"False Claims Act Investigations: Time for a New Approach?"
Pharmaceutical, medical devices and health care companies spend billions each year on all of the costs associated with government investigations triggered by False Claims Act (FCA) suits, including the costs of producing documents and witnesses in response to government subpoenas, conducting internal investigations and resolving the allegations. The costs do not stop with a settlement of the FCA claims, as resolutions typically require companies to sign a multi-year corporate integrity agreement. The current enforcement environment shows no signs of abating, with health care enforcement remaining a government priority, and with the promise of generous rewards for whistleblowers.
Have companies and their counsel mounted the most effective defense possible beginning with the receipt of the first subpoena? Over the past 15 years, most companies (and their counsel) have, upon receipt of a government subpoena, responded as required while simultaneously conducting an internal investigation that seeks to ferret out the issues in the federal investigation and the company’s potential exposure. Very few companies have sought to force the government at an early stage to disclose the False Claims Act suit. Thus, companies have defended investigations without the benefit of the discovery and litigation rights accorded litigants in federal civil suits and without the ability to correct any misconduct identified in the FCA complaint, and have typically allowed the matter to be resolved on the government’s timetable.
Does this remain the most effective and efficient strategy for companies in the current federal law enforcement environment? As we suggest below, in certain cases the answer may be no: It may be in the best interests of a particular company to adopt a more aggressive strategy, including taking steps to force an early unsealing of the qui tam litigation, thereby engaging the rights of discovery and other processes attendant in any pending federal civil litigation while the federal investigation is pending.
Under Seal: The Statutory Rights of the Government
Under the False Claims Act, a person, called variously a whistleblower or a relator, may file an action on behalf of the government asserting that the government has suffered a loss as a result of false claims by the named defendants. The case automatically remains sealed for 60 days to allow the government to determine whether to intervene. 31 U.S.C. § 3730(b)(2). During this time, the complaint is not served on the defendant, who does not know of its existence and thus cannot engage in discovery or otherwise seek to dismiss or contest the suit. If the government elects to intervene, the matter is unsealed and the litigation commences, with the government pursuing the matter as plaintiff. Many such cases, however, are resolved without any actual litigation. Often, prior to an actual intervention and any litigation, counsel for the government and the defendant engage in negotiations that culminate in a settlement that is filed coincident with the unsealing of the complaint.
A second provision allows the government, upon a showing of good cause, to move for an extension of the “time during which the complaint remains under seal.” § 3730(b)(3). The law does not appear to limit the reasons for which the government may seek an extension of the seal; in context, the implication is that the seal extension may be sought where the government can demonstrate good cause for extending the seal beyond 60 days for the making of its intervention decision. The statute also does not appear to permit extending the seal so that the government can build its case and work towards perfecting its litigation position.
If the government declines to intervene, the case is unsealed, and the litigation in federal court between the whistleblower and the defendants commences.
The Government’s Pinched Resources
On January 21, 2011, Assistant Attorney General Ronald Weich for the U.S. Department of Justice and Assistant Secretary Jim Esquea for the U.S. Department of Health and Human Services sent to Sen. Chuck Grassley (R-Iowa) a letter addressing, inter alia, the number of qui tam cases pending and the resources handling those cases. Esquea and Weich specified the following:
- As of January 4, 2011, there were 1,341 qui tam cases under seal, 885, or 66 percent, of which alleged health care fraud.
- For qui tam cases filed since October 1, 2006, the average length of time that the case remained under seal was 13 months, a figure the letter represented “has remained fairly constant.”1 Thirteen months is more than six times the period envisioned by Congress.
- Approximately 200 assistant U.S. attorney (AUSA) full-time equivalent work years were devoted to health care fraud enforcement.2
Given the huge incentives paid to whistleblowers in False Claims Act cases in just the past two years — more than $650 million total in just 14 cases3 — companies should expect this growth in filings to continue; indeed, the number of pending and as yet sealed qui tams likely exceeds 1,400. As a current federal prosecutor recently told one of the authors of this memorandum, “We have received a flood of whistleblower suits” since January.
In addition to this significant bubble of qui tam cases, companies should expect, once the whistleblower provisions of the Dodd-Frank Act become final, a similar flood of cases in the SEC arena. See Pub. L. No. 111-203, § 922(a), 124 Stat. 1841 (2010); 17 CFR Parts 240 and 240. Under those provisions, whistleblowers will be entitled to between 10 percent and 30 percent of monetary sanctions in excess of $1 million. This new financial incentive may trigger a flood of filings, as would-be whistleblowers eye the chance to reap a share of future Foreign Corrupt Practices Act and insider trading cases, and other financial fraud enforcement actions. Investigating these filings will further pinch the government resources available to handle False Claims Act cases, as the government reallocates its limited resources.
These two factors, when coupled with the hiring freeze imposed at the Department of Justice on January 21, 2011,4 require a reconsideration of the classic approach taken in defending qui tam actions. While a company may ultimately determine not to change its strategic approach to the government’s investigation, the company should be cognizant of the risks inherent in pursuing the old approach in the new environment.
Leveling the Playing Field for FCA Claims
The government’s typical strategy in False Claims Act cases has been to investigate the matter fully prior to making an intervention decision. This strategy has allowed the government to triage its scarce resources and to pursue investigations largely on a timetable of its choice. See, e.g., United States ex rel. Lee v. Horizon West, Inc., 2006 WL 305966 (N.D. Ca.) (“After the filing of the initial complaint, the United States began a broad investigation into Relator’s claims, during the course of which it repeatedly applied to this Court to extend the period of time for intervention.”). In many instances, the government has sought ex parte, and has obtained, extensions of the seal lasting well past the 60-day period, and in some cases for many years. See, e.g., United States ex rel. Health Outcomes Technologies v. Hallmark Health System, Inc., 349 F. Supp. 2d 170 (D. Mass. 2004) (False Claims Act suit filed on February 27, 1996, and kept under seal until August 20, 2004); United States ex rel. Erickson v. University of Washington Physicians, 339 F. Supp. 2d 1124 (W.D. Was. 2004) (qui tam filed under seal August 3, 1999; newspaper filed motion in 2004 to intervene and to obtain documents filed under seal and ex parte). In all likelihood, in many situations, the government has not used the time to make its intervention decision but rather to enhance the strength of its litigation position. See United States ex rel. Costa v. Baker & Taylor, Inc., 955 F. Supp. 1188, 1191 (N.D. Cal. 1997) (while the Justice Department asserted that 18 months was insufficient time to make an intervention decision, the district court note that the “State of California … demonstrated greater candor by admitting in its memorandum that it determined long ago that the accusations had merit and is now seeking information only about the scope of the damage.”). As the court stated in United States ex rel. Costa, “This practice of conducting one-sided discovery for months or years while the case is under seal was not contemplated by Congress and is not authorized by statute.” 955 F. Supp. at 1191.
Where the investigation is both criminal and civil, the government has used its criminal investigative powers to subpoena documents, to compel the examination of witnesses before the grand jury and to consider the hiring of experts, all before the unsealing of the qui tam complaint and its service on the defendant. As Assistant Attorney General Weich conceded to Sen. Grassley, cases have remained under seal routinely for longer than one year.5 In these circumstances, the first peek that the company and counsel have had at the qui tam complaint has come only when the government has sought permission from the court to disclose the complaint to counsel for the defendant for purposes of negotiating a settlement. Where this has happened, this partial lifting of the seal often has not included an accompanying right on the part of the defendants to engage in discovery and otherwise defend. In short, this “partial lifting” of the seal — an event not envisioned in the statute — has been part of a government strategy to achieve a settlement, rather than part of a process to enable the government to make its intervention decision. As one court stated:
[O]ne cannot help wondering whether the fact that the defendant must guess about the case filed against them is not the more significant settlement advantage currently enjoyed by the government. …Congress enacted the seal provision to facilitate law enforcement, not to provide an extra bargaining chip in settlement negotiations.
United States ex rel. Costa, 955 F. Supp. at 1191.
For companies targeted by a qui tam, this government strategy has presented benefits and costs. As regards benefits, companies have made the judgment that deferral of public disclosure has been in their best interests. Sometimes, after investigation, the government has determined not to intervene, and the whistleblower has dropped the matter; that the matter remained under seal eliminated potentially harmful publicity around a meritless claim. In other circumstances, counsel and the company were able to negotiate a settlement with the government prior to unsealing of the complaint. This allowed the company to present to the public a solution to the whistleblower allegation simultaneous with the disclosure of the allegations. For public companies, maintaining the seal until the matter has been resolved has been perceived as a significant benefit. Company counsel have thus had the opportunity to develop and execute a rational media strategy with the goal of controlling, to the extent feasible, the disclosure of negative information.6 With many constituencies to manage — directors, customers, employees, shareholders and the government agencies — the ability to control the information in an orderly fashion has been perceived to have substantial value.
The costs, however, have included foregoing of the rights of discovery and other processes afforded a defendant in federal court. During the period when a company knows it is under investigation but the matter remains under seal and has not been served, the defendant company cannot: know the precise nature of the allegations; notice and take depositions; issue subpoenas for information; seek relief in court via motions to dismiss, or for summary judgment; or seek to compel a third party, or the government, to provide information necessary to crafting a defense. In addition, the company cannot look into the allegations in the complaint and is not able to take corrective action to address any misconduct. While counsel can pursue an internal investigation and seek voluntary interviews, counsel is in the dark as to the precise parameters of the complaint. This adds to the unfairness of the government’s current approach: While prosecutors often assert the company has engaged in “serious” misconduct, they keep the company in the dark, often for years, as to the specific allegations in the FCA complaint.
Time for a New Approach?
The current pinch on government resources, coupled with the rise in false claims suits and the expected flood of Dodd-Frank whistleblower actions, suggests a re-thinking of this calculus. While in the past companies might have expected False Claims Act matters to stagnate with a shortage of government resources, we believe that that will not be the case. Companies should expect that the government will continue to initiate investigations and issue subpoenas, and to take action to keep investigations secret and under seal for as long as possible. During this period — when 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 — the government and the whistleblower have an advantage. Working in conjunction with counsel for the whistleblower, the government will take steps, with knowledge of the precise allegations in hand, to collect electronic and documentary evidence and to interview witnesses.
We predict that there will be an increase in the number of cases where the government delays an intervention decision, and the litigation is pushed forward by the whistleblower and his/her attorney. This will happen as the number of cases grows and the federal judiciary becomes impatient with the pace of the government investigations. This unsealing of the complaint will allow company counsel to see the allegations asserted against it and to make use of the discovery tools to defend itself; however, this ability, and thus some leveling of the playing field, will, if the current wait-and-defend strategy remains the paradigm, come at a significant cost and with great disadvantage to defendants. The passage of time is not an ally for a litigant endeavouring to assemble evidence about historical events. If a company’s entry into the litigation arena comes two to four years after the litigation has been commenced, the company will forever be playing catch up and may find that witnesses’ memories already have been either captured and/or influenced by the opposing side, or have dimmed to the point of unreliability.
Companies should expect that the government will neither quickly recognize its inability to handle the flood of cases nor strategically evaluate the ongoing deterioration of its litigation position. Companies should expect that, in the short term, the government increasingly will endeavour to compensate for its scarce resources by working in concert with whistleblower counsel during the investigative phase. Members of the whistleblower bar will embrace this, in part to justify their role (and the significant payments made to them) in the process, particularly given the recent challenges to the enormous sums paid to whistleblowers. Thus, when ultimately forced by an increasingly impatient judiciary to choose to intervene, the government will, if it declines, hand the litigation over to a well-positioned and litigationally advanced relator. The government then will sit on the sideline and watch, opting to pounce and re-enter should the relator develop a strategic advantage in the litigation.
Accordingly, 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.7 The precise terms of the False Claims Act, as well as its legislative history, support the right of a party named as a defendant in a False Claims Act suit to disclosure of those claims, not at a time chosen by the government for its convenience and strategic advantage, but rather sixty days after the filing of the case. As one court has stated, “There is nothing in the statute or legislative history to suggest that, in evaluating requests for [extensions of the seal], the court should disregard the interests of the defendant and the public. Defendants have a legitimate interest in building their defense while the evidence is still fresh.” United States ex rel. Costa v. Burke & Taylor, Inc., 955 F. Supp. 1188, 1189 (N.D. Ca. 1997). See also ACLU v. Holder, 2001 U.S. App. LEXIS 6216, at 21 (4th Cir. March 28, 2011) (while declining to order the unsealing of all qui tam complaints in an action initiated by the ACLU, a divided panel of the Fourth Circuit acknowledged that Congress had crafted “a narrow window of time (i.e., 60 days) in which the seal provisions are mandatory.”). As the Senate stated in 1985:
Subsection (b)(3) of section 3730 establishes that the Government may petition the Court for extensions of both the 60-day evaluatory period and the time during which the complaint remains under seal. Extensions will be granted, however, only upon a showing of ‘good cause’. The Committee intends that courts weigh carefully any extensions on the period of time in which the Government has to decide whether to intervene and take over the litigation. The Committee feels that with the vast majority of cases, 60 days is an adequate amount of time to allow Government coordination, review and decision. Consequently, ‘good cause’ would not be established merely upon a showing that the Government was overburdened and had not had a chance to address the complaint. While a pending criminal investigation of the allegations contained in the qui tam complaint will often establish ‘good cause’ for staying the civil action, the Committee does not intend that criminal investigations be considered an automatic bar to proceeding with a civil fraud suit. The Committee believes that if an initial stay is granted based on the existence of a criminal investigation, the court should carefully scrutinize any additional Government requests for extensions by evaluating the Government’s progress with its criminal inquiry. The Government should not, in any way, be allowed to unnecessarily delay lifting of the seal from the civil complaint or processing of the qui tam litigation. (Emphasis added.)
Delay in disclosure to a company of the precise allegations in the False Claims Act suit affects not only a company’s ability to defend itself, but also its ability to take corrective action. Kept in the dark, a company only can guess at the identity of bad actors in its employ. Unaware of the precise problem, a company may fail to correct flawed internal controls. A fraud readily stopped may linger and fester for two years or longer while the government creeps along with its understaffed investigation. Disclosure of the allegations on the timetable envisioned by Congress provides good management the opportunity to stop the submission of additional false claims, thus reducing the company’s exposure and the government’s loss.
If sued by a competitor, or in shareholder’s derivative action, a company would never acquiesce in a process that gives the other side a two- to four-year head start in the litigation. Nor would the company consider settling the litigation on terms proposed by the other side, without the opportunity to conduct discovery or to seek court review of the legal merits of the litigation theories. This has, however, been a matter of routine in the false claims arena. In today’s enforcement and whistleblower-friendly environment, it would be prudent for companies to evaluate whether this approach continues to make sense.
1 The department’s odd choice of time periods — narrowing its answer to just those qui tams filed since October 1, 2006 — suggests that, when all pending qui tams are evaluated, the average period of time cases have remained under seal is substantially longer.
2 Assuming the average AUSA works a 55-hour work week for 48 weeks a year, only 157 AUSAs are working on health care matters, criminal and civil. We believe that these numbers indicate that fewer than 100 AUSAs nationwide are handling all 885 health care qui tams.
3 Michael K. Loucks, “Rewarding the Whistleblowers under the False Claims Act: the Great American Giveaway” BNA Health Care Fraud Report, 15 HFRA 102, 01/26/2011.
4 See http://abcnews.go.com/images/Politics/AG%20Memo%20re%20Budget%20 Implications%20for%20the%20DOJ%20Workforce.pdf; http://www.mainjustice.com/2011/01/24/justice-department-under-hiring-freeze/. While this hiring freeze will be lifted, we expect that funding for the Department will remain tight given the continuing political concerns regarding the size of the federal government's deficit.
5 What remains unclear is what relief may be sought by a defendant named in a qui tam that the government has kept under seal without good cause as required by the statute. See United States ex rel. Costa, 955 F. Supp. at 1191-92 (“The court notes with regret that when the earlier extensions were granted in this case, the effects of inertia and the lack of an opposing party may have resulted in a less searching inquiry regarding good cause than is appropriate.”).
6 Indeed, in recent litigation, a divided panel of the U.S. Court of Appeals for the Fourth Circuit ruled that the seal provisions of the False Claims Act only prohibit the relator from publicly referencing the filing of the qui tam complaint and that “[n]othing in the FCA prevents the qui tam relator from disclosing the existence of the fraud.” ACLU v. Holder, 2001 U.S. App. LEXIS 6216, at 23 (4th Cir. March 28, 2011). Given this ruling, there may be instances where a relator, seeking to goad government counsel into action on his/her pending whistleblower suit, speaks publicly about the existence of a fraud.
7 Depending on the precise circumstances, the appropriate strategy may be to seek a partial unsealing of the complaint to allow for defense counsel review without the rights of discovery, while maintaining the secrecy of the matter. Another approach may be to seek unsealing of the complaint with the attendant rights of discovery, while maintaining the seal and thus barring public disclosure of the allegations.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.