A Tale of Two Memos for White-Collar Cases and Whistleblowers

In the past month, the U.S. Justice Department has released two memoranda that will affect civil enforcement generally and the False Claims Act specifically.

The first memo confirms that DOJ will more actively dismiss the whistleblower cases it turns down rather than let them run their course. The memo follows a surprise announcement in October that we covered here. It’s an internal memo, but it’s already been published in the legal press. Here’s a summary.

Under the False Claims Act, the government may move to dismiss a case over a whistleblower’s dissent as long as it gives notice of the motion and there’s a hearing on it.

In exercising this power, the memo calls on civil prosecutors to consider these factors:

  1. Whether the case clearly lacks merit at the outset or after investigation.
  2. Whether it piggybacks off an existing government investigation but adds nothing to it.
  3. Whether it interferes with the government’s policies and programs in that sector or industry.
  4. Whether it interferes with the government’s goals for litigation brought on its behalf.
  5. Whether it poses a risk to national security from disclosure of classified information.
  6. Whether it will cost the government more in time, labor, dollars, or lost opportunities than it will return on the investment.

Three more points. First, these factors are not mutually exclusive, so more than one may apply at a time. Second, they’re not exhaustive, so the government can move to dismiss for other reasons, too. Third, it ain’t all or nothing, so the government can move to dismiss some claims or defendants but not others.

The second memo says something more profound for enforcement generally. Effective January 25, civil prosecutors may no longer treat an agency’s “guidance” as a set of binding rules whose violation means a violation of law. That’s because an agency’s guidance can’t create binding rules beyond what exists by statute or regulation. For one thing, it doesn’t go through the same process as formal regulations do, where an agency will give notice of a proposed rule to stakeholders and afford them a chance to comment. (Which makes for better rules). Sometimes, it doesn’t even emanate from the agency but a contractor. Because guidance doesn’t have the force of law, the fact that a person or business didn’t comply with it doesn’t prove or even presume that they violated the law.

The memo defines such guidance as “any agency statement of general applicability and future effect, whether styled as ‘guidance’ or otherwise, that is designed to advise parties outside of the federal Executive Branch about legal rights and obligations.” The memo expressly applies, for example, when the government enforces the False Claims Act by alleging that someone falsely certified their compliance with statutes or regulations.

DOJ Will Clear Out Weak Qui Tam Cases

In a surprise announcement, the U.S. Justice Department says it will start moving to dismiss weak whistleblower cases brought under the False Claims Act rather than let them run their course. The announcement was made at a recent conference by the Director of Commercial Litigation for the Fraud Section of the Department’s Civil Division. I wasn’t at the conference, but this gentleman was, and he sheds light on the new policy.

Up to this point, the government has let whistleblowers litigate cases on their own even when it didn’t think they were any good. As we’ve explained before, the government always gets a first look at these cases. If it likes what it sees, it will take over the case and throw its weight behind it. If it doesn’t, it will decline to intervene but allow the case to proceed if the whistleblower (and his or her lawyers) is willing to do the work. Often, the government’s decision not to intervene will prompt whistleblowers to dismiss the case themselves. But now, it seems, the government will sometimes make that decision for them.

Don’t Keep The Change, Doc

Meaning, don’t just pocket the difference when the government overpays you for healthcare goods or services.

Recently, a medical group agreed to pay $450,000 to settle allegations that it refused to return $175,000 in overpayments that it received from federal healthcare programs like Medicare and Medicaid. Here’s the government’s press release.

The overpayments at issue tend to happen in medical practices when two insurers share responsibility for a payment, and one pays too much.

But the thing is, you have to return the surplus, whether it’s big or small; you can’t keep it, and you can’t dawdle, either. If you do, you may incur significant liability under the False Claims Act, as we’ve explained before.

The rule is that you have sixty days to return the money once you know (or should know) about the overpayment. For more on the 60-day rule, see here.

In this case, the government alleged that the medical group failed to return the money despite repeated warnings, until it learned the Justice Department was investigating. Apparently, it didn’t know that one of its employees had filed a whistleblower lawsuit, which the government joined and took over. (For more on that process, see here.) The former employee will receive $90,000 of the settlement proceeds, or twenty percent.

This isn’t the first time the feds have moved to enforce the 60-day rule, and it sure won’t be the last. They’re just getting started.

When Medicare Says You Can’t Sit With Us

Earlier this year, the U.S. Department of Health and Human Services issued new regulations on its power to exclude healthcare providers and suppliers from participation in a federal healthcare program. The agency excludes some 3,500 people or entities per year. You’ll want to avoid being one of them.

Here are some important takeaways.

The agency is empowered to cast a wider net. It may exclude not just the providers and suppliers who submit claims or receive payments but any person or entity that furnishes items or services for which others request or receive payment.

You can be excluded if you’re convicted of interfering with an audit. The agency doesn’t define the term “audit” for this purpose. Before, you had to have obstructed a criminal investigation, not just an audit or the like. The new rule also makes changes to the factors that extend or reduce the presumptive three-year exclusion under this provision.

You can be excluded for not providing information to support a claim even if you didn’t furnish the items or services in question. You can be excluded if you referred the items or services to others to furnish or certified that they were needed.

The agency has ten years to exclude you for false claims or illegal kickbacks. This timeframe follows the outer ten-year statute of limitations for violations of the False Claims Act. Before, there was theoretically no limit on how far back the agency could look to exclude you under these provisions.

The rule makes several changes to the aggravating and mitigating factors that extend or reduce the length of exclusions. Most of these changes affect the dollar-loss thresholds. For example, it’s now aggravating if the government’s loss amounts to $50,000 or more, when it used to be $15,000. And it’s mitigating if the loss is less than $5,000 when it used to be $1,500. Or, for excessive or unnecessary billing, it’s aggravating if the loss is $15,000 or more when that threshold used to be $1,500. Also, in most cases, it’s no longer mitigating if you provide access to care that’s otherwise not available in your area. Instead, the agency will consider that in deciding whether to exclude you rather than for how long.

You may be eligible for early reinstatement. You can request it if you were excluded because your professional license was revoked, suspended, or surrendered in a disciplinary investigation. There’s a presumption against it for the first three years that you’re excluded or for the length of your suspension or revocation, whichever is longer. There’s no such presumption if you’re still licensed in a different state or by a different licensing authority or if you were able to get a new license after full disclosure. But you’re not eligible at all if you lost your license because of patient abuse or neglect.

Double, Triple Whammies and Rewards

Speaking of the False Claims Act, get ready to buckle up.

Starting Monday, an interim final rule by the U.S. Justice Department will nearly double the statute’s civil monetary penalties for each false claim. The minimum penalty will go from $5,500 to $10,781, and the maximum penalty will go from $11,000 to $21,563.

For defendants, this means you’re looking at a minimum fine of $10,781 for every allegedly false claim. Multiply that by hundreds or thousands of bills that the government may deem suspect, and you quickly run up some big numbers.

Already, the FCA’s penalties have implicated the Eighth Amendment’s ban on excessive fines in cases where they’ve far surpassed the government’s actual losses. In many of those cases, the Justice Department has avoided the constitutional question by forgoing or reducing the penalties it sought under the statute.

Now throw these new penalties in with the specter of treble damages, which means the government can recover three times its actual losses in addition to the penalties, and you’ve got double and triple whammies for government contractors—with corresponding rewards for the whistleblowers who sue them.

The new rule was required by the Bipartisan Budget Act of 2015, which directed all federal agencies to update their civil monetary penalties every year to account for inflation. For the False Claims Act, this first update catches up on inflation since 1986, which was the last time the Justice Department raised the penalties in such cases. Actually, that’s not true; the last time was 1999, but the new rule disregarded that because the Bipartisan Budget Act had repealed the underlying legislation.

The DOJ’s new penalties apply in both its civil and criminal division and across constituent agencies like the Drug Enforcement Administration (DEA), the Federal Bureau of Investigation (FBI), and the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF).

The rule may also budge many states to conform their own penalties to federal law. That’s because the federal government lets states keep ten percent more than their pro-rata share of a Medicaid-fraud recovery when they bring a case under state law. To be eligible, however, a state’s civil penalties must meet or exceed the federal ones.

The new rule is effective August 1, and it will apply to all cases that allege false claims after November 2, 2015, which is when the Bipartisan Budget Act became law. Although the Justice Department is soliciting public comment through August 29, the rule is already final and will go effective next week.

The Scope of Fraud for Government Contractors

This summer, the U.S. Supreme Court issued an important decision for government contractors and the whistleblowers who sue them under the federal False Claims Act.

The bottom line may be this: contractors must abide by a myriad of rules, regulations, and contractual provisions in doing business with the government, but if they don’t, not ever misstep, only the material ones, can give rise to liability for fraud.

The case began with the tragic death of a teenage girl.

For five years, the girl had received counseling services at a clinic owned by a Medicaid contractor. When she was seventeen, she died from a bad reaction to a drug that she was prescribed there after being diagnosed with bipolar disorder.

Afterward, her parents learned that only one of the five employees who treated her was properly licensed. The employee who prescribed the drug had claimed to be a psychiatrist but, in fact, was a nurse who lacked the authority to prescribe without supervision. The employee who diagnosed her had claimed to be a psychologist but, in fact, had graduated from an unaccredited online school and been denied a license.

Those employees weren’t the only ones, either. Some 23 employees at the clinic weren’t licensed to provide mental-health services but did it anyway, counseling patients and prescribing drugs in violation of Medicaid’s regulations. The clinic’s director knew about it and helped misrepresent their qualifications.

Thereafter, the girl’s parents filed a whistleblower lawsuit under the False Claims Act. They alleged that the contractor had defrauded Medicaid by billing for services that its employees were not licensed or qualified to render and by not disclosing that fact. First, the trial court dismissed the case on the ground that, even if the contractor had violated Medicaid’s rules, its violations didn’t make its bills false because those rules were not an express condition of payment. Then, the court of appeals reversed, holding that such rules were implied conditions of payment even if they weren’t expressly identified as such.

By the time the case got to the Supreme Court, the issue had boiled down to whether the parents could sue under a theory of implied false certification. Under this theory, when the contractor submitted its bills, it impliedly certified that it had complied with all conditions of payment. Therefore, since it knowingly failed to disclose its regulatory violations, its bills were false, and they triggered liability under the False Claims Act.

So did the Court endorse this implied-certification theory?

Yes and no.

The Court held that liability depends on whether a defendant’s misrepresentation about its compliance was material to the government’s payment decision. In other words, the question is whether the government would have paid the bill if it knew of the defendant’s noncompliance. In this case, the contractor had used billing codes that corresponded to specific job titles when it knew that its staff didn’t measure up, so the Court sent the case back down for the lower courts to decide whether that misrepresentation was material.

The Court also held that liability doesn’t depend on whether the government calls something a condition of payment. That may be relevant, but it’s not conclusive. The question remains whether the condition was material to the government’s payment decision. Otherwise, the government might label every applicable rule or regulation an express condition of payment, and there are just too many of them for that.

To illustrate the difference, the Court used two examples. First, suppose the government orders guns but doesn’t specify that they actually be able to shoot. Obviously, that would be a material condition whether or not the government spelled it out. Second, suppose the government contracts for health services but expressly requires providers to use American-made staplers for the paperwork. That likely wouldn’t be a material condition, especially if the government routinely paid out on claims knowing that foreign staplers were used.

CMS Issues Final “Overpayments” Rule for Medicare Parts A and B

Speaking of healthcare—providers, suppliers, and other stakeholders should take note that, last week, the Centers for Medicare & Medicaid Services (CMS) published its long-awaited final rule for reporting and returning overpayments under Medicare Parts A and B.

The rule defines “overpayments” to include any funds you receive or retain that you’re not entitled to after applicable reconciliation. The CMS published its rule for Medicare Parts C and D two years ago, and there’s no rule for Medicaid yet. With or without an administrative rule, however, you’re still subject to a statutory 60-day rule under the Affordable Care Act.

The rule confirms that you must report and return an overpayment within sixty days of the date on which you “identify” it or by the due date of any corresponding cost report, if applicable, whichever is later. After that, the overpayment becomes an obligation that you owe the government, and it triggers liability under the False Claims Act and the Civil Monetary Penalties Law, among other consequences.

The rule provides that you identify an overpayment when you either have or should have, through the exercise of reasonable diligence, both determined that you received an overpayment and been able to quantify its amount to a reasonable degree of certainty.

What’s reasonable diligence? The agency deems it to include both (1) reactive investigations by qualified individuals in response to credible information about a potential overpayment; and (2) proactive compliance activities by qualified individuals to screen for overpayments.

Once alerted to a potential overpayment, you have up to six months to complete your investigation, except in extraordinary circumstances; then the 60-day clock begins to run.

How far back do you need to look? The rule says six years, which is consistent with the base statute of limitations under the False Claims Act.

The rule goes into effect on March 14, 2016. You can read the text and extensive commentary for yourself here.

Blowing the Whistle in the Public Domain

Suppose you’re privy to some major government fraud, and you’re thinking of blowing the whistle on it. That could be good because, under the federal False Claims Act (FCA), you may stand to receive anywhere from 15-30% of whatever the government can recover. Multiply that by millions or even billions of dollars in damages, and you’ve got quite a bounty.

But you can’t blow the whistle on something that’s already public, right?

Well, yes and no.

Yes, the rule is that you can’t make a case based substantially on facts or allegations that have already been disclosed publicly—whether in the news media, a federal court hearing, or a federal agency report, audit, hearing, or investigation.

But no, this public-disclosure bar doesn’t apply if you’re considered an “original source” of information, which means two things:

  1. You have independent knowledge that materially adds to the publicly-disclosed information; and
  2. You voluntarily provide this information to the government before filing your case.

So wait, don’t you have to be the one who first brought things to light?

Not necessarily. It used to be the case in some courts that you had to have brought your case before the public disclosure, or played some part in making it public, but that’s no longer true, as a recent appellate decision helps explain.

Bear in mind, however, that if a court finds that your case is based primarily on the already-public stuff then your share of the recovery is capped at ten percent and may be less.

And if another “original source” has already filed the same case then you’re out of luck. That’s because, under the FCA’s first-to-file rule, you can’t blow the whistle on the same material facts and allegations that someone has already sued on.

The rationale behind all this is to encourage all brave whistleblowers to come forward but discourage sheer opportunists from jumping on the bandwagon.

Individual Accountability for Corporate Wrongdoing

Another day, another collar, and another notable policy shift from the Justice Department.

Two weeks ago, it was the arguably-more-important decision to require search warrants before federal agents could use certain, mobile tracking-and-hacking devices in the field.

Last week, it was a policy memorandum that made a splash in the world of white-collar enforcement and defense. The policy was circulated internally on September 9 and unveiled publicly the next day in a speech by Deputy Attorney General Sally Yates.

Titled, Individual Accountability for Corporate Wrongdoing, the policy prioritizes and emphasizes the prosecution of people and not just business organizations. It applies to both the Department’s civil and criminal divisions, and it prescribes the following six points.

First, to receive even partial credit for cooperation, an organization must disclose all relevant facts regarding the individuals responsible, regardless of their position, status, or seniority. Cf. U.S.S.G. § 8C2.5, comment. (n. 13). Only once an organization does that does it become eligible for cooperation credit, and its failure to follow through and make good on that may trigger stipulated penalties or a material breach of its settlement agreement. The same goes for civil enforcement actions, including civil actions brought under the False Claims Act. See, e.g., 31 U.S.C. § 3729(a)(2) (defining cooperation sufficient to reduce the statutory penalties).

Second, the Department’s investigation of a business organization should focus on individuals from the beginning, because it helps prosecutors climb the organization’s ladder by flipping those on the lower rungs.

Third, attorneys in the civil and criminal divisions who handle such investigations should routinely talk to each other in order to maximize recoveries and take advantage of the full range of remedies available to the government—including imprisonment, fines, penalties, damages, restitution, forfeiture, and regulatory exclusion, suspension, or debarment.

Fourth, absent extraordinary circumstances or an approved policy, the Department will not agree to cut people loose from civil or criminal liability in order to resolve a case against their organization. When government lawyers resolve a case against a business, they should preserve their ability to pursue its officers or employees, and they should not agree to dismiss charges against, provide immunity for, or release civil claims against them. Or, if they do, the agreement must be approved by the appropriate United States Attorney or Assistant Attorney General.

Fifth, the department’s lawyers should not resolve a case against a business without a clear plan to resolve any related cases against individuals, and they should explain their decision to prosecute or decline such cases in a formal memorandum that must be approved by the relevant U.S. Attorney or Assistant Attorney General or their designee. Furthermore, if they reach a tolling agreement with the business to avoid blowing the statute of limitations, they should take care to resolve any individual cases before the statute runs or get tolling agreements there, too.

Sixth, the department’s civil division should consistently focus on people as well as businesses, and its lawyers should consider suing culpable individuals in order to punish and deter wrongdoing, even when they may not be able to pay a large judgment.

The memorandum closes by directing all components to incorporate these points into their everyday work, beginning with a training conference tomorrow in Washington, D.C.

In the Light of Perpetual War

Yesterday, the U.S. Supreme Court unanimously decided an important case that was closely watched by lawyers who prosecute and defend whistleblower actions.

The background is the False Claims Act, which was passed in 1863 to fight rampant fraud in Civil War defense contracts. The FCA imposes liability on anyone who knowingly presents a false or fraudulent claim for payment to the government. See 31 U.S.C. § 3729. As we’ve covered here before, the Act empowers whistleblowers, or “relators,” to sue on the government’s behalf and, when successful, to share in a portion of the recovery. Id. § 3730.

Generally, under the FCA, a whistleblower lawsuit must be filed within six years of the alleged violation, or within three years of the date the government should’ve known about it, but in all events, no more than ten years after the violation. 31 U.S.C. § 3731(b).

Another law, however, suspends all statutes of limitations for fraud against the government whenever Congress has declared war or authorized the use of military force. 18 U.S.C. § 3287. It’s called the Wartime Suspension of Limitations Act. The law tolls the statute of limitations until five years after Congress or the President declares an end to hostilities.

There’s no question that this law applied to criminal cases; the question before the Court was whether it applied to civil cases, too.

The backstory was that, in 2005, the relator worked for a defense contractor in Iraq, and later, he filed a whistleblower lawsuit in Virginia alleging that his employer had fraudulently billed the government for services that weren’t performed properly or performed at all.

The government didn’t intervene, but shortly before trial, it alerted the parties to another, similar case in California that had been filed first.

This revelation, according to the Supreme Court’s opinion, “initiated a remarkable sequence of dismissals and filings.”

First, the district court dismissed the complaint under the “first-to-file” rule, which bars whistleblower lawsuits that rely on the same facts as an already-filed case. 31 U.S.C. § 3730(b)(5). The relator appealed that dismissal, and while his appeal was pending, the California case was dismissed for failure to prosecute. The relator then filed a new complaint, but he didn’t dismiss his appeal first, so the district court dismissed the new complaint under the first-to-file rule on the basis of his own, pending appeal. So the relator withdrew his appeal and filed a new case, but by then, others had already filed similar cases in Texas and Maryland, and besides, it was 2011, more than six years after the alleged fraud, so the court dismissed his case again—this time with prejudice.

Finally, the relator appealed the dismissal again and won, when the court of appeals held that he could refile his case for two reasons. First, the Wartime Suspension of Limitations Act applied to civil cases like his and thus tolled the statute of limitations. Second, the first-to-file rule didn’t apply once a related action was dismissed, and by then, both the Texas and Maryland cases had been dismissed.

The Supreme Court agreed on the second point but not the first. It held that the text, structure, and history of the WSLA demonstrated that it applied only to criminal cases, not civil cases, and it reversed the case on that basis. Were it otherwise, in fact, in today’s world, the WSLA could effectively eliminate the statute of limitations. Instead, the Court interpreted the law in favor of repose.

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