Q&A: False claims investigations and enforcement

February 2018  |  SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION

Financier Worldwide Magazine

February 2018 Issue

FW moderates a discussion on false claims investigations and enforcement between Sam Nazzaro at BDO, Maura Kathleen Monaghan at Debevoise & Plimpton, and Jonathan M. Phillips at Gibson, Dunn & Crutcher LLP.

FW: How would you describe recent investigations and enforcement activity related to the US False Claims Act (FCA)? Could you comment on any recent cases of note?

Nazzaro: As recently reflected by the US Department of Justice’s (DOJ) 2017 false claims statistics, healthcare and health and human services (HHS) cases continued to predominate in 2017 – almost 68 percent of the False Claims Act (FCA) cases were healthcare related and most of those were ‘qui tam’ cases. As the FCA is the government’s main civil cure to rectify false claims for federal money or property, most actions are filed under the FCA’s whistleblower, or qui tam, provisions. Using qui tam provisions is a way for whistleblowers and private citizens to bring matters on behalf of the US and obtain a percentage of the recovery. Of the $3.7bn in settlements and judgements in 2017, $2.4bn came from the healthcare industry, which includes but is not limited to drug companies, hospitals, pharmacies, laboratories and physicians. Increased instances of healthcare fraud and more sophisticated means of capturing and analysing data has led the government to become more proactive in developing FCA cases. There are several cases of note from 2017, including the largest civil settlement of $145m from Life Care Centers of America Inc., an operator of skilled nursing and rehab facilities.

Phillips: The new Administration showed in 2017 that it is not letting its foot off of the FCA enforcement gas. Last year marked the eighth straight year in which the federal government recovered more than $3bn from FCA cases – specifically, a total of $3.7bn in 2017 – and in which over 700 new cases were filed. Of particular note is the number of cases being pursued into litigation by private whistleblowers, also known as relators, even after the government has investigated their allegations and decided not to intervene. We are seeing relators increasingly willing to push FCA cases in litigation, and in 2017 relators brought in $426m in recoveries on the government’s behalf – the second highest total ever for declined cases.

Monaghan: FCA enforcement is an important priority for the DOJ. The DOJ is particularly interested in healthcare fraud and abuse because it is believed to cost the government billions of dollars each year. The DOJ is concentrating on elder and hospice care, opioids and improper referrals to hospitals and other providers. For example, in October 2017, the DOJ reached a $75m settlement with Vitas Healthcare, which allegedly billed the government for unnecessary hospice and homecare services. In July 2017, the DOJ arrested over 400 individuals for false billings related to opioids. The DOJ has also brought actions involving the mortgages and housing industry. In September 2017, the DOJ won a $296m judgment against a home mortgage broker that allegedly defrauded a federal mortgage insurance programme. These cases highlight the necessity for every company that receives government reimbursement to have a robust compliance programme that prevents, detects and corrects conduct that can lead to FCA violations.

FW: What penalties can firms expect to face if they breach the FCA? What steps have courts taken to limit penalties and damages in recent years?

Phillips: The FCA imposes severe sanctions on defendants. The statute provides for mandatory trebling of the damages sustained by the government from the alleged fraud, in addition to mandatory civil penalties of approximately $11,000 to $21,500 per violation. In cases where the FCA violation is based on the submission of a false claim, each claim may be subject to a separate penalty. For some defendants whose ordinary business involves the submission of dozens or hundreds, or even thousands, of invoices for government payment, the potential civil penalties can be astronomical – in the hundreds of millions or billions of dollars. However, courts have recognised that the Eighth Amendment’s prohibition on excessive fines acts to limit the total amount of civil penalties that can be imposed on a single defendant so that the amount of FCA penalties cannot be drastically disproportionate to the actual harm to the government. Since the penalty amounts were just recently doubled, we expect to see that defence invoked more and more in the coming years.

Monaghan: FCA violations may result in fines of $21,563 per false claim and treble damages – three times the dollar amount of the false claims. The DOJ typically accepts double damages from companies that are cooperative and settle FCA actions voluntarily. Defendants have argued that large FCA awards violate the Eighth Amendment prohibition against excessive fines, but this position has generally been rejected by courts. But defendants still have options. They can seek to reduce penalties and damages by limiting the scope of wrongdoing. For example, a company might argue that the court should reject a whistleblower’s attempt to extrapolate wrongdoing at the facility at which she worked to billing at other facilities because the whistleblower did not work at those facilities and had no knowledge of their practices. Another strategy is to seek a negotiated resolution with the DOJ before a matter goes to trial.

Nazzaro: The penalties for FCA violations are quite significant and the statute creates civil liability as long as you knowingly submit a claim. There is no requirement that you intend to defraud the government. For claims submitted after 2 November 2015, the FCA now imposes a civil penalty of not less than $10,781 or not more than $21,563 for each false claim submitted and automatically trebles the amount of the government’s damages. In addition, there is a statutory provision for attorney fees and costs and most cases are lengthy and expensive. Recent DOJ policies have also stressed individual accountability by pursuing FCA and other civil remedies to redress fraud by individuals. Of course, if there is intent to defraud, criminal prosecution can ensue. The DOJ reviews most cases through both a criminal and civil lens so the stakes can be very high, including significant reputational damage and an inability to participate in federal reimbursement programmes. In addition to the federal government, so far approximately 32 states have also enacted their own false claims statutes.

FW: In what ways has the government sought to expand its application of implied certification under FCA liability? What are the practical implications of this development?

Nazzaro: Under the implied certification theory, a claim can be determined false for purposes of civil liability under the FCA based on an implied representation that the provider or contractor who submitted the claim was in compliance with all applicable statutes, government contract provisions or regulations. Given the thousands of such possible regulatory requirements that may apply to providers, the potential scope of the implied certification theory has a considerable effect on organisations operating in any industry. After a split among the circuits on this theory, it came to a head in 2016 in the Supreme Court case of Universal Health Services, Inc. v. US ex rel. Escobar. In that case, it was alleged that a Massachusetts clinic which submitted claims, implied falsely that the clinic was in compliance with Medicaid regulations. The government claimed that compliance with the regulations was an implied condition of payment. The Supreme Court held that implied certification theory was allowable in some circumstances, but that there must be specific representations about the goods and services and they must be material.

Monaghan: Implied certification claims are based on the theory that by submitting a billing claim, the defendant is impliedly stating that it complied with the applicable regulations – but was not doing so. Such claims are attractive to the DOJ and whistleblowers because they do not require proof of an expressly false statement. The Supreme Court endorsed “implied certification” in 2016 – with an important caveat. The plaintiff must establish materiality, meaning the government would not have provided reimbursement had it known about the noncompliance. Defendants have won on materiality when they showed that the government knew about the noncompliance but continued to provide reimbursement. Defendants have lost where plaintiffs showed that the government received something very different from what was described on a reimbursement form, such as healthcare provided by unlicensed practitioners. Since materiality is often debatable, companies should not view the materiality requirement as a licence to relax FCA compliance.

Phillips: We have seen the government take the position that the Supreme Court’s recent decision in Escobar did not change the law in regard to the meaning of implied certification liability. But the significance of the Escobar court’s comments about the relevance of government knowledge in these cases cannot be understated. The court clarified that if the government knows of the issues alleged to underlie false claims, but continues to pay the defendant anyway, that is “strong evidence” that the FCA’s materiality requirement is not met. Going forward, we expect this to increase the importance of taking discovery of the government in FCA litigation, as that will be an important source to mine for evidence that alleged legal violations were not material to government payment.

FW: What general advice can you offer to a company that finds itself subject to an FCA-related investigation? What initial steps should it take to assess the matter internally and respond to the authorities?

Monaghan: Companies subject to FCA investigations should retain counsel to conduct an internal investigation to determine whether there has been misconduct and what, if anything, the whistleblower knows about it. Potential misconduct should be stopped immediately and internal controls should be established to prevent it from reoccurring. Overpayments resulting from misconduct should be returned to the government immediately. If a company concludes that it has acted properly, it should both cooperate with government investigators and develop legal defences, such as the whistleblower lacks credibility or that the company followed applicable regulations. If the company believes that there has been misconduct, it may want to enter into early settlement negotiations with the DOJ. Such negotiations could result in double damages – instead of treble damages if the case went to verdict – as well as some limitation in the scope of liability, such as only to billings resulting from certain facilities, time periods or business practices.

Phillips: The critical flashpoint of FCA investigations is the government’s intervention decision, and companies often have a chance to tell their story and provide input into that decision. Companies facing FCA-related investigations should attempt to understand as much as they can about the government’s concerns at the outset of the investigation and then work diligently to develop their own understanding of the relevant facts and to assess the likelihood that an FCA violation has occurred. In consultation with counsel, companies should also strongly consider presenting the facts and law of their case to the government, not only to advocate about the legal merits but also to ensure the government does not proceed based on factual gaps or misunderstandings which the company is in the best position to correct.

Nazzaro: It is very important to take potential FCA cases seriously even if the company does not feel it violated the statute. Under the FCA, intent is not required for civil violations and ignorance, incompetence and errors can present significant FCA exposures. One of the critical steps is to assemble an experienced team of attorneys, forensic accountants and subject matter experts who can objectively assess the situation by performing a number of steps which may include statistical sampling, substantive review of claims, evaluation of existing controls including policies, procedures, training, reporting mechanisms, supervision and review. Data analytics, email review and interviews will often complete the investigative procedures.

FW: While most FCA cases are brought by whistleblowers, their ability to bring a suit is not limitless. What defences can a firm employ to close down a whistleblower FCA suit?

Phillips: The primary goal of the FCA’s qui tam whistleblower provisions is to make the government aware of potential fraud so that the matter can be investigated and, possibly, pursued in litigation. Those provisions concomitantly limit whistleblower actions to claims that are novel and are the product of the whistleblower’s own knowledge, because those have the highest value to the government in identifying potential fraud. Accordingly, whistleblower suits can be dismissed, for example under the public disclosure bar. The public disclosure bar prohibits actions that are substantially similar to allegations or transactions that have appeared in certain public sources such as news media or government reports, unless the whistleblower has knowledge that is independent of, and materially adds to, the public disclosures and he has voluntarily disclosed them to the government. In a similar vein, the FCA also prohibits certain whistleblower actions under the ‘first-to-file’ bar, which prohibits whistleblowers from bringing an action that is based on the same facts as an already filed qui tam. FCA whistleblowers are further limited by the statute’s lesser-known government-action bar, which prohibits them from bringing suit based on allegations or transactions that are already part of a civil suit to which the government is a party.

Nazzaro: Obviously, a claim must have to indeed be false and this is often not an easy determination given some of the complexities in, for example, healthcare reimbursement. Other defences may include that the claim is already in the public domain. In my view, however, a practical approach to defending FCA matters will most likely appear after a targeted and focused investigation using experienced professionals who are also familiar with the tactics and the way that the government pursues these matters.

Monaghan: After a whisteblower files an FCA claim, it is placed under seal while the DOJ investigates. The seal is lifted when the DOJ intervenes and takes over the case or declines intervention, and the whistleblower proceeds alone. Either way, the DOJ, as the party in interest, can settle or end the matter. It may be prudent to reach out to the DOJ to convince it that the case is meritless and should be dismissed or to seek early resolution. In court, defendants can file a motion to dismiss. FCA defendants often argue in such motions that the alleged misconduct is not false or fraudulent, is not material, meaning the government would have provided reimbursement even if it knew about the alleged conduct or statement, or reflects public information. Even if the motion is denied, it may educate the court and the DOJ on the weaknesses of the case.

FW: To what extent can action be taken against employees who falsely accuse a company of FCA violations? What considerations does a company need to make before it decides to pursue such action?

Monaghan: Companies should be cautious when taking action against employees who the company believes have made false FCA allegations. A company should take action against an employee for making false allegations only if it has solid evidence that the allegations are false and without a reasonable basis. Otherwise, any retaliation, including just transferring the employee to a new position, may result in a lawsuit under the FCA’s ‘whistleblower’ protection provisions. Employees sometimes can prevail just by demonstrating that their allegations had a reasonable basis. Companies often find that they can minimise the risk of FCA allegations in the first place by treating employees with respect and creating a strong compliance culture. Employees are less likely to bring FCA actions if they believe their concerns are being addressed by management and that they are not being given unrealistic goals that can be accomplished only by cutting corners on compliance.

Nazzaro: First and foremost, compliance with the FCA is paramount and organisations should be cognisant of the perceptions that may arise when well-meaning whistleblowers are challenged. Although it may be a normal reaction for a company to want to take action against a false accusation, companies must proceed very cautiously when they become aware of a whistleblower. Although it is a natural reaction to pursue the whistleblower, especially in instances of fraud perpetrated in part or in whole by the whistleblower, one must be mindful that the statutory scheme provides significant protection to the whistleblower, including protections against retaliation in the form of discharge and discrimination. Furthermore, with the expansive nature of the FCA, a claim may not be necessarily apparent to everyone. Again, consulting with FCA professionals, including counsel, forensic accountants and other subject matter experts, from the onset and especially with regard to whistleblowers is critical.

Phillips: Companies considering such legal action must very carefully consider whether they can meet the required legal elements, because they will want to avoid creating the perception that they are seeking to retaliate against the employee and could be subject to sanctions if the actions are brought in bad faith. A number of courts have recognised that various tort or contract actions, such as defamation or breach of the employee’s contractual agreement not to misuse company information, are available where it can be established that a relator has made false accusations. But courts have also held counter-suits against relators to high standards of proof, as they do not want to create a chilling effect on potential whistleblowers’ willingness to bring meritorious cases.

FW: Based on your experience, what general steps can firms take to minimise and manage FCA risks and liabilities? Are today’s firms fully aware of the conduct which can lead to FCA violations?

Monaghan: The most important step in minimising FCA-related risk is developing and maintaining a robust and comprehensive compliance programme. Such a programme should consist of mechanisms for monitoring, auditing and investigating each business function, as well as third-party contractors, to identify potential activities that could lead to FCA violations. If potential misconduct is identified, it should be remediated immediately, and efforts should be made to ensure that the issue is not systemic and does not occur in the future. Companies should also conduct periodic risk assessments aimed at proactively addressing any areas of concern. Many large healthcare companies have developed robust compliance programmes in response to eight and nine figure FCA resolutions. However, some smaller healthcare companies or companies that receive government reimbursement but are targeted less frequently for FCA actions may be less attuned to FCA risks and may not have invested sufficiently in FCA compliance.

Phillips: Any company that deals with US government funds, either directly or indirectly, must take special care in their compliance efforts. A significant percentage of whistleblower allegations are made internally before they are made in FCA qui tam complaints. Accordingly, firms should adopt strong internal controls that provide a conduit for employees to raise concerns and that take those concerns seriously. At the same time, firms must be mindful that the FCA and other laws prohibit retaliating against employees who raise concerns about potential FCA violations, and that should factor into how they establish their compliance programmes.

Nazzaro: In many cases, organisations still do not anticipate the impact that an employee may have on the company if there are FCA violations. These risks reinforce and highlight the need for an effective compliance programme to detect violations and ‘hear and listen’ to the whistleblower before things progress too far. Likewise, an effective response and investigative process is needed to respond to various issues that arise in doing business with the government. The plaintiffs’ bar in these FCA matters has become more sophisticated and the government has allowed many of them to pursue cases without government intervention. An organisation must demonstrate that it has exercised appropriate measures to properly investigate and remediate issues. In addition, there are several meaningful proactive procedures an organisation can implement to mitigate FCA compliance risk. Similar to many other regulatory risks, a comprehensive periodic FCA risk assessment is often a wise first step. The risk assessment should be conducted by those independent of relevant management but in close cooperation with the applicable business units. A robust mechanism for monitoring FCA controls, higher risk transactions and the compliance programme itself will help mitigate the risk that the FCA compliance programme becomes stale, outdated and ineffective over time.

Sam Nazzaro is a litigation managing director with BDO. His expertise and prior engagements include assisting global companies, healthcare providers, financial institutions and foreign governments investigate fraud and corruption and manage and mitigate risk. He has successfully investigated, managed and led healthcare fraud/false claims matters, complex anti-money laundering (AML) investigations and sensitive and high-profile international governance projects. He can be contacted on +1 (202) 644 5436 or by email snazzaro@bdo.com.

Maura Kathleen Monaghan is a partner at Debevoise & Plimpton and co-chair of the firm’s commercial litigation and healthcare groups. Her practice focuses on complex commercial litigation, including products liability and mass tort litigation, healthcare, regulatory and criminal investigations and arbitration. She is recognised by Benchmark as a one of the “Top 250 Women in Litigation”. She can be contacted on +1 (212) 909 7459 or by email mkmonaghan@debevoise.com.

Jonathan M. Phillips is a partner at Gibson, Dunn & Crutcher LLP and a member of the firm’s litigation department. His practice focuses on Food and Drug Administration (FDA) and healthcare compliance, enforcement and litigation, as well as other white-collar enforcement matters and related litigation. Prior to joining Gibson Dunn, he served as a trial attorney in the civil fraud section of the US Department of Justice (DOJ).  He can be contacted on +1 (202) 887 3546 or by email jphillips@gibsondunn.com.

© Financier Worldwide

THE PANELLISTS

Sam Nazzaro

BDO

Maura Kathleen Monaghan

Debevoise & Plimpton

Jonathan M. Phillips

Gibson, Dunn & Crutcher LLP

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Q&A: False claims investigations and enforcement