Editor’s note: This article is excerpted from Gibson and Dunn’s “2012 Year-End False Claims Act Update.” The full article is available at www.gibsondunn.com/publications/Pages/2012YearEnd-FalseClaimsActUpdate.aspx
. For years, the Department of Justice (DOJ) has sought recoveries under the False Claims Act (FCA) with a torrid pace. In 2012, those efforts remained unabated. The federal government recovered approximately $5 billion in the last fiscal year alone from settlements and judgments in cases filed under the FCA. This record amount marks the third consecutive fiscal year in which the government recovered more than $3 billion and brings total recoveries under the FCA during the last four years up to $13.3 billion, the largest four-year total ever. Although staggering, the monetary values of these settlements and judgments tell only part of a much bigger story: Today, FCA resolutions frequently entail significant nonmonetary components requiring companies to implement enhanced compliance practices that can compound corporate trauma and disruption. Moreover, the DOJ continues to advocate novel recovery theories—pushing the envelope past the statute’s historic roots. We have pounded the drum consistently about the onslaught of FCA cases. And all available evidence shows that as the government’s recoveries under the FCA continue to grow, the DOJ continues to devote more resources to investigating and enforcing the act, and plaintiffs’ lawyers representing “whistleblowers” (called qui tam relators) continue to file more qui tam lawsuits. This past year was no exception. As in prior years, the government’s enforcement of the FCA—in cases brought either directly by the government or by qui tam relators—spread across the pharmaceutical, health care, defense, government procurement, mortgage, financial, and educational industries, among others. In the last fiscal year alone, for example, the government trumpeted FCA recoveries of more than $3 billion in the pharmaceutical and health care industries and, as part of the government’s February 2012 record settlement with five banks over the 2008 mortgage crisis, $900 million related to alleged mortgage fraud. FCA whistleblowers also fared well in 2012. These relators, empowered by the act to file suits on the government’s behalf, can receive as much as 30 percent of any recovery obtained in the suit by the government (the exact amount depending upon whether the government intervenes in the suit). In 2012, qui tam relators earned more than $439 million in share awards. More than 60 percent of the government’s recoveries in 2012 ($3.3 billion) derived from cases initiated under the FCA’s qui tam provisions, and whistleblowers initiated more new matters in 2012 than in any prior year on record (647, or 82.7 percent of the 782 new matters). In all, private individuals initiated more than 8,489 qui tam actions since 1986, when statutory amendments markedly expanded whistleblowers’ rights and protections and increased the percentage of their potential recoveries. Total recoveries since 1986 from whistleblower suits now exceed $24 billion. These ever-increasing bounties, along with rapidly expanding theories of liability under the FCA, make it easy to see why the number of qui tam cases continues to increase, why qui tam cases account for most new FCA matters opened each year, and why a thriving cottage industry of plaintiffs’ lawyers and qui tam resources has developed. Although qui tam relators initiate far more FCA lawsuits than the government, and although the government declines to intervene in most, the DOJ continues to actively prosecute FCA cases. In our 2012 midyear false claims act update, we discussed how the Obama administration increased the focus on the FCA and sought large monetary and nonmonetary settlements from potential FCA defendants. The administration’s “relentless focus” on eliminating fraud and waste in government programs is achieving considerable results. More than 99 percent of the $4.9 billion recovered under the FCA in fiscal year 2012 arose from cases where the government either filed the case directly or intervened in an action filed by a qui tam relator; less than 1 percent of that amount was recovered in actions in which the DOJ declined to intervene. Clearly, as we have reiterated in our earlier alerts, the government’s determination whether to intervene in an FCA qui tam case represents one of the most crucial junctures in the entire proceeding. The federal government is not alone in pursuing recoveries under the FCA; as of this writing, 29 states and the District of Columbia have adopted their own false claims laws. Several states recently strengthened their laws, and at least seven states currently have legislation pending to either enact or expand a false claims law. (A number of municipalities, including New York City, also have their own false claims laws.) As budgetary pressures at the state and local level drive state officials to weed out “waste, fraud, and abuse,” we expect to see a significant increase in enforcement activity by states using both their own false claims laws and other related consumer protection laws. FCA Enforcement Activity
For the 2012 fiscal year, the federal government secured nearly $5 billion in civil settlements and judgments under the FCA—a record amount for recoveries in a single year. The end of fiscal year 2012 also marked the end of a “record-setting four-year period,” in which the federal government recovered $13.3 billion from FCA cases, an amount representing more than one-third of the total recoveries under the FCA since the 1986 amendments. Fiscal year 2013 promises to be a banner year as well. The DOJ already has announced more than 15 FCA settlements for the first quarter of fiscal year 2013 (October through December 2012), including a $762 million civil and criminal settlement billed by the DOJ as the largest in history involving a biotechnology company and a $109 million civil settlement with a pharmaceutical company. And although the DOJ has yet to make an official announcement, yet another pharmaceutical company reported recently that it had reached an agreement-in-principle to enter a $491 million settlement (including $257 million to settle civil allegations). Qui Tam Activity
As in years past, whistleblowers were a key driver of the record-breaking 2012 recoveries under the FCA. Of the $4.9 billion in fiscal year 2012 recoveries, a record $3.3 billion—or two-thirds—was recovered in whistleblower suits. As noted above, 647—82.7 percent—of the 782 new FCA matters opened during the 2012 fiscal year were initiated by complaints filed pursuant to the FCA’s qui tam provisions. This stands in contrast to fiscal year 1987, when relators initiated only 30—8 percent—of 373 new matters. The increase is both stark and accelerating. Of the nearly 8,500 qui tam suits filed since the 1986 amendments, nearly 2,200 were filed after January 2009. These qui tam cases have led to over $24.2 billion in government recoveries since 1986, with almost half ($10.5 billion) of that amount recovered in the last four years. Further, for these 8,500 suits, whistleblowers have been awarded nearly $4 billion, with $439 million in awards in fiscal year 2012 alone. Overall, nearly 70 percent of all FCA recoveries since 1986 can be attributed to qui tam matters, and all indicators suggest this proportion will continue to grow. The chart below demonstrates both an increase in overall FCA activity and a distinct shift from largely government-driven investigations and enforcement to qui tam-initiated activity. Health Care/Pharmaceutical Industry
Most recoveries in fiscal year 2012—a record-breaking $3 billion—stemmed from settlements and judgments involving fraud allegedly committed against federal health care programs. Since January 2009, the DOJ has recovered $10.1 billion for health care fraud under the FCA. And in its most recent Semiannual Report to Congress, the Health and Human Services (HHS) Office of Inspector General (OIG) reported expected recoveries of about $6.9 billion, including $6 billion in “investigative receivables.” HHS OIG also reported commencing 367 civil actions in fiscal year 2012, which includes FCA and other civil and administrative actions. In July 2012, the administration announced a new public-private partnership, its latest effort in the fight against health care fraud. Described as “a ground-breaking partnership among the federal government, state officials, several leading private health insurance organizations, and other health care anti-fraud groups,” the new partnership is an effort to “share information and best practices in order to improve detection and prevent payment of fraudulent health care billings.” This new partnership will build on the work of the Health Care Fraud Prevention and Enforcement Action Team (HEAT), which was formed in 2009 and generated more than $8.8 billion in health care fraud recoveries for the government in the first three years of its existence. In addition to record-breaking monetary recoveries, the DOJ increased its use of nonmonetary penalties in the last year. These nonmonetary penalties were prominent in both of the large settlements mentioned above: for example, one company entered into a corporate integrity agreement (CIA) with HHS OIG, it will be subject to probation for five years, its chief executive and board of directors must make certain certifications of compliance, and it agreed not to compensate sales representatives for off-label sales. The DOJ is not alone in emphasizing prospective compliance, acknowledging efforts by its “agency partners . . . [to] negotiate compliance agreements in connection with their administrative remedies that establish tough structures to help prevent further instances of fraud.” For example, HHS OIG requires CIAs as a condition of waiving its exclusion authority. These agreements, which have long been a regular component of negotiated FCA resolutions, now often include what HHS OIG calls “enhanced compliance provisions.” One notable example is an “Executive Financial Recoupment Program,” which requires the company to recoup up to three years of annual performance pay (i.e., bonus plus long-term incentives) from executives who are discovered to have participated in significant misconduct. Other enhanced provisions relate to management certifications, compliance experts and outside consultants, compensation policies, transparency in journal article authorship, and cooperation with continuing government investigations. State agencies, too, have placed a focus on prospective relief. Using deceptive marketing and other similar laws, many states have pursued cases based on allegations similar to those underlying many FCA cases. Settlements arising out of these cases have included not only monetary relief, but also affirmative commitments regarding how the defendant companies will market and promote their products. And they are not without teeth: in December 2012, a large pharmaceutical company agreed to conduct a corrective advertising campaign and to pay $1 million to the state of Oregon after Oregon alleged that the company’s receipt of two regulatory letters from the Food and Drug Administration reflected violations of its 2008 consumer protection settlement with the state. There is every indication that health care will continue to lead FCA recoveries going forward. Conclusion
In today’s world of increased government spending and expanding breadth of the FCA, it is more important than ever that companies remain mindful of the FCA, have compliance programs in place to prevent violations of the FCA, and appropriately respond and react to allegations of FCA violations that may have occurred despite these precautions. Defending an FCA investigation, even successfully, can be extremely disruptive and expensive. Furthermore, studies show that most whistleblowers first report their concerns internally. Companies therefore must take employee complaints seriously, establish standard procedures for raising complaints and responding to them, and educate the workforce about the FCA. Every well-designed response plan also should include a discussion with qualified outside counsel about the potential benefits and risks of self-disclosure to the government. It is important to be thoughtful and strategic about this decision and whether to avail oneself of the various voluntary self-disclosure regimes that now exist (e.g., HHS OIG). The factors leading to a determination about self-disclosure are complex and nuanced, and must be handled appropriately. In conclusion, based on our observations from 2012, the ever-increasing and well-publicized FCA bounties, the staggering figures of fraud and abuse in government programs, and the intense demand for oversight and accountability discussed in this and our prior FCA updates, we predict that 2013 will be another dynamic and interesting year for FCA activity. The authors can be reached at email@example.com
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