The healthcare reform law passed by Congress last month has yet another surprise for corporate legal and compliance departments: It allows yet more whistleblower lawsuits to be filed against corporations under the False Claims Act.
Formally known as the Patient Protection and Affordable Care Act, the healthcare law sharply narrows the definition of “publicly disclosed information” under the FCA. That, in turn, expands the range of complaints whistleblowers can bring under the FCA and thwarts companies’ ability to get such claims dismissed, legal experts say.
The False Claims Act is the federal government’s main tool for combating fraud in government contracting. It was originally passed during the Civil War, but went largely unused until amendments in 1986 allowed private citizens to file “qui tam” lawsuits on behalf of the government and then collect a portion of the proceeds in any settlement. Since then, the government has recovered more than $24 billion under the FCA, including $2.4 billion in 2009. The large majority of that $2.4 billion was recovered through qui tam suits, according to Justice Department statistics.
One key defense against qui tam lawsuits has been to argue that the whistleblower’s complaint is based on publicly available information, and therefore isn’t “whistleblowing” per se. By narrowing the definition of publicly available information, such a defense becomes that much harder to make.
“The changes open the floodgates to more qui tam plaintiffs,” says Peter Hutt, a partner in the law firm Akin Gump Strauss Hauer & Feld.
Hutt
The healthcare reform law went into effect March 23. In addition to the FCA amendments, it also provides $250 million in funding over the next decade to investigate and prosecute healthcare fraud. But because the FCA applies to any company that does business with the government, the changes slipped into the healthcare law will reverberate far beyond the healthcare sector itself.
Dan Levin, a partner in the law firm White & Case, says the amendments signal lawmakers’ continued strong support for False Claims Act enforcement—which is popular with Republicans and Democrats alike, regardless of their polarized views on healthcare reform specifically.
“I’d expect to see a steady increase in FCA case filings as the increased resources and statutory changes work their way through the system,” Levin says.
Define ‘Public’
The amendments change the definition of “publicly disclosed information” in several ways. First, the amended FCA now requires that the government be party in a proceeding for that hearing to constitute public disclosure. That means any information disclosed in litigation between private parties can now be fodder for a qui tam lawsuit under the False Claims Act, according to a legal bulletin from White and Case.
Frey
Second, information disclosed in state hearings, audits, reports, or investigations can also be the basis for a qui tam suit. That resolves a dispute among federal appeals courts, which had reached different conclusions about whether such information fit under the public-disclosure defense, says Jeremy Frey, a partner in the law firm Pepper Hamilton.
FCA AMENDMENTS
Below is an excerpt from a legal bulletin from White & Case that explains how recent amendments to the False Claims Act affect the public disclosure bar:
The public disclosure bar of the FCA sets forth instances in which a qui tam relator (whistleblower) is prohibited from bringing an FCA claim due to the public nature of the fraud alleged in the complaint. The recent amendments change the public disclosure bar in four important ways, each of which will likely make it easier for plaintiffs to bring FCA suits and survive motions to dismiss.
The Government Can Exert Discretion over Whether an FCA Suit Is Dismissed Under the Public Disclosure Bar
Under the prior language of the statute, the public disclosure bar deprived courts of jurisdiction over a case. The amended statute now only permits dismissal of the case on non-jurisdictional grounds, provided that the government does not oppose such a dismissal.
Information Disclosed in Suits Between Private Parties Will Not Trigger the Public Disclosure Bar
The amended statute now requires that the government be a party at a hearing for the hearing to constitute a public disclosure. As a result, qui tam relators will be able to bring FCA suits more readily by using information disclosed in hearings between private parties (e.g., a suit between a hospital and a doctor regarding employment issues). Private party lawsuits, therefore, may supply potential qui tam relators with information that can be used to bring an FCA suit.
Information Disclosed in State Court Proceedings or State Reports, Hearings, Audits, or Investigations Will Not Trigger the Public Disclosure Bar
Under the prior statute, courts struggled with whether fraud disclosed in a state report, hearing, audit, or investigation constituted a public disclosure that barred an FCA suit. The statute disallowed a suit if based on information disclosed “in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation. ” In Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, published on March 30, 2010, the Supreme Court determined that information disclosed in a state hearing, audit, or investigation fell within the ambit of the prior statute, and that such information could not be used as the basis for a qui tam relator suit. The amendment effectively overturns this decision for future litigation, and ensures that, moving forward, allegations of fraud revealed in state audits, reports and investigations can form the basis for a qui tam relator suit.
An “Original Source” No Longer Needs to Have “Direct and Independent Knowledge” of the Alleged Fraud
The amendment strips important aspects of the prior requirements for an individual to qualify as an “original source. ” An original source no longer need have “direct and independent knowledge” of the fraud, creating the possibility that an individual with indirect knowledge of the fraud could still be considered an “original source” and bring a qui tam suit. In addition, the amendment will likely lead to litigation over whether certain information “materially adds to the publicly disclosed allegations or transactions.”
The changes outlined broaden the type of information that can form the basis of a qui tam relator suit and increase the number of individuals who will qualify as original sources under the statute. These changes, although part of a health care reform bill, apply to the FCA generally and will affect all companies that do business with the U.S. government. In addition to the statutory changes, the Act also made clear the government’s intention to aggressively investigate and prosecute health care fraud by adding U.S. $250 million of funding over the next decade for investigating and prosecuting health care fraud. Companies must be increasingly vigilant to ensure that their policies and procedures comply with all aspects of the FCA.
Expanded Use of Civil Investigative Demands in FCA Cases
As discussed in a prior White & Case client advisory, the Fraud Enforcement and Recovery Act, enacted in May 2009, amended the FCA in a number of important ways. The impact of one of those amendments will soon be felt. The FERA allowed the attorney general to delegate his authority to issue civil investigative demands in FCA cases. CIDs provide the government with subpoena-like powers and can be issued before the Department of Justice files a complaint or joins a qui tam action. Attorney General Eric Holder signed an order which delegated this power not only to Assistant Attorney General for the Civil Division, Tony West, but also to all 93 US Attorneys. Last year, Mr. West stated:
Rooting out fraud and safeguarding taxpayers from illegal conduct are among the Justice Department’s highest priorities. I applaud the dedication of the public servants who investigate and prosecute fraud, and the courage of the many private citizens who risk their careers by reporting fraud. The cases that the department pursued this year illustrate the government’s commitment to maintaining the integrity of the health care system, ensuring the members of our military and law enforcement community are safe, and protecting consumers from fraudulent schemes. The extraordinary success of this public-private partnership goes far beyond the U.S. $2.4 billion recovered to additional billions saved through deterrence and vigilance.
Companies should expect the DoJ to use CIDs aggressively when investigating and prosecuting fraud. These enhanced investigatory powers, including the power to compel document production and witness depositions, will provide the DoJ with additional ammunition in its fight against fraud.
Source
White & Case Legal Bulletin (April 2010)
Legal observers note, however, that the change will not apply to litigation pending before healthcare reform went into effect last month. On March 30, the U.S. Supreme Court handed down a decision that information disclosed in a state hearing, audit, or investigation couldn’t be used as the basis for a qui tam suit, and clarified that its ruling—and therefore the public disclosure bar as previously existed—applied to cases pending before healthcare reform was enacted.
One point that remains unclear, Hutt says: Whether the new FCA standards apply retroactively to conduct that predates their arrival but is first identified in qui tam lawsuits filed after the enactment date.
The amendments also give the government veto power over whether an FCA suit is dismissed under the public disclosure defense. Previously, public disclosure deprived courts of jurisdiction over a case. Now, the amended statute only permits dismissal of the case on non-jurisdictional grounds if the government doesn’t oppose the dismissal.
Finally, more whistleblowers will qualify as an “original source” under the law, since the amendments no longer require an original source to have "direct and independent knowledge" of the alleged fraud. Instead, that person only needs “knowledge that is independent of and materially adds to” the publicly disclosed allegations, and he must have voluntarily provided the information to the government before filing a qui tam claim.
Getting Ahead of the Curve
The bottom line, experts say, is that compliance with the False Claims Act will now be more important than ever. Strict compliance with all laws and regulations that apply to government contracting are the best way to avoid a qui tam lawsuit in the first place, Hutt says, but companies will also need strong internal policies to ensure that any complaints or allegations of wrongdoing raised by whistleblowers are fully investigated and properly addressed.
Levin
And while it may seem obvious, Levin says, companies must make sure they understand when they’re actually dealing with the government. In a world of Cash-for-Clunker programs, federally funded bank bailouts and more, that knowledge “isn’t always as obvious as it used to be,” he said.
Levin also says companies must determine where their risks are greatest and tailor their compliance efforts accordingly—something they do for their financial risks, but often fail to do for False Claims Act risks.
“Almost everybody today has good codes of conduct, policies, and training,” he says. “Companies need to show that they’re implementing them appropriately and taking it seriously,” such as by auditing compliance efforts or including compliance in performance reviews.
Frey says compliance officers “should continue to remain especially vigilant about ‘red flags’ involving possible government overpayment on claims already presented and paid.”
Meanwhile, experts say they’re already seeing the effect of an amendment to the FCA under the 2009 Fraud Enforcement and Recovery Act. That statute allowed the attorney general to delegate authority in FCA cases to issue civil investigative demands, which give the government subpoena-like powers.
Hutt says he’s seen far more “CIDs” issued since January, when Attorney General Eric Holder delegated that power to Tony West, assistant attorney general for the Civil Division. He and others expect even more CIDs following Holder’s decision last month to delegate that authority to all 93 U.S. attorneys as well.
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