The False Claims Act Basic Concepts, Recent Trends, and Strategies for Minimizing Risks Philip D. Robben February 26, 2013 False Claims Act Basics (I)! Imposes liability on those who submit false claims or make false statements to obtain payment from the government.! Frequently amended by Congress in response to court decisions.! Best of both worlds for the government:! As a civil statute, a civil standard of proof applies.! Lesser intent than in a criminal case.! But, the government often employs the tactics and evidence gathering common to criminal cases.! The government often pursues both criminal and FCA investigations in tandem. 2 1
False Claims Act Basics (II)! Whistleblower (qui tam) provisions heighten the risk.! Can be anyone with inside information about alleged violations of the FCA:! Former employees (most common)! Current employees! Competitors! Customers and consumers! Others! Entitled to share up to 30% of any proceeds recovered in a judgment or settlement of the matter rewards can be staggering.! Whistleblowers are entitled to special protections pursuant to the FCA s anti-retaliation provision. 3 False Claims Act Basics (III)! Whistleblower must file their complaint under seal with the court.! Only the government may review the complaint while under seal.! Purpose of the seal is to give the government the chance to investigate the allegations in the complaint and decide whether government wants to intervene in the case.! Defendant does not receive notice of the lawsuit until the court unseals the complaint.! The first sign of trouble is often a subpoena.! Complex cases may remain under seal for several years. 4 2
False Claims Act Basics (IV)! 29 states, the District of Columbia, and some cities have false claims acts, many of which are modeled on the federal statute.! States have a financial incentive to frequently amend their FCAs as the federal FCA is amended and broadened.! State courts often follow federal court decisions.! Some state FCAs only cover the Medicaid program. 5 An Extraordinarily Potent Weapon! The potential consequences of losing an FCA case are severe:! Exclusion from government funded programs/contracts.! Mandatory treble damages.! Penalties of $5,500 - $11,000 per violation.! Example: GlaxoSmithKline $1.5 billion settlement in 2012! The FCA is the government s primary civil antifraud tool.! More than $35 billion in recoveries since 1986.! More than $4.9 billion collected in 2012 alone. 6 3
Government Intervention is Key Factor! Where a whistleblower brings a suit, the government has a choice to intervene or not.! The bulk of judgments and settlements occur in cases where the government intervenes:! In 2012, total FCA recoveries in qui tam cases were $3.3 billion in intervened cases and $29.4 million in declined cases.! Less than 5% of intervened cases are ultimately dismissed.! But, the government only intervenes in about 20% of cases.! Approximately 85% of declined cases are ultimately dismissed, typically at the motion to dismiss stage. 7 What Is A False Claim? (I)! The FCA does not define what types of claims are false.! Whistleblowers and the DOJ are constantly trying to stretch the bounds of what constitutes a false claim under the FCA.! Undisputed Examples! Seeking payment for goods or services that were not provided.! Over-charging for goods or services that were provided.! Providing different goods or services than those agreed to.! Providing worthless goods or services. 8 4
What Is A False Claim? (II)! Disputed Examples! Implied certification of compliance with a governing statute or regulation.! Off-label marketing of pharmaceuticals! U.S. ex rel. Landis v. Tailwind Sports (Lance Armstrong) 9 FCA Enforcement Trends (I)! Qui tam filings have been a driving force: *!!" )!!" (!!"!"#$%&'"'$()*"+$ '!!" &!!" %!!" $!!" #!!",-./012"345" 012"345"!"!$"!%"!&"!'"!("!)"!*"!+" #!" ##" #$" Source: Civil Division, U.S. Department of Justice, Fraud Statistics 1987 2012, dated October 24, 2012. 10 5
FCA Enforcement Trends (II)! FCA suits have tended to focus on HHS and DoD spending, which have historically been areas of significant government outlay.! But, the financial crisis led to more government money being injected into the economy in various forms.! November 2009 President Obama forms the Financial Fraud Enforcement Task Force to investigate and prosecute significant financial crimes and other violations relating to the current financial crisis! 35 30 25 20 15 10 5 0 FCA Recoveries, 1987-2012 (billions) HHS DoD Other 11 FCA Enforcement Trends (III)! In 2012, the mortgage industry accounted for $1.4 billion in FCA recoveries, including:! $202.3 million Deutsche Bank/MortgageIT! $158.3 million CitiMortgage Inc.! $132.8 million Flagstar Bank! What does the future hold?! More cases that push the limits of the FCA.! Healthcare and defense will continue to be a focus.! Congress can be expected to limit the reach of defense-friendly court decisions. 12 6
Minimizing FCA Exposure (I)! Perform an assessment to determine the company s level of risk given the nature of its interaction with the government.! Implement a compliance program or make enhancements to an existing program that takes FCA risks into account:! Program is company-specific; no one-size-fits-all solution.! Provide employees with fraud prevention training.! Give employees the means to report potential problems.! Investigate and take corrective action as needed.! Make efforts to improve employee morale and loyalty.! Obtain periodic outside reviews of the company s compliance practices to make sure they meet current best practices. 13 Minimizing FCA Exposure (II)! In Deutsche Bank, the DOJ claimed that DB was liable for all violations, even those committed before it acquired MortgageIT.! Include FCA exposure in due diligence conducted in connection with M&A transactions.! Due diligence review should include a review of at least:! Government contracts executed by the target company.! Applicable contractual and regulatory obligations.! Target company s compliance with the above. 14 7
Questions? Philip D. Robben Kelley Drye & Warren LLP 101 Park Avenue New York, New York 10178 Phone: (212) 808-7726 Fax: (212) 808-7897 probben@kelleydrye.com 15 8