The Whistleblower Stampede And The New FCA Litigation Paradigm Richard L. Shackelford King & Spalding LLP Actions under the qui tam provisions of the False Claims Act ( FCA ), 31 U.S.C. 3730(b)-(h), are increasing exponentially. Although these cases have been the primary catalyst for the Department of Justice s fraud enforcement efforts for many years, the numbers of cases being filed today are significantly above historical levels. During 2011 more than 760 new FCA matters were commenced 1 and the dollars recovered in 2012 are on a record pace, including a $3 billion settlement of civil and criminal allegations by a major pharmaceutical company. 2 Statutory changes and case law developments in the last three years have weakened certain defenses historically available in FCA whistleblower cases, increased the exposure for whistleblower retaliation claims, and potentially expanded the number of potential relators. These legislative changes and case law developments will force defense counsel to employ new strategies in the defense of these cases. 1 See Fraud Statistics - Overview, Office of Pub. Affairs, U.S. Dep t of Justice, http://www.justice.gov/civil/docs_forms/c-frauds_fca_statistics.pdf. 2 See Press Release, Office of Pub. Affairs, U.S. Dep t of Justice, GlaxoSmithKline to Plead Guilty and Pay $3 Billion to Resolve Fraud Allegations and Failure to Report Safety Data (July 2, 2012), http://www.justice.gov/opa/pr/2012/july/12-civ-842.html. DMSLIBRARY01-19472564.2
There is another critical change in the FCA healthcare landscape. Increasing numbers of FCA healthcare cases are proceeding without government intervention and are being actively litigated in jurisdictions all across the country. This is likely due to the confluence of several factors: the increasing number of cases being filed, the decreasing patience of federal judges with long, drawn-out investigations and the resulting impact on their dockets, and the increasing numbers of new relator s counsel moving into the FCA area from other areas of plaintiff s practice. FCA QUI TAM BACKGROUND The FCA allows a private party plaintiff -- called a relator -- to file a qui tam action on behalf of the United States against a defendant. 3 A whistleblower can be virtually anyone -- including a current or former employee, a customer or a competitor. They can be natural persons or corporations. Relators are required to file qui tam actions in federal district court under seal. The seal remains in place for at least 60 days. The U. S. Department of Justice ( DOJ ) must choose either (1) to intervene in the matter and take over the litigation, (2) to decline to intervene and allow the relator to pursue the litigation in the name of the United States, or (3) to dismiss the matter so that the relator cannot 3 31 U.S.C. 3730(b)(1). 2
pursue it (a relatively rare occurrence). 4 The DOJ regularly seeks lengthy extensions; and the willingness of courts to allow repeated extensions of the seal varies by federal district and by judge. During the time that a qui tam is under seal, DOJ has authority under the FCA to issue Civil Investigative Demands ( CIDs ) to gather documentary evidence and to depose witnesses. 5 DOJ also often relies upon subpoenas issued by the Office of Inspector General of the U.S. Department of Health and Human Services to gather documentary evidence. DOJ frequently seeks to finish its investigation while the qui tam action remains under seal and to reach a settlement before any active litigation occurs. Prior to filing a qui tam action, relators are required to disclose the substance of their allegations to DOJ. As a practical matter, counsel for qui tam relators generally contact the U.S. Attorney s Office for the district in which they intend to file and, at times, the DOJ Civil Fraud staff in Washington, D.C. to discuss the scope of their allegations and to begin the process of working with DOJ to investigate the case while the action remains under seal. The FCA allows DOJ to share with relators the documents and information received pursuant to a CID. 6 Relators generally recover from 15% to 25%, but not more than 25%, of the proceeds of the action (or settlement of the claim) when the government intervenes 4 31 U.S.C. 3730(b)(4), 3730(c)(2). 5 31 U.S.C. 3733. 6 31 U.S.C. 3733(a)(1). 3
in the action. Relators generally recover from 25% to 30% of the total recovery when the government does not take over the case. A successful relator also recovers statutorily mandated attorney s fees and costs. 7 The FCA contains three key provisions relating to relators that often become a focus of investigation and/or litigation in qui tam actions. These are the antiretaliation, public disclosure and original source provisions. All three of these have been substantially amended within the past three years. Recent Key Statutory Amendments and Case Law Relating to Whistleblowers 1. Statutory Amendments Historically, a key provision for the defense has been 3730(e)(4), the public disclosure bar. Prior to significant amendments in the Affordable Care Act in 2010, this provision imposed an explicit jurisdictional bar to any action based upon the public disclosure of information from various government proceedings or reports, or from the news media. The public disclosure provision as revised by the Affordable Care Act currently reads as follows: (A) The court shall dismiss an action or claim under this section, unless opposed by the Government, if 7 31 U.S.C. 3730(d). 4
substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed-- (i) in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party; (ii) in a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation; or (iii) from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information. 8 The provision no longer expressly references jurisdiction, and the court is not required to dismiss a relator s action if the government opposes a defendant s motion to dismiss. 9 The prior version of the statute imposed a jurisdictional bar for both state and federal disclosures. 10 The Affordable Care Act amendment limits the bar to 8 31 U.S.C. 3730(e)(4)(A). 9 Whereas the pre-affordable Care Act version of the public disclosure bar began with No court shall have jurisdiction..., the statute now provides that The court shall dismiss... It remains to be seen whether courts will construe the new language as a jurisdictional bar. 5
information from federal proceedings, reports, investigations, etc., and news media disclosures. Once the public disclosure bar has been triggered, its operation may be avoided if the Relator qualifies as an original source. Original source was defined previously as someone with direct and independent knowledge of the information and who voluntarily provided the information to the government before filing an FCA action. 11 This provision was also amended by the Affordable Care Act. 12 An original source is now defined to mean a person who either voluntarily discloses the information to the government prior to the public disclosure, or has knowledge that is independent of and materially adds to the publicly disclosed allegations and who has voluntarily provided the information to the government before filing an FCA action. 13 The terms knowledge that is independent and materially adds are undefined by the statute. The current original source provision reads as follows: (B) For purposes of this paragraph, original source means an individual who either (i) prior to a public disclosure under subsection (e)(4)(a), has voluntarily 10 See Graham Co. Soil & Water Conservation Dist. v. United States ex rel. Wilson, 130 S. Ct. 1396, 1400 (2010). 11 See 1986 version of the FCA at 31 U.S.C. 3730(e)(4)(B) (1986). 12 See Patient Protection and Affordable Care Act, Pub. L 111-148 (March 23, 2010). 13 31 U.S.C. 3730(e)(4)(B). 6
disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section. The FCA contains a non-retaliation provision that until recent amendment protected only employees from being retaliated against by their employers for lawful acts in furtherance of an action under the FCA. This provision, 3730(h), stated prior to amendment as follows: Any employee who is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment by his or her employer because of lawful acts done by the employee on behalf of the employee or others in furtherance of an action under this section, including investigation for initiation of, testimony for, or assistance in an action filed or to be filed under this 7
section, shall be entitled to all relief necessary to make the employee whole. 14 The Fraud Enforcement and Recovery Act of 2009 ( FERA ) expanded the FCA retaliation provision in two ways. First, the provision was expanded to include [a]ny employee, contractor, or agent. Second, the scope of protected activity was also expanded. After FERA, the provision read as follows: Any employee, contractor, or agent shall be entitled to all relief necessary to make that employee, contractor or agent whole, if that employee, contractor, or agent is discharged, demoted, suspended, threatened, harassed, or in any other matter discriminated against in the terms and conditions of employment because of lawful acts done by the employee, contractor, or agent on behalf of the employee, contractor, or agent or associated others in furtherance of other efforts to stop 1 or more violations of [the FCA]. 15 Congress again modified the scope of protected activity through another amendment to the provision that was enacted as part of the Dodd-Frank Wall Street 14 31 U.S.C. 3730(h) (1986). 15 See Fraud Enforcement and Recovery Act, Pub. L. No. 111-21 (May 20, 2009). 8
Reform and Consumer Protection Act of 2010 ( Dodd-Frank Act ). 16 Accordingly, 3730(h) of the FCA now reads as follows: Any employee, contractor, or agent shall be entitled to all relief necessary to make that employee, contractor, or agent whole, if that employee, contractor, or agent is discharged, demoted, suspended, threatened, harassed, or in any other matter discriminated against in the terms and conditions of employment because of lawful acts done by the employee, contractor, agent or associated others in furtherance of an action under this section or other efforts to stop 1 or more violations of this subchapter. 17 The net effect of the whistleblower provisions of FERA, the Affordable Care Act and the Dodd-Frank Act is generally to weaken some of the traditionally available defenses to qui tam actions -- while still maintaining the basic core of the defenses -- and to open the door even wider for whistleblowers to assert FCA fraud and FCA retaliation claims. 16 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 (July 21, 2010). 17 31 U.S.C. 3730(h). 9
2. Recent Key Case Law Developments The recent decision by the Fifth Circuit in Little v. Shell Exploration & Production Co., 18 represents a troubling expansion of the FCA from a defense perspective. In that non-intervened case, two auditors with the Minerals Management Service of the U.S. Department of the Interior brought qui tam actions against Shell alleging that Shell had defrauded the government by taking unauthorized deductions for expenses to gather and store oil on offshore drilling platforms. The Fifth Circuit held that a federal employee is a person under the FCA and therefore may bring a qui tam action under the statute. 19 Significantly, DOJ filed an amicus brief arguing against the position ultimately adopted by the Fifth Circuit. 18 Little v. Shell Exploration & Prod. Co., No. 11-20320, 2012 U.S. App. LEXIS 15785 (5th Cir. July 31, 2012). 19 See id. at *7-24. The court remanded the case to the district court to determine whether there had been a public disclosure that would trigger the jurisdictional bar that existed prior to the amendments by the Affordable Care Act. The court also found that the relators were not original sources under the pre-affordable Care Act provisions because as auditors for the government employed specifically to disclose fraud they could not have voluntarily provided the information to the government as required by the statute. Id. at *31; see also 31 U.S.C. 3730(e)(4). 10
While there may in fact be significant impediments outside the four corners of the FCA to federal employees and agents becoming viable relators, 20 the mere possibility of such an outcome should be of great concern to persons and companies doing business with the government. This is especially true in the healthcare context where new and expanding forms of government contractors have audit and access rights over healthcare companies and their information. On the other hand, a helpful decision for the defense is Graham County, supra, where the Supreme Court concluded that the version of the public disclosure bar prior to its amendment by the Affordable Care Act covered both federal and state proceedings and reports. 21 Thus, it is important for the defense in a particular case to assess whether state level public disclosures occurred prior to March 23, 2010, the date of enactment of the Affordable Care Act. 22 Another helpful decision for the defense is the Fourth Circuit s ruling in United States ex rel. Radcliffe v. Purdue Pharma L.P., 23 in which the court found that a release signed by the relator prior to filing his qui tam action was adequate 20 For example, the Court considered conflict of interest principles and noted that there are potential if not clear difficulties under statutes and regulations concerning ethical obligations of federal employees... for federal employees to be relators. Id. at *16-17. 21 Graham County, 130 S. Ct. at 1411. 22 See id. at 1400, n.1 (noting that the Affordable Care Act makes no mention of retroactivity, which would be necessary for its application to pending cases ). Consideration of whether the prior versions of the public disclosure and original source provisions control in a particular case will also come into play for cases involving conduct prior to March 23, 2010. 23 600 F. 3d 319 (4th Cir. 2010). 11
to bar the action. The court s reasoning turned on the fact that the government was aware of the claims made in the qui tam action prior to its filing. The court stated: When the government is unaware of potential FCA claims the public interest favoring the use of qui tam suits to supplement federal enforcement weighs against enforcing prefiling releases. But when the government is aware of the claims, prior to suit having been filed, public policies supporting the private settlement of suits heavily favor enforcement of a prefiling release Thus, when the government was aware, prior to the filing of the qui tam action, of the fraudulent conduct represented by the relator s allegations, the public interest has been served and the Release should be enforced. 24 3. The New Litigation Paradigm The FCA litigation practice is changing rapidly these days. The days of virtually all healthcare FCA cases either settling or going away entirely prior to DOJ s intervention deadline are over. This has resulted in several new trends which require the development of entirely new litigation strategies by both 24 Id. at 332-33. 12
relator s and defense counsel. The single most significant new trend is simply that, for the reasons described above, more FCA cases are moving forward into actual litigation. The vast majority of healthcare FCA cases moving forward are those where the government has not intervened. Thus, these cases must get processed, by and large, as traditional private party civil litigation in federal court. Another less frequent occurrence is the situation where the federal district court holds firm on an intervention deadline, but the government has not completed its investigation. In these instances certain U.S. Attorney s Offices are stating in their declination notices that DOJ is not intervening at this time, presumably seeking to leave the door open for a later intervention after the completion of the government investigation. This approach is not expressly contemplated by the FCA intervention statute which appears to contemplate only a thumbs up or down on intervention. 25 The statute does, however, give DOJ the ability to intervene in a qui tam action post-intervention deadline upon a showing of good cause. 26 Several trends have emerged or likely will emerge from the growing number of healthcare FCA cases proceeding to active litigation as non-intervened cases. 25 See 31 U.S.C. 3730(b)(4). 26 31 U.S.C. 3730(c)(3). Even in FCA cases where the government does not intervene DOJ often seeks to participate in the consideration of legal issues in which the government has a particular interest. DOJ does this by filing a statement of interest or amicus curiae brief in the action. 13
First, the number of these cases that survive a motion to dismiss and thereby proceed with active discovery, summary judgment briefing and potentially even trial, is inevitably going to increase simply due to the greater number of nonintervened healthcare FCA cases moving forward on court dockets across the country. A related trend is the appearance of an entirely new cadre of relator s counsel. Increasingly, these lawyers are experienced plaintiff s lawyers who have moved into the FCA area from more traditional plaintiff s practice areas (e.g., medical malpractice, tort, class actions, etc.). These lawyers may employ new strategies imported from these other areas of practice, including in some instances a greater willingness to take cases to trial. The expansion of the anti-retaliation provision of the FCA to include contractors and agents will undoubtedly lead to more litigation of retaliation issues. An issue that often arises in these matters is whether and how the relator obtained confidential and proprietary documents and information of the defendant corporation. These issues can be particularly frustrating for the corporate defendant and its counsel because it is often not transparent whether and what documents have been removed by the relator from the corporate files, including electronically stored information. The removal of corporate documents can also 14
raise difficult issues in a particular case as to whether their removal constituted protected activity under the lawful acts language of the FCA anti-retaliation provision. Unfortunately, there are few cases dealing directly with this issue in a clear and cogent matter. Finally, another trend that is emerging is the filing of qui tam actions by corporations, resulting in what is essentially business litigation between two corporate entities. These types of proceedings are inherently more complex given the substantially greater volume of documents and number of persons involved inside of a corporation as compared to a single private individual bringing a claim. This has the practical effect of substantially increasing the scope and cost of discovery. 15