements and — despite the contractor’s noncompliance — submits an invoice for payment, then the Government or a relator might argue that the contractor has violated the FCA. 

Distinguishing an ordinary breach of contract from a false claim of compliance with contract terms is not easy.  A recent case decided by the United States Court of Appeals for the Fourth Circuit exemplifies this difficult distinction in a way that is very concerning for companies that do business with the Federal Government.  United States v. Triple Canopy, Inc., No. 13-2190, 2015 WL 105374 (4th Cir. Jan. 8, 2015).

In 2009, Triple Canopy was hired by the Government to provide security services for Coalition forces at Al Asad Airbase in Iraq.  The contract required Triple Canopy’s guards to receive initial firearms training and qualify on a U.S. Army qualification course to hit a target from a distance of 25 meters with an accuracy rate of at least 23 rounds out of 40.  To meet this requirement, Triple Canopy hired approximately 332 Ugandan guards to serve at Al Asad under the supervision of 18 Americans.

Although the guards’ personnel files showed qualifying marksmanship scores from a course in Kampala, Uganda, the guards could not demonstrate such proficiency in the field.  Upon arrival in Iraq, Triple Canopy supervisors learned that the guards could neither “zero” their rifles nor satisfy the qualifying score of 23 rounds out of 40.  After a failed training attempt, a Triple Canopy supervisor directed the creation of false scorecards for the guards that were placed in their personnel files.  Additional replacement Ugandan guards, who, similarly, were unable to satisfy the marksmanship requirement, resulted in additional false scorecards.  In May 2010, a Triple Canopy supervisor ordered a medic to prepare false scorecards for 40 Ugandan guards who failed to qualify in marksmanship.  Triple Canopy’s site manager then signed and post-dated the scorecards showing qualifying scores in June 2010.

The Triple Canopy medic, Omar Badr, later filed a qui tam action under the Federal False Claims Act, 31 U.S.C. § 3729, et seq., and the Government intervened in the case, bringing the full resources of the Department of Justice to bear against Triple Canopy.  The Government and Badr alleged violations of the FCA under an “implied certification” theory.  Under this theory, the Government and Badr argued that Triple Canopy violated the FCA by merely submitting a request for payment.  It was irrelevant, in the Government and Badr’s view, that Triple Canopy never explicitly certified compliance with the contract’s marksmanship requirement on its invoices, nor did Triple Canopy ever make any certification of any kind on the Government’s Material Inspection and Receiving Report (form DD-250).

Triple Canopy prevailed at the district court.  In regards to the Government’s claim, Triple Canopy convinced the court (1) that it never submitted a demand for payment containing an objectively false statement and (2) that the Government never reviewed and therefore never relied on the false scorecards.

The Fourth Circuit reversed the district court’s dismissal of the Government’s claim, explaining as follows:

[C]ommon sense strongly suggests that the Government’s decision to pay a contractor for providing base security in an active combat zone would be influenced by knowledge that the guards could not, for lack of a better term, shoot straight. . . . If Triple Canopy believed that the marksmanship requirement was immaterial to the Government’s decision to pay, it was unlikely to orchestrate a scheme to falsify records on multiple occasions.

. . .

Distilled to its essence, the Government’s claim is that Triple Canopy, a security contractor with primary responsibility for ensuring the safety of servicemen and women stationed at an airbase in a combat zone, knowingly employed guards who were unable to use their weapons properly and presented claims to the Government for payment for those unqualified guards.  The Court’s admonition that the FCA reaches “all types of fraud, without qualification” is simply inconsistent with the district court’s view of the FCA that Triple Canopy can avoid liability because nothing on the “face” of the invoice was objectively false.

The Fourth Circuit also reversed the district court as to whether it was relevant that the Government never reviewed Triple Canopy’s false scorecards.  According to the Fourth Circuit, “[t]he district court . . . erred in focusing on the actual effect of the false statement rather than its potential effect.  A false record may, in the appropriate circumstances, have the potential to influence the Government’s payment decision even if the Government ultimately does not review the record.”  Id. at *7.

The Fourth Circuit’s reversal sends Triple Canopy’s case back to the district court for further litigation and strengthens the “implied certification” theory of FCA liability in a way that will embolden relators and the Department of Justice to further pursue FCA claims against government contractors.  Many government contracts attorneys are hopeful, however, that future Courts that face this same question will take a close look at the facts of the alleged conduct of Triple Canopy and properly limit the application of this decision to similar factual circumstances.

In an opinion released May 26, 2015, Kellogg Brown & Roots Services, Inc. v. United States ex rel. Carter, the U.S. Supreme Court unanimously held that whistleblowers cannot extend the statute of limitations for war-related civil false claims under the Wartime Suspension of Limitations Act (“WSLA”), reinstating an already generous statute of limitations period under the civil False Claims Act (“FCA”).  The Court also settled a split between the U.S. Courts of Appeals for the D.C. Circuit and the Fourth Circuit.  For purposes of the FCA’s “first-to-file” bar, the FCA only limits a lawsuit based on the same underlying facts as another case that is actually open and pending when the later lawsuit is filed.  In reaching these holdings, the Court relied heavily on the plain meaning of the statutory language, simultaneously handing a victory to both Defendants (on the statute of limitations issue) and Plaintiffs (on the first-to-file issue).  But, the holding relating to the WSLA may prove to be the greatest legacy from the KBR decision, reigning in aggressive whistleblowers and government lawyers who would try to allege a case of “fraud” decades after the conduct occurred, and long after a Defendant is able to defend itself effectively.

Statute of Limitations and the WSLA

The qui tam complainant, Benjamin Carter, a former contractor in Iraq in early 2005, alleged that Kellogg Brown & Root Services, Inc. (“KBR”) and Halliburton Company fraudulently billed the Government for unperformed or improper water purification services.  While the relator first filed his qui tam action in 2006, his fourth and final complaint was filed in 2011.  Notably, the FCA provides a six-year limitations period, with a ten-year maximum.  31 U.S.C. § 7371(b).

The WSLA, 18 U.S.C. § 3287, was originally enacted during the First and Second World Wars to extend the statute of limitations for war-related criminal fraud that the Government was unable to prosecute because of the war-time conditions.  The current version of the WSLA suspends the statute of limitations for “any offense against the laws of the United States.”  Concluding that this does not suspend the statute of limitations forcivil fraud claims, the Court noted that the term “offense” commonly refers to crimes.  Given this plain meaning, the Court concluded that the WSLA does not suspend indefinitely the statute of limitations under the civil FCA, reversing (in part) the Fourth Circuit.

First-To-File and What it Means to Be “Pending”

The Supreme Court also interpreted the FCA’s first-to-file bar, which limits a person’s ability to “bring a related action based on the facts underlying [a] pending action.” 31 U.S.C. § 3730(b)(5).  Applying the ordinary meaning of the term “pending,” the Supreme Court agreed with the Fourth Circuit that the first-to-file bar applies only to cases presently open and awaiting decision.  The Court held that “pending” does not have the “peculiar” use posited by the contractors – “a short-hand for the first filed action” – a result that might allow the first-to-file bar to operate in perpetuity.  Rather, the first-to-file bar does not create a permanent prohibition on any subsequent related action because an action is no longer “pending” upon dismissal.  Justice Alito, writing for the unanimous majority, joked that under the interpretation advanced by defendants, both the famousMarbury v. Madison and the trial of Socrates would still be “pending.”  Thus, the Court explained, a later FCA action is not barred simply because an earlier, but now dismissed, FCA action based on the same underlying facts had been filed.  If the prior case was still open, however, then the first-to-file bar would likely prohibit the second action.

Despite the fact that the Court applied the ordinary meaning of the term “pending,” the Court’s decision is still a bit novel, upending much of the jurisprudence on this topic.  Until this decision, most of the lower courts in the United States interpreted the first-to-file provision as a bar of all later filed qui tam actions that were based on the same facts as an earlier filed lawsuit.  These lower courts reasoned that the first-to-file bar should limit further qui tam litigation regarding alleged false claims once the Government has been put on notice of the potential fraud.  Once the Government was on notice, there was no reason to permit relators to claim a bounty on an alleged fraud the Government was fully able to obtain for itself.  It will be interesting to see how case law will evolve to address this new decision from the Court.  At the very least, this creates an opportunity for parasitic “whistleblowers” and it increases the risk that companies may have to litigate serially similar allegations of misconduct.

Conclusion

While the KBR decision is a mixed bag for both defendants and plaintiffs, perhaps the best result of this decision is that it protects government contractors from exposure to never-ending claims of civil fraud stemming from wartime activities.  The FCA’s statute of limitations period now firmly requires whistleblowers to bring an action within six years (with a ten-year absolute cap).  On the other hand, government contractors and government contracts attorneys alike will have to take the Court’s first-to-file decision into account when considering settlements and dismissals of qui tam actions.  As soon as a case is no longer pending, a related action may properly be brought—opening the door for additional opportunistic actions upon settlement or dismissal.

For Carter (the whistleblower in the KBR case), the case may offer limited hope.  While his claims may not necessarily be barred under the first-to-file rule, the question remains as to whether a firm statute of limitations will otherwise bar his claims.  In the end, it seems likely that KBR will come out on top of this “mixed bag” of a decision.

On June 8, 2015, the U.S. Court of Appeals for the Seventh Circuit rejected the doctrine of implied false certification in a False Claims Act (“FCA”) lawsuit, U.S. ex rel. Nelson v. Sanford-Brown Ltd.  No. 14-2506, 2015 WL 3541422.  In a welcome decision for government contractors, the Court held that the FCA is “not the proper mechanism” for Government enforcement of regulations.  Instead, regulatory violations should be handled by the appropriate Government agency–not the courts.

Under the implied false certification doctrine, an invoice submitted to the Government impliedly certifies compliance with applicable laws and regulations.  A number of circuits, including the Fourth, Ninth, Tenth, and D.C. Circuits, have adopted the implied false certification theory.  In Sanford-Brown, the Seventh Circuit joins the Fifth Circuit in rejecting the theory and more clearly differentiating a breach of contract from the submission of a false claim.

Qui tam relator Brent Nelson was the previous Director of Education at Sanford-Brown College, a for-profit educational institution in Wisconsin.  He alleged that Sanford-Brown and its corporate parent defrauded the Government by receiving federal subsidies even though it was violating the Higher Education Act and the Program Participation Agreement (“PPA”) it had signed with the U.S. Secretary of Education.  The United States declined to intervene in the case and many of the relator’s claims were dismissed due to the public disclosure bar or the first-to-file rule.  Ultimately, the district court granted defendant’s motion for summary judgment, rejecting the implied false certification theory.

Nelson appealed to the Seventh Circuit, challenging, among other issues, the district court’s rejection of implied false certification.  The United States, though it had declined to intervene, filed an amicus brief supporting the relator and arguing that a violation of the Program Participation Agreement caused Sanford-Brown to present false claims, because compliance with the agreement was a condition of payment.

The Seventh Circuit found the relator and the Government’s position to be “untenable” and lacking a “discerning limiting principle:”

[W]e conclude that it would be…unreasonable for us to hold that an institution’s continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference into the PPA are conditions of payment for purposes of liability under the FCA…The FCA is simply not the proper mechanism for government to enforce violations of conditions of participation contained in—or incorporated by reference into—a PPA.

The Court declined to join the circuits that adopted the doctrine of implied false certification, instead joining the Fifth Circuit, which rejected the theory in U.S. ex rel.Steury v. Cardinal Health, Inc., 625 F.3d 262, 270 (5th Cir. 2010).  The Sanford-Browncourt cited the Second Circuit’s decision Mikes v. Straus, 274 F.3d 687, 699 (2d. Cir. 2001), which noted “[t]he False Claims Act was not designed for use as a blunt instrument to enforce compliance with all [] regulations.”

The Court’s ruling makes clear that it was the U.S. Department of Education’s role to enforce the PPA through the administrative mechanisms provided by its regulations.  Noncompliance with federal regulations does not trigger FCA liability in the Seventh Circuit, unless there is proof that the original agreement was entered into fraudulently.

By deepening the circuit split on the theory of implied false certification, the Seventh Circuit introduced further complexity into FCA jurisprudence.  Now government contractors have varying degrees of FCA exposure, depending on their location.  Contractors in the Seventh Circuit should take comfort in the fact that they have a narrowed scope of potential FCA liability.  Regulatory compliance is to be evaluated and adjudicated by the appropriate agency and not by the courts. The Seventh Circuit’s ruling will protect contractors from opportunistic relators who may allege that mere breaches of implied certifications with respect to the myriad statutes and regulations affecting government contracts amount to false claims.

The last Supreme Court term was a big one.  Most observers will remember it as the term that upheld Obamacare, established a constitutional right to same-sex marriage, and introduced the American lexicon to “jiggery-pokery.”  Those staying abreast of developments in the civil False Claims Act (FCA) jurisprudence, however, will remember the 2014 term for settling some uncertainty in regard to the FCA’s first-to-file bar and statute of limitations in Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, 135 S.Ct. 1970, __ U.S. ___ (2015).  The full slip opinion can be found on the Supreme Court’s website, here; we previously covered the opinion, here.

The Carter holding on the Wartime Suspension of Limitations Act (WSLA) issue was welcomed by the government contracting community.  Going forward, companies should expect no further litigation of the WSLA in the context of the civil False Claims Act, given that the Court held that the WSLA is truly designed to toll the statute of limitations on crimes and “offenses,” not allegations of routine civil fraud.  Rather, litigation over the limitations period will be limited to whether the FCA’s six-year statute of limitations can be tolled for equitable reasons.  This is a significant victory for defendants, who faced nearly unbounded liability for any claim that a so-called whistleblower could cook up years in the past.  The prospect of a never-ending statute of limitations combined with the FCA’s potential for treble damages and civil penalties would have had ruinous consequences for industries submitting claims for payment of any kind to the federal government: government contractors would have been deterred from doing business with the federal government, health care entities would have been discouraged from accepting Medicare and Medicaid, and other industries would have faced significant risks for participating in federal programs or seeking federal dollars. So the unanimous ruling from the Court put a bit of common sense back in the FCA jurisprudence in regard to the WSLA.

The Court’s interpretation of the first-to-file bar, however, provides little comfort to FCA defendants in responding to allegations from so-called “whistleblowers.”  The first-to-file bar states “[w]hen a person brings an action under [the qui tam provision of the FCA], no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.”  31 U.S.C. § 3730(b)(5) (emphasis added).  Departing from several Circuit Courts that had previously ruled differently, the Court interpreted the word “pending” to mean that a later suit is barred only if the first-filed suit is actually pending.  The majority of Circuit Courts had previously considered “pending” to mean that a FCA case had been previously filed, and that the facts had been publicly disclosed.  But this new ruling from the Court means that a new, parasitic FCA lawsuit might be allowed to continue, even when another, substantially similar FCA suit has been filed and then dismissed.  The Court’s holding focuses on the procedural status of a particular case, not necessarily the key underlying facts.  The Court’s holding, as the Court itself acknowledged, will “produce practical problems.”  What will those practical problems look like?

The first potential problem is that of the previously dismissed case.  A case that has been dismissed under the first-to-file bar might be refiled (so long as it is still timely under the FCA’s six-year statute of limitations).  Carter might have opened the door to re-litigation of those previously dismissed matters.  That’s a boon to the plaintiff’s lawyers, to be sure.

The second problem is trying to determine when an earlier case is actually “pending.”  Imagine the following scenario: Let’s assume two qui tam cases share substantially the same facts.  Qui tam #1 is filed on January 1.  Qui tam #2 is filed on February 1.  Qui tam #1 is dismissed on March 1 for failure to plead fraud with particularity under Federal Rule of Civil Procedure 9(b).  The defendant in qui tam #2 moves to dismiss on April 1.  Does the first-to-file bar apply?  Although there would be no question that the first-to-file bar would apply between February 1 and March 1, the Supreme Court’s holding suggests that the answer is “no,” starting at the moment qui tam #1 is dismissed.  The Court’s holding in this regard seems clear: “a qui tam suit under the FCA ceases to be ‘pending’ once it is dismissed.”  The problem with this interpretation is that it diminishes the first-to-file bar’s jurisdictional character, thereby making it more likely that courts will begin to view the first-to-file bar as something other than a jurisdictional defense.  While this might seem like legal legerdemain, whether the first-to-file bar is jurisdictional has serious real world consequences for defendants.  Principal among them, the possibility that the first-to-file bar can be waived as a defense.  Expect courts to struggle with reconciling long-standing precedent on the first-to-file bar’s jurisdictional status with the Carter ruling.

The third and final problem will take place during the negotiation of settlements.  These days, the federal government is often declining to intervene and letting qui tam relators proceed with an action on its own.  When that happens, the question becomes, “who is the defendant actually settling with?”  The purpose of a settlement is to end a legal controversy once and for all.  Under the Carter ruling, however, one could imagine a scenario where the government declines to intervene in qui tam #1, the defendant settles with qui tam #1 plaintiff, but then the second relator files qui tam #2 based on the same facts as qui tam #1.  If the earlier case was settled, then does that bar the second relator?  Under the Carter ruling, the answer is unclear.

As of this writing, the Carter decision has been cited in four decisions.  None of those decisions have had to deal with these difficult interpretive issues regarding the FCA’s first-to-file bar.  Based on our reading of the Carter ruling, however, it seems likely that courts will diminish the potency of the first-to-file bar in the coming years and up-end much of the existing jurisprudence.  In the near term, litigants should not be surprised to see more cases asking these difficult questions.  As the Supreme Court said in Carter, “[t]he False Claims Act’s qui tam provisions present many interpretative challenges, and it is beyond our [the Supreme Court’s] ability in this case to make them operate together smoothly like a finely tuned machine.”

The United States District Court of the Eastern District of Pennsylvania recently issued a decision unsealing a False Claims Act case over the objections of the government, the relator and the defendant.[1] In United States ex. Rel. Brasher v. Pentec Health, Inc. No. 13-05745, 2018 WL 5003474 (E.D.P.A. Oct. 16, 2018), a case initially filed five years ago, the government filed a motion to continue the seal – which happened to be its eleventh such motion – arguing that additional time was necessary, in part, to finalize its decision whether to intervene in the action, as well as to pursue settlement options. The Court disagreed.

In initially denying the government’s request to extend the seal – an extension also supported by the relator and the Defendant – the Court expressed concerns “about the secrecy and pendency of the case, including concerns about the lack of meaningful deadlines, and that the need for transparency and accountability were not being met” by what, at the time, already amounted to just over five years of extensions.

In response, the Government filed a motion for reconsideration in October 2018, in another attempt to continue the seal on the case. This motion too was denied. In its decision, the Court stressed the importance of the FCA’s requirement that there be “good cause” shown in order to extend the period the case is under seal, rejecting the government’s general argument that it was the practice among some courts to routinely grant unlimited extensions. Indeed, the Court recognized that “courts have grown increasingly impatient with the Government’s repeated requests for extension of the seal in qui tam actions.” The decision pointed to the fact that none of the parties in this case were able to identify any specific, concrete harm that would occur as a direct result to the seal expiring, and made clear that the effect on settlement negotiations was irrelevant, as “the sealing provision is not intended to allow the Government to negotiate a settlement under the cloak of secrecy but rather to investigate the allegations and then to determine whether it is electing to intervene.”

This case is another instance of a trend of courts being less willing to grant multiple extensions keeping qui tam actions under seal. Especially of note here is that in this case all three parties, the government, the relator, as well as the defendant government contractor, expressed support for the extension, an extension the Court was not persuaded to grant despite the lack of party opposition. Continued judicial impatience with keeping similar cases under seal for extended periods of time may have significant consequences for FCA defendants, including government contractors, as this could result in the government attempting to investigate at an increased pace, forcing defendants to produce documents, witnesses, and other information on a shortened timeline. At the same time, shorter investigations could result in lower costs for FCA defendants as it may force the government to limit the scope of its inquiries to the relator’s central allegations, rather than spending time on peripheral issues and/or broadening the scope of its investigation. As this issue is likely to continue evolving, we will continue to monitor developments as they occur.

[1] False Claims Act cases are filed under seal to give the government time to investigate and determine whether or not to intervene.

Contrary to some expectations, the Trump Administration Department of Justice imposed record penalties under the U.S. Foreign Corrupt Practices Act from 2017 through 2020. But in each of those years, fewer and fewer new FCPA investigations were initiated. We expect the Biden Administration to continue the trend of increasing FCPA enforcement settlement values, while also increasing the pace of initiating new FCPA investigations. Anticorruption matters present some of the most severe threats to a company’s organizational integrity. Understanding the changing enforcement culture is an important component to addressing those threats.

Record FCPA penalties 2017-2020, despite a personal anti-FCPA view at the top. Analysis of historical enforcement data shows that FCPA settlements did not slow down under the Trump Administration, when looking at dollar value. By our count, six of the top 10 FCPA settlements in history were completed on President Trump’s watch, accounting for over $7 billion in fines, penalties, and disgorgements. And 2020 just became the biggest year in FCPA history, measured by penalties.

This record stands somewhat in contrast to the personal views voiced by President Trump regarding the law. The President reportedly criticized the FCPA in 2017,  speculating about the negative effect the law has on U.S. companies. And White House Economic Advisor Larry Kudlow reportedly said in January 2020 that the administration was “looking at” making changes to the law because of complaints from the U.S. business community about antibribery enforcement.

The Trump DOJ and SEC initiated fewer cases than previous administrations. We do not expect the Trump Administration to engineer any substantive change to the FCPA before January 20, 2021. But by one very important measure, the Trump Administration’s DOJ and Securities and Exchange Commission did slow down FCPA enforcement: each year since 2016, fewer FCPA investigations were initiated than in the year before. We have no information on whether the slowdown was an actual reflection of the President’s personal skepticism of the law, or mere coincidence.

5 reasons the Biden Administration will step up FCPA enforcemen

1. The new playbook is the old playbook

The playbook for prosecutors, formerly known as the U.S. Attorneys’ Manual, got a makeover in the Trump Administration. It is now known as the Justice Manual.

The most famous page of that playbook is the 2015 Yates Memorandum which, in 2015, essentially required that corporations identify all individuals involved in any aspect of alleged misconduct, regardless of their status or seniority, in order for the corporation to receive any credit for its cooperation with the government. At one time, President Trump’s then-Deputy Attorney General Rod Rosenstein suggested that the DOJ might change the approach outlined in the Yates memo. But the principles and procedures favoring individual prosecutions remain materially unchanged in the current Justice Manual. This means that the focus on individual prosecution is still DOJ policy, and we expect it to remain so in the Biden Administration.

2. Re-populating the rank and file

The Trump Administration was many things, but a magnet for lawyers it was not. According to one study, DOJ ranked 15th out of 16 cabinet departments in filling critical personnel positions, with only 45% of “key positions” filled as of November 2020, roughly 9/10 of the way through the term.

The Biden Administration is likely to act aggressively to reverse that trend. The President-Elect’s transition teams are bristling with DC legal talent. We expect strong moves to re-populate key DOJ offices such as the Criminal Division’s Fraud Section, which has exclusive authority over FCPA cases.

3. Young prosecutors see the FCPA as good hunting

The Fraud Section has always attracted smart, professional, ambitious prosecutors. The culture of the Section, in our experience, has always tended that way. And a major FCPA settlement is a very good way to make a mark. With a new crop of FCPA prosecutors occupying the Bond Building, we expect a new round of mark-making.

4. Economic downturn

The COVID-19 recession is a perfect storm of misfortune. Any economic downturn creates multiple incentives for fraud. FCPA cases spiked in 2001 and 2007-2009, correlating with the two most recent recessions. And we expect the trend to be magnified in the current one. International trade flows are disrupted, profit targets are under pressure, industries are consolidating, and corrupt officials always have a hand outstretched for a bribe.

5. Sector sweeps

Back in the Obama days, DOJ and SEC were known for the concept of “industry sweeps,” in which an FCPA investigation of one company would lead to series of cases in the same industry sector and then to adjacent sectors. Some former Fraud Section attorneys have downplayed the concept of industry sweeps as a strategy. But there are good reasons for pursuing corruption sector-by-sector, even if it is unintentional. As prosecutors learn about a new industry they tend to learn the common patterns of bribery and other wrongdoing. And settlements have clustered by industry year after year as a result. We are arguably in the middle of sector sweeps of healthcare, aerospace and defense, and financial services now. We expect those trends to continue.

Get ready for the enforcement surge. For all these reasons, we consider 2021 to be likely to be another record year for FCPA enforcement, and we expect the trends toward greater enforcement to accelerate. Steps organizations can take now to address the threat of corruption include the following:

1. Assess the changing culture of enforcement in the DOJ and the Securities and Exchange Commission
2. Pressure test your compliance procedures by performing a legal pre-mortem
3. Consider upgrades to your risk-based compliance program
4. Update your training
5. Make sure your internal investigations teams are ready

At the Global Investigations Review Annual Meeting in New York on September 21, 2023, Principal Associate Deputy Attorney General Marshall Miller (“Miller”) delivered remarks that provide an invaluable glimpse into the Department of Justice’s (“DOJ’s”) current and forthcoming priorities and initiatives on corporate criminal enforcement. Miller’s remarks shed light on various key areas of DOJ’s enforcement focus, including DOJ’s continued encouragement of voluntary self-disclosure and increasing attention towards safeguarding national security interests. Miller also emphasized DOJ’s commitment to consistency, predictability and transparency in its corporate enforcement work with an aim that such commitment will help companies better predict outcomes for certain criminal violations and implement robust compliance programs to prevent criminal prosecution.

Emphasis on Voluntary Self-Disclosure

DOJ continues to prioritize incentivizing companies to self-disclose criminal misconduct. Indeed as Miller put it, DOJ “is placing a new and enhanced premium on voluntary self-disclosure.” In line with this effort and to promote consistent application, earlier this year on February 22^nd, DOJ announced its new single voluntary self-disclosure (“VSD”) policy adopted by and effective across all 94 U.S. Attorneys’ Offices.[1]

Through its new VSD policy, DOJ also now defines precise requirements for a company to obtain a presumption of a declination by self-reporting. This is even available for companies with, what Miller called, “aggravating circumstances.” Miller highlighted Corsa Coal Corporation (“Corsa”) as an example of DOJ making good on its VSD policy. Corsa received a declination despite engaging in bribery to secure $143 million in coal contracts an Egyptian state-owned company. Corsa’s timely and voluntary self-disclosure, cooperation, remediation, and disgorgement of profits played a crucial role in its favorable outcome. Miller noted, “because [Corsa] stepped up and owned it, it received a declination,” highlighting a lesson for all companies seeking a declination from the DOJ. Companies hoping for a declination with the DOJ should heed that self-reporting is not the end all be all, but rather only the first step in the process; meaningful cooperation (including providing helpful information about the individual wrongdoers involved) and investing in an effective compliance program to detect and fix misconduct must also be demonstrated. 

DOJ intends for the VSD policy to provide clearer requirements for self-reporting and benefits for companies who take advantage of the policy and timely self-report. DOJ reports seeing early significant returns on this new policy with many companies self-disclosing, resulting in investigations.[2] However, as DOJ admits, a full assessment of the effectiveness of the VSD Policy is still premature. Only time will tell how successful and lenient the policy will be for corporations looking to earn credit by self-disclosing. The calculus of voluntary disclosure may have shifted, but it is still too early to tell whether the shift is material for companies facing that difficult decision.

Self-Disclosure in Mergers & Acquisitions (M&A)

A DOJ self-disclosure policy within the M&A context is in the works. Miller noted that the DOJ understands the importance of not discouraging companies with strong compliance programs from acquiring companies with histories of misconduct, especially when the acquiring companies engaged in careful pre-acquisition and post-acquisition due diligence and remediation of such misconduct. Currently, the Criminal Division’s Corporate Enforcement Policy offers the possibility of a declination for misconduct discovered during the pre- or post-acquisition due diligence. This development is particularly potentially significant for private equity firms – serial acquirers of companies. Such firms may do well to enhance their due diligence programs, depending, of course, on the policy’s final terms.

Miller referenced a December 2022 declination for Safran SA, an acquiring company that voluntarily self-disclosed bribery misconduct of its acquired companies, cooperated and remediated the misconduct. That company secured a declination with disgorgement. DOJ anticipates extending this approach across the board for M&A transactions, with an emphasis on the “critical importance of the compliance function having a prominent seat at the table in evaluating and de-risking M&A decisions.” Forthcoming guidance from Deputy Attorney General Monaco regarding voluntary self-disclosure in the M&A space will be provided in the near future. Such guidance will likely underscore the importance of early detection and reporting of misconduct prior to formal acquisition or closing, and an evaluation of the strength of acquiring companies’ compliance programs.

Dire Consequences for Companies Breaching Prior Resolution Agreements

Companies with prior resolution agreements should carefully comply with their obligations under such agreements. Miller stressed that DOJ will not hesitate to hold a company accountable with severe penalties for breaching the terms an agreement resolving criminal charges (e.g., deferred prosecution agreements, non-prosecution agreements, corporate probation terms, etc.). In fact, Miller stated that requiring a guilty plea after such breaches is now DOJ’s standard policy. DOJ’s stringent approach with severe penalties will also be applied to all resolution agreements, including breaches of civil settlement agreements and violations CFIUS mitigation agreements or orders.

Incentivizing Good Corporate Citizenship Through Compensation

To enhance compliance, the DOJ expects (especially when evaluating the strength of a compliance program) companies to implement a compensation system that effectively promotes good behavior and deters wrongdoings. To this end, Deputy Attorney General Monaco directed the DOJ’s Criminal Division earlier this year on March 15^th to launch a two-part pilot program on compensation incentives and clawbacks.

Under this pilot program, all corporate resolutions with the Criminal Division will require that companies include “compliance-promoting criteria within its compensation and bonus system.” Such criteria can include prohibitions on bonuses for personnel who fail to satisfy compliance performance requirements, incentives linked to commitment to compliance processes and promotion thereof, and disciplinary measures that claw back bonuses or compensation to employees who engage in legal misconduct or fail in their managerial oversight to report or prevent such misconduct.

With respect to clawbacks specifically, the pilot program also provides an incentive for companies to claw back or withhold compensation from wrongdoers. Companies can now reduce potential criminal penalties if they make a good faith attempt to claw back compensation even if they are ultimately unsuccessful. Citing this as a double benefit for companies, Miller noted the program will allow companies to reduce the same dollar amount from the applicable fine for the misconduct by the amount they claw back from the wrongdoers. Companies “get to keep the money it recoups from the wrongdoer, and [they] get to subtract that amount off [their] fine.” 

Companies that cannot claw back monies at the time of resolution will have to pay the applicable fine, but will have a reserved credit equaling the amount they attempted to claw back from the wrongdoer. If successful in their clawback efforts, the reserved credit will be released to the company. But, even if unsuccessful, DOJ will credit the good faith attempt by releasing to the company up to 25% of the sought amount. 

Importantly, Miller specified that companies should have an active clawback policy that is “regularly deployed.” The DOJ will not take kindly to superficial or paper clawback policies that have no real bite to its bark and will view such policies as “no better than having no policy at all.” Companies should also regularly review their clawback policies and employment agreements to ensure they promote compliance long before such companies discover any wrongdoings. 

Dedication to Combatting National Security Compliance Failures

Miller focused the latter half of his remarks on how corporate enforcement actions tied to national security risks are now taking center stage for DOJ, which has detected an increasing number of cases implicating national security across industries with many cases involving sophisticated money laundering, cryptocrime, technology theft, and sanctions and export evasion, and terrorism crimes. To combat this growing threat, DOJ has dedicated significant resources, including hiring new prosecutors (25 to the National Security Division and 6 to the Bank Integrity Unit), expanding units focused on national security-related economic crimes (e.g., violations of the Money Laundering Control Act, the Bank Secrecy Act, and economic and trade sanctions programs) and forming the Disruptive Technology Strike Force to “target illicit actors, harden technology supply chains, and protect critical technological assets from acquisition by [United States’] adversaries.”

DOJ’s charged focus on national security is a signal for companies to ensure that their compliance protocols have updated and robust measures to mitigate national security risks. Certainly, any company that operates in high-risk regions controlled by autocracies must make national security compliance its highest priority. DOJ warns that all companies should carefully look over all their transactions operating in dangerous parts of the world and conduct diligence to safeguard against national security violations (e.g., money-laundering monies to support terrorism, using subsidiaries to conduct illicit business in North Korea in support of its nuclear weapons program, skirting export controls to funnel military technologies to United States adversaries, etc.).

Takeaways

By sharing its latest corporate criminal enforcement priorities, Miller stressed DOJ’s commitment to fostering a consistent, transparent and predictable enforcement environment that encourages companies not only to detect, deter, and report corporate misconduct but also to collaborate with DOJ in addressing evolving corporate crimes impacting national security. Companies should heed Miller’s remarks, and revisit their compliance programs with legal counsel to enhance measures geared towards promoting corporate responsibility and good citizenship. This includes refining company internal disclosure and reporting protocols, structuring compensation and bonus systems to optimize compliance, and implementing effective mechanisms to detect and prevent national security risk.

FOOTNOTES

[1] The VCD Policy is further discussed in detail in https://www.corporatesecuritieslawblog.com/2023/02/corporate-voluntary-self-disclosure-of-criminal-activity-more-of-the-same-or-a-real-sea-change/

[2] Additional analysis of the DOJ’s latest corporation resolutions can be found in https://www.law360.com/articles/1719945/self-disclosure-lessons-from-exemplary-corp-resolutions

Investigations are stressful for an organization’s leadership. But what is often overlooked is that they are stressful for an organization’s employees as well. The need-to-know nature of internal investigations usually restricts knowledge of the investigation’s character, scope, and potential consequences to a relatively small circle of senior management. But the employees who fall within the scope of the investigation will often know little about what’s going on, which can generate anxiety, impair morale, and create tensions in the workplace, further leading to negative repercussions for the organization that persist long after the investigation has been closed.

For most employees, their first awareness of an investigation is either through receipt of a litigation hold notice or an instruction to meet with the organization’s counsel. The employee will likely have received only a thumbnail summary of the nature of the investigation, which can leave the employee with more questions than the organization is able to answer, increasing workplace stress and anxiety. Interviews typically begin with an UpJohn warning—fa notice to the employee that the lawyer about to question them is not their lawyer and that anything they say can and may be used against them. Again, stress. The interview may cause the employee to question whether the organization suspects them of wrongdoing. The employee may question the conduct or integrity of their peers or supervisors.

After the interview, the employee returns to the workplace knowing, or at least suspecting, that counsel also interviewed their coworkers and wondering what they said. But, of course, counsel has instructed the employee not to discuss the subject matter of the interview with anyone. In other words, the investigation becomes the elephant in the office. In the absence of information, human nature will lead employees to fill in the blanks with what they know or believe they know. This very human tendency often leads the employees to conclude the worst. The resulting anxiety can damage morale and reduce productivity. Some employees may even choose to leave for a competitor.

What can be done to mitigate these collateral consequences of an investigation? One approach is to conduct a closeout debrief. A closeout debrief can serve to bring closure for employees, relieve anxiety, and restore trust in the organization. The concept is quite simple. The debrief occurs after counsel is comfortable that they have determined the facts, but before the investigation is formally closed. The debrief affords counsel and opportunity to review and confirm or correct information the employee provided. As such, it is a privileged communication. But it also provides an opportunity to inform the employee that the investigation is at or nearing its conclusion, express the organization’s appreciation for the witness’s assistance, and answer questions or provide assurances the organization was unable to offer earlier in the investigation.

This is not to say that counsel should share the entirety of their investigative findings. There may in fact be very little factual information that can be shared with employees. But even where little or no factual information can be shared, it can be tremendously reassuring to an employee to learn the investigation has been concluded, their cooperation was helpful and appreciated, and they are not at risk. Even where the investigation reveals misconduct that warrants terminating one or more employees, or other corrective action, the closeout debrief can be an opportunity to reassure employees who are not at risk of termination. A benefit of bringing closure to an investigation for employees is freeing them from the “sword of Damocles” that an ongoing investigation can feel like and allow them to breathe a sigh of relief.

The decision whether to conduct a closeout debrief and what to disclose is highly fact-specific. A close-out debrief will not be appropriate or feasible in every case or for all interviewed employees. But in our experience when conducted under the right circumstances and in the right way, the closeout debrief can help restore employee trust in the organization and in one another, relieve anxiety, restore morale, and increase productivity. It can also help reduce the risk that an employee will turn into a public whistleblower. In one case, for example, we were able to reassure the employee whose complaint had triggered a broad investigation, that contrary to her fear that she would be retaliated against, the organization agreed that she was right to raise her complaint and appreciated her willingness to do so. We could almost see the stress and tension drain from her.

The closeout debrief can also provide an opportunity to address operational weaknesses that contributed to the problem or create a risk of future problems. Lack of communication or weak management can create the conditions that cause employees to misinterpret company actions and intentions. We have seen erroneous allegations of misconduct arise from lack of communication or trust among employees or between employees and supervisors. The closeout process can provide an opportunity to address those underlying problems and implement measures to prevent them from recurring.

In sum, for CLOs, CCOs, and experienced senior management, internal investigations are simply a sad reality of corporate life. But for employees, an investigation can be a traumatic one-time event, which can undermine the quality of the employee’s work experience and burden the organization’s operations. Although the needs of an investigation require that the organization limit the information it discloses during the course of an investigation, the closeout debrief can afford an opportunity to restore the trust between it and its employees and reaffirm to them the organization’s values and commitment to compliance.