Throwing Pitches in a Civil Case

Make that Pitchess with an extra s—as in Pitchess motions. In California, they’re how you ask a court to order the production of a police officer’s personnel file in litigation.

We’ve written about them in the context of criminal cases, but the procedure’s the same in civil cases, as a court of appeal recently explained in an employment case.

A retired police officer had sued his police department for unlawful retaliation. He said the trouble started after he had served 18 years on the force, when he blew the whistle on two officers for filing false reports. He was branded a snitch and ostracized. Even his calls for help in the field would go ignored. He transferred divisions and applied for 14 different promotions but was denied each time in favor of someone less qualified. So he sued.

To prove his case, he moved to obtain the personnel files of the officers who were promoted ahead of him. He argued their records were material to his case because the department claimed to have promoted the more-qualified candidates.

The trial court, however, denied his motion because the records belonged to third parties who had nothing to do with the alleged retaliation. That was the department’s argument, anyway, and the court accepted it.

But that’s not the law.

Because the records were material to the plaintiff’s case, the agency had to produce them for the court to decide what was relevant and discoverable. It didn’t matter that it was a civil case, not a criminal one. It didn’t matter that the records pertained to people who were innocent of wrongdoing. What mattered is that the records were material to the plaintiff’s case, and there was no denying that.

Although the trial court could take a number of steps to balance the rights of third parties, it couldn’t refuse to review the records and test their relevance.

So the court of appeal reversed and sent the case back.

SEC Reports Enforcement Results for 2016

As we wind down the calendar year, the Securities and Exchange Commission has already reported its enforcement results for the fiscal year that ended September 30.

In case you missed it, here’s the press release. Naturally, there’s some self-patting on the back, but if the past predicts the future, the agency is looking to file cases. Its numbers have climbed steadily over the last dozen years, and it continues to ramp up its use of big-data analytics and the whistleblower program, which it launched in 2011.

Here are some highlights from 2016.

  • The agency filed a total of 868 cases, which was a new single-year high.
  • It filed a record number of cases involving investment companies or advisers and a record number under the Foreign Corrupt Practices Act.
  • It obtained over $4 billion in judgments and orders, which matched the haul from each of the last two years.
  • It awarded more money to whistleblowers ($57 million) than in all prior years combined.

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.

The New Federal Defend Trade Secrets Act

Speaking of trade secrets, there’s a new civil law on the books.

Two weeks ago, with a stroke of the President’s pen, Congress enacted a law that allows you to sue (or be sued) in federal court for the theft of trade secrets. The new law amended a criminal statute that we alluded to in last week’s post.

The amended statute defines a trade secret as any information you own that you’ve taken reasonable steps to keep secret and that derives economic value from not being known to, nor readily ascertainable by, another person who could derive value from it. The law provides federal jurisdiction for civil claims if the trade secret has sufficient nexus to interstate or foreign commerce. It doesn’t preempt any state laws.

If you’ve got a claim, you must bring it within three years of the date you discovered the theft or should’ve discovered it through reasonable diligence.

If you win, you can get injunctions to protect your trade secret as well as recover damages for your actual losses, their unjust gains, or your reasonable royalties. If you prove that the other side acted in bad faith, you can get punitive damages up to double your other damages, along with reasonable attorneys’ fees.

Plus, at the outset, not only can you sue (or be sued), you can apply for an emergency restraining order to freeze or seize property you need to preserve your trade secret, without notice to the other side.

The courts won’t just dole these orders out, though, because the law reserves them for “extraordinary circumstances.” To get one, you must clearly allege specific facts to show, among other things, that the bad guys stole your trade secret and would hide or destroy the property or evidence if they were given notice. And you have to put up security in advance to cover their damages if it turns out you were wrong or went too far.

If you do get a restraining order, the law requires that the seizure be carried out in a way that minimizes harm to any legitimate business operations. The court will schedule a hearing within seven days of the order, and there, you’ll have to prove up the underlying facts or the court will dissolve or modify its order.

If it turns out you were wrong or went too far, anyone harmed by your seizure can sue you for their damages, including lost profits, cost of materials, loss of good will, punitive damages if you acted in bad faith, and reasonable attorneys’ fees in most cases.

Finally, the law protects whistleblowers who disclose trade secrets in the course of reporting a violation of law, as well as parties to litigation who disclose trade secrets in a court filing, as long as they file it under seal and abide by any subsequent court orders.

For the full text of the statute, see here.

CFTC Launches New Website for Whistleblowers

Another thing about the Commodity Futures Trading Commission: Last month, the agency unveiled the new website for its whistleblower program at www.whistleblower.gov. It looks pretty good, and it’s easy to navigate. It tells you what you need to know about the program, including how to submit a tip and how to apply for an award.

The CFTC’s whistleblower program was created by the Dodd-Frank Act of 2010, and it provides monetary awards to people who voluntarily report violations of the Commodity Exchange Act. If your tip translates into an enforcement action that results in more than $1 million in sanctions, you stand to receive 10-30 percent of the money collected. The pay out may even include money collected by other agencies that piggyback off your successful tip.

Here’s the CFTC’s press release.

Meanwhile, the agency has apparently caught flak for the way it’s been accounting for its office leases, though after a year-long audit by the Government Accountability Office, it seems like much ado about little.

You can read a couple stories about it here and here, but after reviewing the GAO’s report, it’s hard for me to see the point of the whole exercise unless it was to fuel congressional squabbles over the CFTC’s budget.

And for my money, an agency that we’ve called on to regulate the multi-trillion-dollar derivatives markets needs a lot more than $250 million per year to do its job.

The SEC Dodd-Frank Whistleblower Program

Speaking of whistleblowers, the Securities and Exchange Commission just published its annual report to Congress on its own program that it launched in 2011.

And overall, it seems to be on the upswing.

The SEC’s program authorizes monetary awards for volunteering original information that results in a successful enforcement action, including sanctions that exceed $1 million. It doesn’t matter whether you help open a successful investigation or close an existing one more efficiently or favorably.

If you fit the bill, you get ten to thirty percent of whatever the agency collects, and the percentage will vary with the facts and circumstances of the case. Factors that can raise your percentage include the value of your information, the overall assistance you provide, the public interests at stake, and whether you tried to report the matter internally (and suffered retaliation for it) before going to the government. Factors that can lower your percentage include your own unclean hands, if any, whether you delayed unreasonably in reporting the matter, and whether you interfered with your company’s internal compliance program (if any).

According to the report, since 2011, the Commission has paid over $54 million to 22 whistleblowers, and in the last fiscal year alone, it paid over $37 million to eight of them. One received over $30 million and another received over $3 million.

Who are they? According to the agency, about half are current or former employees of the companies they blow the whistle on. Others include ticked-off investors, industry peers, or personal contacts of the person or company in question. They hail from all fifty states as well as other countries, but most come from California, New York, New Jersey, Florida, and Texas. Many submit their information anonymously through counsel.

What do they report on? It runs the gamut, but often, they report on misstated corporate disclosures and financials; fraud in connection with securities offerings; price manipulation; insider trading; unregistered offerings; or violations of the Foreign Corrupt Practices Act.

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.

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.

You Can Go Your Own Way

Go your own way, if you must, but in whistleblower cases, it’s better to have a partner, especially when that partner is the Department of Justice. Under the whistleblower, or qui tam, provisions of the False Claims Act, citizens may sue on behalf of the government, and if they do, they stand to collect anywhere from 15-30% of the recovery. That can translate into many millions of dollars, as we’ve explained here before, but a lot depends on whether the government decides to join your lawsuit in a process called intervention. That’s because the lawsuit is initially filed under seal and served only on the government, not the defendant, until the government can review it and decide what to do.

If the government intervenes in your case, you’re not only on the right track but, often, the fast track to resolving the case favorably and for dollar values that dwarf the value of settlements when the government doesn’t intervene.

But that’s not always the case. Last summer, for example, saw a big settlement of $124 million in a case in which the government had declined to intervene. Of that, the primary whistleblower in the case will receive over $17 million. It is reportedly the largest settlement to date in a non-intervention case. The settlement resolved allegations that a major pharmacy company paid kickbacks by swapping below-cost discounts on Medicare Part A business for referrals to Medicare Part D and Medicaid business.

Besides, the government usually doesn’t decide quickly and, sometimes, it doesn’t decide at all, agreeing to unseal the case but deferring its decision whether to intervene. That may encourage whistleblowers to push their cases along in discovery in the hope of eventually persuading the government to take over.

Still, going your own way can be risky. Just last month, one whistleblower whose case was declined by the government and then dismissed by the court suffered another blow: he was ordered to pay over $10,000 in litigation costs to the other side.

That might feel like a lonely day.

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