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Podcast: Public Disclosure: Cooperating with DOJ

In the third episode of Ropes & Gray’s False Claims Act podcast series, Public Disclosure, litigation partner Kirsten Mayer considers the Department of Justice’s 2019 guidance to companies who face investigation under the False Claims Act. DOJ has encouraged companies to cooperate, self-disclose and remediate compliance issues, but what—if anything—should a company expect to receive in return? Her guest is Professor Jacob Elberg from Seton Hall Law School, who handled FCA cases for the government for many years in his prior role as an AUSA and Health Care Fraud Chief in the District of New Jersey. The two discuss the DOJ guidance, what DOJ is trying to promote with it, and what the DOJ actually appears to be doing in its FCA settlements, based on Professor Elberg’s recent analysis of civil settlement agreements in his article, “A Path to Data-Driven Health Care Enforcement.” The results may surprise you.

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Podcast: Public Disclosure: Good Faith and Bad Intent


Time to Listen: 26:10 Practices: False Claims Act, Litigation, Government Enforcement / White Collar Criminal Defense

In the second episode of Ropes & Gray’s False Claims Act podcast series, Public Disclosure, litigation partner Kirsten Mayer and her guests delve into the knowledge requirement under the FCA. Kirsten talks with Kim Friday, a partner at Osborn Maledon, and Erica Blachman Hitchings, a member of the Whistleblower Law Collaborative. Both guests prosecuted FCA matters for the Department of Justice for many years and now represent whistleblowers in FCA cases. They cover the nuts and bolts of proving a company’s intent, and share their insight into what DOJ and whistleblowers look for when they are building and evaluating a case.  

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Transcript:

Kirsten MayerKirsten Mayer: Welcome to Public Disclosure, our podcast series about the False Claims Act, one of the most powerful anti-fraud statutes in the government’s arsenal. I’m Kirsten Mayer, a litigation partner at Ropes & Gray, and your host for today’s episode. The Federal False Claims Act is a whistleblower statute that dates back to the Civil War. At its most basic, it prohibits submitting false or fraudulent claims for payment to the government. Whistleblowers who file cases can receive up to thirty percent of the government’s recovery if they succeed. Because the False Claims Act targets fraud, however, you can’t violate the law by accident. This sounds simple enough, but for heavily regulated industries like health care, banking or defense, the laws that govern and guide their conduct are not always clear. What does it mean to know a claim for payment is false? How do whistleblowers or the Department of Justice prove that a company that submitted false claims for payment knew that those claims were false? And how does a company show that it acted in good faith, even if it made a mistake? We will address those questions and more with my two guests today: Erica Blachman Hitchings and Kim Friday.

Kim FridayKim Friday: Hi, this is Kim Friday. I'm a partner at Osborn Maledon in Phoenix, where I represent both whistleblowers and defendants in False Claims Act actions. I spent ten years investigating and prosecuting FCA cases for the federal government, most recently at the U.S. Attorney's Office in San Francisco, where I led the office's civil enforcement group. Thank you for having me on, Kirsten.

Erica Blachman HitchingsErica Blachman Hitchings: Hi, I'm Erica Blachman Hitchings. I am a member of the Whistleblower Law Collaborative, a law firm representing whistleblowers nationwide in FCA matters and other government enforcement programs, including the SEC. I spent nearly nine years in the Department of Justice prior to becoming a relator’s counsel, first as a trial attorney in a Department of Justice Civil Fraud Unit in Washington, D.C., and then in the U.S. Attorney's Office in the Northern District of California as an AUSA in the Affirmative Civil Enforcement Unit. Great to be here.

Kirsten Mayer: What does it mean to say that a defendant knows that its claims for payment were false under the False Claims Act? Well, the False Claims Act itself says that a defendant acts knowingly if she or he has actual knowledge that the claim is false, or they are deliberately ignorant of whether a claim is false, or they recklessly disregard whether the claim is true or false. This means that the False Claims Act doesn’t reach an honest, good faith mistake about the meaning of a law or regulation. Claims that are submitted based on a reasonable but erroneous interpretation of a defendant’s legal obligations are not fraud. Sounds good in theory, but how does this work in practice? Kim deals with this issue frequently. When does a reasonable but incorrect interpretation of the law get you off the hook?

Kim Friday: The standard we really look to comes from a case called Safeco, which is a Supreme Court case. Not really an FCA case, but it's been adopted by courts addressing this question under the FCA. And what the Supreme Court said in Safeco is that when you have statutory text, and relevant case law, and agency guidance that all allow for more than one reasonable interpretation, if the defendant has adopted one of those reasonable interpretations, it's very difficult to prove that that defendant acted with knowledge to violate the FCA. We are often, in these cases, dealing with complex regulations and program requirements, and it's not surprising that companies might interpret those requirements differently. If a company can show that it made a good faith effort to comply with the regulation at issue, that can be a powerful defense in these cases.

Kirsten Mayer: But the defense is not an easy one to win.

Kim Friday: The question really becomes whether the regulation or the requirement is truly ambiguous, in other words, truly subject to those competing interpretations given the case law, the statutory text, and all the agency guidance. And then, temporally, whether that defendant had to have that reasonable competing interpretation at the time of its submission of the claim for payment, or whether it's okay to come up with that competing interpretation or rationalization after the fact. And the courts are really a bit divided on that latter question.

Kirsten Mayer: When you think about whether a statute is ambiguouswhether the defendant has offered a reasonable interpretationwhistleblower’s attorneys and the Department of Justice will look carefully at whether there is evidence that the defendant was warned away from a particular interpretation of the statute, even if that interpretation is reasonable. Kim explained.

Kim Friday: It's important to recognize that this reasonable interpretation question can't happen in a vacuum. The company has to really be looking out there and looking at the landscape, and saying, "Has the agency spoken on this question? Can I discern maybe what the agency thinks the policy is through actions that the agency has taken, enforcement actions or otherwise? Or have courts spoken on this question?” So certainly there can be those red flags or those signposts that can indicate to a company that their interpretation is not reasonable. I think there is very persuasive case law on that point from the D.C. Circuit that says basically if a party is warned away from its interpretation, most of the time by authoritative agency guidance, then it will be and can be found liable for knowingly submitting a false claim or making a false statement.

Kirsten Mayer: In addition to agency guidance or case law, Erica pointed to other sources that can serve to warn a company away from an otherwise reasonable interpretation of the law. She explained that a warning can been offered by an auditor, someone in compliance, or even in-house or outside counsel.

Erica Blachman Hitchings: To the extent that that becomes part of the investigation, or even sometimes those individuals such as an auditor may be a future whistleblower, that can play into the evaluation of the company's scienter. So it's not necessarily the guidance itself, but it's what are reasonable people doing, educated in these areas, with the guidance? And how should that be informing responsible decision making within a company?

Kirsten Mayer: Erica and Kim have both talked about the role that agency guidance plays in evaluating claims under the False Claims Act, but there are important limits to how guidance can be used in these cases. There is a body of case law, including recent decisions from the U.S. Supreme Court, addressing how judges should view or use agency guidance. In addition, the Department of Justice has established guardrails on its own use of these kinds of documents. Last year, the DOJ amended the Justice Manualits instructions for its own attorneysand confirmed that agency guidance could not, by itself, form the basis for civil action, including cases under the False Claims Act. Sub-regulatory guidance after all isn’t law – it’s paper (to paraphrase). The manual did, however, describe several ways in which agency guidance would continue to be relevant from the Department’s perspective, including specifically to shine light on a defendant’s intent. Erica explained how she sees it.

Erica Blachman Hitchings: If there is an agency guidance, particularly if there's multiple publications that are consistent over time, or directly on point, or particularly well publicized, that is going to catch the attention of both whistleblower attorneys when they're evaluating cases as they come in the door, and DOJ counsel when they are investigating and making determinations as to whether to proceed. For example, I’ll throw out a few questions or issues that might pop up – so one is, is agency guidance cited in or utilized in company compliance or other materials? That can certainly reflect on the knowledge and the scienter of an organization. But with a quick caveat, because I think the next point dovetails appropriately on that, is that at the same time, a company can't get out of liability by simply not pushing out relevant agency guidance through its compliance programs. And that is really where the reckless disregard, deliberate indifference aspect of the statute, which is a longstanding and very important aspect of the False Claims Act, comes in. Because even if an individual company may not have well publicized the guidance in its own compliance materials, if the industry has publicized it, there is conference materials, there's administrative decisions that are being published on these issues, there is articles in industry press, all of those types of things are going to factor in into a scienter evaluation. And they can be very strong evidence of scienter, and, in my opinion, rightly so.

Kirsten Mayer: If this sounds like a backdoor way to bring informal industry guidance, or sub-regulatory advice back to being substantive rules of law that companies must follow, Kim and Erica don’t necessarily disagree.

Kim Friday: The Brand Memo is notable because it puts some guideposts on what the Department itself can do in making enforcement decisions. The Department cannot treat sub-regulatory guidance as imposing these conditions on entities, but it doesn't say anything about what courts can do. And a court considering a question could very well say, even when considering what the appropriate interpretation of regulation is, that that agency guidance is persuasive to it in trying to determine that first question of which interpretation is the correct one. Yes, absolutely, it can be a backdoor way. I don't think that's inappropriate, however.

Kirsten Mayer: We turned next to the nuts and bolts of proving a company’s intent under the False Claims Act – that it actually knew, or recklessly disregarded whether claims were false. What do whistleblower attorneys and the DOJ look for to evaluate a company’s intent? Erica started by explaining what she looks for when she is talking to a whistleblower about what evidence they may bring to the table that’s relevant to this question.

Erica Blachman Hitchings: Often, and this shouldn't probably surprise you guys and your listeners, that a relator may be the very person who tried to inform management, or compliance, or others within their organization that they believed there was a problem. And if that problem is ignored or that person is retaliated against, they may well become a potential relator walking in our door. If we have somebody who comes in with a very clear narrative, and even documentary evidence showing that they raised this very issue, and backup as to why it truly is a problem, that is certainly a checkbox, a piece of the scienter evidence, at least at the early stage of a case. Alternatively, though, is maybe something that is more what some might describe as a top-down scheme, or a full program, or course of conduct that has pushed out from the core of the company down. And that's another potential area of identifying scienter – those emails, the formulation of the program itself at the highest levels of the company. And, third would be, what is the norm? And this is coming back to something we've already talked about, is agency guidance in the industry? It doesn't have to be from the agency there, but if there is just tons of conversation happening with anybody in this industry, or there's prior False Claims Act cases alleging and settling, or even winning through judgement the very same conduct, that is certainly going to go in the checkbox for deliberate ignorance, reckless disregard in terms of at least knowing what the rules should be and how the entity should be behaving in that industry. And, finally, an example that often comes up is an audit, internal or external, that is ignored, and that can be definitely strong scienter evidence in and of itself. And, on the flipside, a complete failure to audit can be reckless disregard or deliberate ignorance, particularly if you're in an area where there have been known problems throughout the industry, or other red flags within your own company.

Kirsten Mayer: Once a whistleblower brings their case to DOJ, the Department gets first crack at investigating and litigating the case. Kim explained what DOJ looks for when it evaluates whether a defendant had actual knowledge or was reckless with regard to whether it was submitting false claims.

Kim Friday: You want to start from the assumption or the goal that you are going to be able to prove actual knowledge if you can. Being able to prove a company acted with actual knowledge, as opposed to deliberate ignorance or reckless disregard, creates a stronger, more persuasive case for the jury, if it ever gets there. And the best way I think to try to get that actual knowledge is looking, as Erica mentioned, first at audits and internal reviews. You want to see if the company has homed precisely in on the exact issue that you're focusing on. Did they do audits, for example, of their medical claims? And do they know that they had an X error rate, or that it was wrong to code for X, Y or Z? If you can show that, that's very strong evidence of knowledge. You also want to be looking at internal complaint logs, internal whistleblower compliance calls, and understanding whether anyone at the company other than the relator has complained of this conduct, and, more importantly, how the company handled those complaints. Did the company do an investigation, or did they just brush it off? If they did do an investigation, what did they find? And how did they change or did they not change anything? And, thirdly, as Erica mentioned, you also want to look for those indicators that the company understands what the rules of the road are, whether it's agency guidance or otherwise. Under the False Claims Act, there is a general requirement that companies make a limited inquiry, perhaps more, to be certain that they are in compliance with program rules and regulations. This is an affirmative obligation, a responsibility that companies have, so you really want to be looking at how the company is fulfilling or satisfying that obligation – any sort of documents that evidence their understanding of the rules and regulations. Compliance documents are going to be a big part of that.

Kirsten Mayer: Our discussion turned to the kinds of evidence that Erica and Kim have found in their experience to be persuasive of a company’s good faith.

Erica Blachman Hitchings: When the Department is investigating, and I would just first off say, and this shouldn't come as a surprise to you, that defense counsel will often front evidence that suggests good faith. And if it's strong evidence, that can short circuit a DOJ investigation. It may be something that the relator was not aware of – there may have been an overpayment refund made voluntarily by the company. Now that will be looked at very carefully. Was it done appropriately? Was it a wholesome, good faith attempt? The company needs to obviously be aware that that's definitely something you'll want to raise if it's truly the full story, but just to hopefully let folks know, that can impact a DOJ investigation. Moving on to what I think is the most persuasive evidence of good faith: detailed, honest communication with an agency, and Kim already touched on this. Was there a back-and-forth between the company and the agency, trying to figure out the right thing? The second I actually already mentioned, which was if they identified the problem already, did they initiate a return of that money prior to the investigation being launched? Was there a true back-and-forth within the company, really struggling to get the right answer? And, again, I had previously mentioned, if there was legal advice given, if the defendant decides to waive privilege and share that with the government, but certainly only if that legal advice was given with the full facts in hand.

Kirsten Mayer: Not surprisingly, they also both view compliance programs as an important piece of the analysis.

Kim Friday: Taking a step back, first of all, you would be surprised how many companies do not have compliance programs, particularly when they are smaller companies, or maybe they are at the point where they're getting their first in-house lawyer, and that lawyer is going to be an IP lawyer or a licensing lawyer, and not necessarily a compliance attorney. So just the devotion of resources to a compliance program is a good sign. And you want to look at how the compliance program is designed, whether it's actually designed to ferret out and handle misconduct. Does the compliance program provide for regular auditing? Does the compliance program provide for direct reporting to the board of directors or to someone who actually has power to act? Are compliance officers empowered to fix wrongs when they see them? What we often see, and what Erica mentioned before, is that defendants really like to highlight their compliance programs to the Department. But a compliance program can look really good on paper. If it's not actually working in practice, it's not going to be persuasive evidence of good faith. And so you want to look both at the design of the compliance program, but also is it actually effective in practice? And one of the big questions to ask is, did the compliance program catch this conduct? If it didn't, why didn't it catch it? And if it did, how did it treat it?

Kirsten Mayer: We wrapped up by talking about what DOJ and whistleblower lawyers view as persuasive evidence of a company’s bad intent. Erica identified four examples. The first involved email.

Erica Blachman Hitchings: I'll start with one that we, I'm sure, have all seen in our practice, what some would refer to as a CYA email. Often it could be, for example, an email issuing a directive that is inappropriate or really pushing somebody to push the envelope. For example, a businessperson high-up in an organization encouraging or demanding that a medical personnel get every penny out of a patient or something to that effect, but then throwing in at the end a stock statement about, "Oh, but of course use your medical judgment," and particularly if you see that over and over within an organization when everything else doesn't really match up with that phrase, "But use your medical judgement." Second, and we've touched on this already, are policies, particularly compliance policies, that are not enforced. And you can usually figure this out by talking with witnesses, and/or looking at particular documents, many of which Kim has already flagged for us. Third, failure to utilize the data that's available to you, whether it's data that's provided in particular by the government, sometimes CMS, for example, will provide things such as PEPPER Reports that help entities understand where they stand in terms of certain types of billing, compared to their regional or national competitors, or even data within your own organization that could help you find red flags. And, fourth, picking up on Kim's point in our prior conversation about contemporaneous explanations, a post facto justification, particularly a very legalistic one as to why conduct might be okay, if it's not paired with contemporaneous thinking about the conduct is not usually nearly as persuasive as something that is obviously in the moment.

Kirsten Mayer: I put the same question to Kim.

Kim Friday: What I think is most persuasive and compelling is a statement by a higher-up executive, either in an email, lately we're shifting to text messages, so email, text message or otherwise, that shows really clear understanding that what they are doing is wrong. An example, and I actually had this in a case, is someone saying, "I don't look good in orange," for example, "We'll do this, but I don't look good in orange." So something like that, that I think will be easy for a jury to understand. Those are the cases that settle almost immediately – those aren't the cases that go to trial. But that's always what I think the gold standard is that we're looking for.

Erica Blachman Hitchings: And I would echo that. I think that was a really good example, Kim. I'd say another that I have seen is, "We can't let CMS know we're doing this." Essentially, from somebody relatively high-up, or similar things, efforts to hide something from an agency can go a long way.

Kirsten Mayer: The False Claims Act landscape has changed radically in just a few weeks. As recently as February, press reports noted declining FCA recoveries and wondered whether the use of the statute has seen its high water mark. Since then, in response to the COVID-19 crisis, we have seen an unprecedented commitment of public funds to a wide range of programs designed to support and sustain the economy. And public spending on public health will continue to be high. As our discussion wrapped up, I wanted to know what Kim and Erica saw as the biggest challenge that whistleblowers face going forward in this new environment.

Kim Friday: The question of government resources is always a challenge. The government never has enough resources to pursue all of the fraud cases that conceivably have merit, and that it, in a perfect world, would be pursuing. And so I think the challenge on the relator-side now is in really convincing the government that you have a case that is worth them devoting their precious time and resources to, because it's the binary question for the government. For every case they pursue, there's another case they can't pursue.

Erica Blachman Hitchings: I'm an optimist, so I hope very few. But if I'm forced to name one, and I accept this as just part of the legal world, which is just battling out certain theories in court – both sides have victories and defeats to their name, and I think that there's a risk from the perspective of a relators' counsel that valid cases with truly bad conduct, and they become less attractive to some to bring, and/or result in not the best result if it does go into litigation. At the same time, I think many of the most passionately pursued cases, and cases that still will be getting the government's attention, will go forward, and if they have to be fought out in courts, they will be.

Kirsten Mayer: I gave Kim the last word.

Kim Friday: I think the FCA is going to continue to serve a really important role going forward, perhaps even a bigger role than it has in the past. I always think about, there's a famous statement, the bank robber, Willie Hutton, was once asked, "Why do you rob banks?" And he said, "Because that's where the money is." We see the same thing with fraud in the United States.

Kirsten Mayer: Erica and Kim, thank you both for joining me today. And thank you to our listeners. For more information about our False Claims Act practice, please visit www.ropesgray.com/falseclaimsact. We'd love to hear from you about our podcast as well – you can email us at publicdisclosurepodcast@ropesgray.com. Our next episode will feature Professor Jacob Elberg from Seton Hall Law School. He’s a former Assistant United States Attorney and Chief of the Health Care Unit at the U.S. Attorneys’ Office in the District of New Jersey. We will discuss the 2019 Department Of Justice guidance on cooperating with False Claims Act investigations and his own original research on whether the Department is giving defendants the credit for the kinds of cooperation and compliance that guidance seeks to promote. Be sure to tune in to hear his perspective – you won’t want to miss it. You can subscribe to our Public Disclosure podcast series wherever you regularly listen to podcasts, including on Apple, Google, and Spotify. Thanks again for listening.

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