A series of policy pronouncements—through internal memoranda, Department of Justice (DOJ) manual updates and official statements—punctuated 2018 and could have a significant impact on the future of False Claims Act (FCA) enforcement and effective litigation defense. These pronouncements signal a change to the DOJ’s approach to investigations, litigation and acquiescence to qui tam actions, all of which indicate an increase in successful defense strategies for individuals and companies defending against alleged violations of the FCA.
- The Granston Memo:1 Authored by Michael Granston, Director of the DOJ’s Civil Fraud Section, this memo provides guidance on when to consider dismissals of a relator’s complaints under § 3730(c)(2)(A) of the FCA. Granston advises that DOJ attorneys should be “judicious in utilizing Section 3730(c)(2)(A),” and that the dismissal of non-intervened cases is “an important tool to advance the government’s interest, preserve limited resources and avoid adverse precedent.” Government attorneys should consider seven factors when evaluating a non-intervened case:
- Lacks merit.
- Duplicates preexisting complaint or government investigation.
- Interferes with government priorities.
- Creates bad precedent for the government.
- Threatens national security.
- Costs more to litigate than the government is likely to recover.
- Impedes the government’s ability to conduct a proper investigation.
- The Brand Memo:2 Authored by Rachel Brand, then-United States Associate Attorney General, this memo announced a limitation on the use of executive branch agency guidance documents in litigation and investigations. The Brand Memo dictates that the “Department may not use its enforcement authority to effectively convert agency guidance documents into binding rules” and that DOJ “litigators may not use noncompliance with [agency] guidance documents as a basis for proving violations of applicable law” in FCA and other affirmative civil enforcement cases. However, the DOJ may continue to “use evidence that a party read such guidance document to help prove that the party had the requisite knowledge of the mandate.” While the Brand Memo’s impact is still unclear, the DOJ will likely no longer be able to rely on agency guidance documents to prove noncompliance, providing new defenses to defendants.
- 2018 Update to U.S. Attorney’s Manual:3 On Sept. 25, 2018, the DOJ published an updated version of the United States Attorney’s Manual regarding qui tam dismissals. Deputy Attorney General Rod Rosenstein characterized the new manual as an attempt to streamline the DOJ’s policies and procedures into a manual, to limit the future use of memos, speeches and articles. Noteworthy updates include:
- Incorporation of the Granston Memo.
- Policies to no longer keep settlements confidential, through non-negotiable press releases comments by defendants.
- Greater emphasis on prosecutors’ consideration of the impacts of victims when making charging, pleas, and sentencing decisions.
- Official Statements by the DOJ:
- On Feb. 28, 2018, United States Deputy Associate Attorney General Stephen Cox, speaking at the Federal Bar Association Qui Tam Conference, described the desired effect of changes to DOJ policy as an effort to “avoid any attempts to push the envelope by seeking to regulate through our enforcement efforts.”4 Cox stated that monitoring meritless cases “is not a good use of department resources,” is not a good use of judicial resources, and forcing defendants to defend against them is “not in the interests of justice,” because bad cases lead to bad law. Cox explained that dismissals are warranted regardless of whether a false claim was submitted.
- On June 14, 2018, acting United States Associate Attorney General Jesse Panuccio spoke about recent enforcement activity and policy initiatives by the DOJ at the ABA’s 12th National Institute of the Civil False Claims Act and Qui Tam Enforcement.5 Panuccio noted that the DOJ is instructing attorneys to consider whether moving to dismiss the action would be an appropriate use of prosecutorial discretion under the FCA. He suggested that the DOJ may use that authority more frequently going forward in order to free up resources for matters of public interest.
This year also brought a number of important defense-friendly cases to the forefront, and two upcoming judicial decisions that may be beneficial to FCA defendants.
- Post-Escobar—Implied False Certification Theory: In 2016, the Supreme Court issued its decision in Universal Health Servs., Inc. v. U.S. ex. rel. Escobar, 136 S. Ct. 1989 (2016). The court validated an implied false certification liability theory under the FCA in some circumstances, but left two issues open to interpretation.
- The Two-Part Test: The court laid out a two-part test to determine whether the defendant (1) made specific representations about the goods or services provided; and (2) failed to disclose noncompliance with material statutory, regulatory or contractual requirements that render those specific representations misleading or false. However, the court did not explain whether the test is mandatory. A recent Ninth Circuit opinion found that both parts of the test are required for a valid implied false certification claim. In United States ex. rel. Rose v. Stephens Institute, 901 F.3d 1124 (9th Cir. 2019), relators alleged an art school, receiving Title IV funds, failed to disclose statutory, regulatory and contractual obligations. The Ninth Circuit concluded that the government or relator must satisfy the two-part test identified in Escobar for implied false certification liability to attach. Thus, the Ninth Circuit joins the First6 and Seventh7 Circuits in holding FCA liability for implied false certification only attaches when the Escobar test is satisfied. In contrast, the Fourth Circuit held that a “misleading half-truth” consistent with that in Escobar could alone establish implied false certification liability even absent clear, specific representation.8
- Materiality Standard: The Supreme Court, while noting it was “demanding,” did not articulate a clear materiality standard. The Ninth Circuit’s seminal post-Escobar FCA materiality case is U.S. ex rel. Campie v. Gilead Scis., Inc., 862 F.3d 890 (9th Cir. 2017). In Gilead, the relator alleged that the defendant, a prescription drug manufacturer, misrepresented the source of the active ingredients in order to attain FDA approval for its HIV drugs.9 The relator further alleged that the defendant concealed information about quality issues when it later obtained FDA approval to use that source. The Ninth Circuit rejected the argument that the continued FDA approval and Government reimbursement for the drugs meant that any false statements were immaterial, and reversed and remanded the district court’s dismissal of the case for failure to state a claim. The Ninth Circuit reconciled the case with Escobar stating: “there are many reasons the FDA may choose not to withdraw a drug approval, unrelated to the concern that the government paid out billions of dollars for nonconforming and adulterated drugs.” The Ninth Circuit added that there was a dispute between the parties about “exactly what the government knew and when,” which made it premature to decide if reimbursement was paid despite knowledge of noncompliance.
- Cochise Consultancy, Inc. v. U.S. ex rel. Hunt10—Statute of Limitations: Presently before the Supreme Court, Cochise Consultancy will address whether a relator in a qui tam FCA suit may lengthen the limitations period in cases where the United States has declined to intervene, by invoking 31 U.S.C. § 3731(b)(2). The statute runs from the date when “facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances.” If the court refuses to permit a relator to apply § 3731(b)(2) in such instances, the relator will have to comply with the statute of limitations provision in § 3731(b)(1). If relators must solely rely on § 3731(b)(1), the ability of FCA defendants to prevail on a statute of limitations defense will greatly improve.
- Digital Realty Trust, Inc. v. Somers11—FCA Anti-retaliation Provision: In Digital Realty, the Supreme Court, in a unanimous ruling, concluded that the Dodd-Frank anti-retaliation provision only protects individuals who provide information regarding violations of securities laws to the SEC; individuals making internal reports (without SEC disclosure) are not protected. The decision in Digital Realty could influence future interpretation of the anti-retaliation provision in the FCA, which has historically been interpreted to protect employees who report fraud or false claims internally.
- The U.S. Constitution “Appointments Clause”: On Jan. 14, 2019, Intermountain Health Care, Inc., filed a petition for writ of certiorari before the Supreme Court seeking review of two questions: (1) whether a court may create an exception to Federal Rule of Civil Procedure 9(b)’s particularity requirement when the plaintiff claims that only the defendant possesses the information needed to satisfy that requirement; and (2) whether the FCA’s qui tam provisions violate the Appointments Clause of Article II of the U.S. Constitution.12 The Appointments Clause authorizes the president to appoint “Officers of the United States” (principle officers) and authorizes the president, the heads of agencies, and courts to appoint “inferior Officers.”13 If cert is granted, and Intermountain prevails on its constitutional argument, it may be the end of private qui tam FCA litigation. Regardless, a favorable decision on issue one would also be a significant win for defendants.
Despite the many developments that have characterized 2018, 2019 currently stands to be another year that will affect future responses to FCA violation allegations. Individuals and companies will need continued awareness regarding any future changes affecting interpretation, enforcement or litigation of the FCA. For more information or questions regarding these changes, please contact Peter French or Tristan Fretwell.
1Factors to Evaluate Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A) (Jan. 10, 2018) available here.
2Limiting Use of Agency Guidance Documents in Affirmative Civil Enforcement Cases (Jan. 25, 2018), available here.
3Justice Manual, 4-4.111 – DOJ Dismissal of a Civil Qui Tam Action (Sept. 25, 2018) available here.
6United States ex rel. Nargol v. DePuy Orthopaedics, Inc., 865 F.3d 29, 37 (1st Cir. 2017).
7United States v. Sandford-Brown, Ltd., 840 F.3d 445, 447 (7th Cir. 2016).
8United States ex rel. Badr v. Triple Canopy, Inc., 857 F.3d 174 (4th Cir. 2017).
9S. Royal and J. Barton, Feature Comment: 2018 Civil Claims Act Update, 60 Gov’t Cont. 355 (Nov. 20, 2018).
10No. 18-315, 2018 WL 4385694, at *1 (U.S. Nov. 16, 2018).
11138 S. Ct. 767 (2018).
12United States ex rel. Polukoff v. St. Mark’s Hospital, 895 F.3d 730 (10th Cir. 2018), petition for cert. filed (U.S. Jan. 14, 2019) (No. 18-911).
13U.S. Const. art. II, § 2, cl. 2.