Editors' Note: This is the fourth in our start-of-year series examining important trends in white collar law and investigations in the coming year. Our previous entry discussed anti-corruption trends in 2020. Up next: a look at State Attorney General trends. Look for additional posts throughout the month of January.
More than halfway into the Donald Trump administration, Trump's Department of Justice has painted a pretty clear picture of its False Claims Act ("FCA") enforcement priorities. Despite some doubts voiced within the administration – including by Trump's second Attorney General William Barr – about the FCA's qui tam provisions and new policies seemingly intended to ease the burden on FCA defendants, enforcement remains robust. In 2019, the Department of Justice obtained more than $3 billion in settlements and judgments from civil FCA suits, a modest increase from the $2.8 billion recovered in fiscal year 2018 (which represented a slight drop from 2017). These numbers are down significantly from the $6 billion-plus peak of 2014, but are generally in line with the recoveries over the past few years. To the surprise of no one, the health care industry remained a primary target, accounting for $2.6 billion of all recoveries. We see no reason why these trends will not continue into 2020.
Courts Will Continue to Grapple with Materiality and the Parameters of "Implied False Certification" Liability Post-Escobar.
In Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the Supreme Court addressed an issue that had created a rift among courts: whether an "implied" certification of compliance with applicable statutory, regulatory, or contractual requirements, when it was in fact non-compliant, can serve as a basis for FCA liability. Pre-Escobar, the validity and scope of the so-called implied false certification theory, viewed as an expansion of FCA liability, was uncertain.
The Court found implied false certification can serve as a basis for FCA liability, but only if the claim for payment "makes specific representations about the goods or services provided," and the "failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths." Id. at 2001 (emphasis added). Although the Court confirmed that the requirement need not be expressly designated a condition of payment, post-Escobar courts were left to determine, among other things, what non-disclosures are "material" to the government's payment decision. More than three years post-Escobar, courts continue to grapple with the meaning and application of this decision, a trend we expect will continue into 2020 and beyond.
Escobar provided a number of guide posts for courts to test whether a claimant has met the "demanding" materiality standard, including whether the requirement was designated as a condition of payment; whether the government routinely refuses to pay claims based on non-compliance with the requirement; or whether it will pay claims even with knowledge of non-compliance. Id. at 2003-04. In 2019, courts applied Escobar's materiality test with varying results. See, e.g., United States v. Rite Aid Corp., No. 2:11-cv-11940, 2019 U.S. Dist. LEXIS 54854 (E.D. Mich. Mar. 30, 2019) (failure to charge the required "usual and customary" rates to government healthcare programs material to payment decision because rates go to the "very essence" of the bargain); United States v. Am. Imaging Mgmt., No. 15 C 6937, 2019 U.S. Dist. LEXIS 53899 (N.D. Ill. Mar. 29, 2019) (non-compliance with Medicare claims review process immaterial to payment decision where government audited defendant and continued to pay claims).
We expect the implied false certification theory of FCA liability will garner significant attention in 2020, and courts will continue to wrestle with Escobar's standard to determine what statutory, regulatory, or contractual non-compliance is material. One case to keep an eye on is United States ex rel. Ruckh v. Salus Rehab., LLC, 18-10500-D (11th Cir.), in which the relator alleged that the defendant provider "upcoded" services, and failed to maintain required comprehensive care plans. The district court set aside a $347 million judgment, and the Eleventh Circuit heard oral argument on November 20, 2019. At argument, the Court probed materiality, including whether the state Medicaid agency had ever initiated enforcement proceedings for the alleged non-compliance. The Eleventh Circuit's forthcoming decision will tackle Escobar's materiality standard head-on.
Implementation of the DOJ's Dismissal and Cooperation Policies
Granston Dismissals Continue
The last few years have been noteworthy not just for the development of new case law, but also for several new policy pronouncements by the DOJ, some of which appear intended to ease the burden on FCA targets. The Granston Memo, which outlines the DOJ's policy with respect to moving for dismissal of declined FCA cases pursuant to 31 U.S.C. § 3730(c)(2)(A), was released two years ago. At the time, the major question about the memo, which outlined several factors that the DOJ will consider in deciding whether to pursue dismissal, was whether it had any teeth. Two years later, there has been a notable uptick in government motions for dismissal. The DOJ has exercised its discretion in several cases around the country and has a largely unblemished record. Its most successful and notable endeavor involved 11 cases filed across the country by serial relator National Health Care Analysis Group. The government, after investigating the allegations and declining to intervene, moved to dismiss all of the cases and was successful in all but one. There, the Southern District of Illinois in United States ex rel CIMZNHCA v. UCB rejected DOJ's argument that potential recoveries were unlikely to justify the cost of pursuing the case and concluded that the DOJ's investigation of the allegations was insufficient. The DOJ's attempts at dismissal have only been rejected in one other case, out of the Northern District of California (United States ex rel. Thrower v. Academy Mortgage Corp.), and that decision is also presently on appeal.
A circuit split remains to be resolved regarding the standard that a court should apply in considering a dismissal request. In the Ninth Circuit and Tenth Circuit, courts apply a heightened standard, where the government must show a valid purpose for dismissal and a rational relationship between dismissal and that purpose. Alternatively, in the D.C. Circuit, the government has an "unfettered right to dismiss" without a standard of review. As noted, the Seventh Circuit will soon have an opportunity to weigh in.
Despite the increased use of the DOJ's dismissal authority, the news is not all rosy for the defense bar. In March 2019, the author of Granston Memo, Michael Granston issued a warning to FCA defendants attempting to take advantage of the "government burden" factor in the memo by serving burdensome discovery on the government. Granston warned that "[d]efendants should be on notice that pursuing undue or excessive discovery will not constitute a successful strategy for getting the government to exercise its dismissal authority," and that "[t]he government has, and will use, other mechanisms for responding to such discovery tactics." Additionally, the DOJ's enforcement statistics continue to paint a picture of an active, undeterred whistleblower bar. The government still recovered $293 million from declined cases, which is in line with recoveries from years preceding the Granston Memo. While the Granston Memo will no doubt be an important advocacy tool for defendants facing FCA liability in 2020, it is equally clear that the relators bar will continue to find new and creative theories to pursue claims.
Implementation of the May 2019 FCA Cooperation Policy Remains to Be Seen
An alternative approach to an FCA investigation is cooperating with the government. While companies have cooperated in investigations for many years, and have sometimes received credit for this cooperation, the DOJ for the first time issued a formal FCA-specific cooperation policy in May 2019, which we covered in full here. This policy has officially been incorporated as Section 4-4.112 of the DOJ Manual. The policy makes clear that the most important form of cooperation is to voluntarily disclose misconduct to the government, including the disclosure of additional misconduct that goes beyond the scope of known concerns during a pending investigation.
While the policy provides for decisions on credit to be made on a case-by-case basis, it also makes clear that that a company or individual hoping for maximum credit must undertake a timely self-disclosure that includes "identifying all individuals substantially involved in or responsible for the misconduct, provide full cooperation with the government's investigation, and take remedial steps designed to prevent and detect similar wrongdoing in the future." It is too early to tell how DOJ has actually implemented the policy and whether its awarding of credit has changed in practice, but this bears watching in 2020.
What Types of Cases Will We See in 2020: Some of the Old and Some of the New
Healthcare Will Continue to Reign Supreme
As noted above, the healthcare industry, including drug and medical device manufacturers, managed care providers, hospitals, pharmacies, hospice organizations, laboratories, and physicians, continues to be the leading target of FCA enforcement. This is, in fact, the tenth consecutive year that healthcare-related recoveries have exceeded $2 billion. This trend is not going away. Two of the government's largest recoveries came from opioid manufacturers – Insys and Reckitt Benckiser Group plc – and, as we previously covered here, this industry figures to be in the crosshairs in the coming year. As we have also previously covered here and here, the payment of patient co-pays through charitable foundations was a major focus in 2019, accounting for $624 million in total recoveries. While many of these 501(c)(3) co-pay investigations appear to have concluded, expect the DOJ to continue to take enforcement action where pharmaceutical companies attempt to illegally fund their patients co-pays.
Another industry likely to remain in the DOJ's crosshairs are vendors of electronic health records. EHR vendor Greenway Health paid a whopping $57.25 million in 2019 to settle allegations that it misrepresented the capabilities of its EHR product, in turn causing users to submit false claims to the government. This is the second large EHR-related case out of the District of Vermont in the last three years, and given the increased use of such systems by healthcare systems, continued government focus is likely.
Finally, as we previously covered here and here, private equity is a potential new target for DOJ enforcement. A September 2019 settlement with Patient Care America and its private equity backer, Riordan, Lewis & Haden, Inc., turned on extensive private equity involvement in PCA's operations. For private equity funds that actively manage their investments, this should serve as a warning for future enforcement.
False Certifications of Compliance with Cybersecurity Regulations
It seems that cybersecurity threats are everywhere and it is no different with respect to the FCA. We are beginning to see FCA cases brought on the basis of false certification of compliance with government cybersecurity regulations and expect this to become a focus area into the future. The Federal Acquisition Regulations include cybersecurity regulations that are applicable to many government contractors. While many individual agencies maintain their own cybersecurity regulations, in 2016 the government added a provision to the FAR – FAR 52.204-21 – Basic Safeguarding of Covered Contractor Information Systems – which requires contractors to implement several information security requirements, including limiting access to authorized users, limiting physical access to systems, updating malicious code protection and performing real time scans of external files.
In May 2019, in a declined case, the United States District Court for the Eastern District of California refused to dismiss a complaint including allegations that a government contractor failed to comply with its cybersecurity obligations. A few months later, in July 2019, the DOJ announced an $8.6 million settlement with Cisco to resolve allegations that video systems that it sold to state and federal governments contained security vulnerabilities, making them accessible to potential hackers. This case involved the first reported FCA settlement involving cybersecurity fraud, but given the increased attention on cybersecurity, others are inevitable.
As this theory of liability continues to evolve, it will likely implicate our above discussion regarding implied certification cases and whether any false certification is material to the government's decision to pay a claim. For example, depending on the situation, the failure to comply with a certain cybersecurity requirement may or may not be material. There will also undoubtedly be questions about what is required to satisfy the FAR's vast cybersecurity requirements.
Violations of Domestic Preference Laws and Tariffs
The Buy American Act ("BAA") and the Trade Agreements Act ("TAA") created a complex regulatory landscape of contract procurement restrictions intended to protect American industry. Generally, the BAA and TAA impose government purchasing preferences for American-made products, with numerous exceptions. In a series of executive orders (most recently on July 15, 2019), President Trump brought renewed focus to the BAA and TAA, and called for changes to the already byzantine regulatory framework.
Given the importance that the current administration has placed on these laws, contractors that fail to comply with contracts incorporating these requirements face the risk of FCA liability. However, there will certainly be questions raised about what it means to comply with this complex regulatory framework.
Similarly, the recent "trade war" with China that has led to increased tariffs provides incentives for companies importing goods from China to attempt to avoid these tariffs. For example, companies could ship goods from China to a neighboring country and then ship them to the U.S. Under either scenario, this evasion of tariffs could form the basis for FCA liability going forward.
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