DOJ Issues Guidance on Disclosure, Cooperation and Remediation in False Claim Act Matters
On May 7, 2019, the Civil Division of the U.S. Department of Justice (“DOJ”) issued formal guidance on the award of cooperation credit to corporate defendants in False Claims Act matters (the “FCA Guidelines”), available on its website. Similar to the DOJ Criminal Division’s Corporate Enforcement Policy, the FCA Guidelines provide that defendants may earn partial or maximum credit by (i) voluntarily disclosing misconduct unknown to the government; (ii) cooperating in an ongoing investigation; or (iii) undertaking remedial measures in response to a violation.
Enforcement of the False Claims Act
The False Claims Act imposes civil and criminal liability for persons that, inter alia, knowingly present or cause to be presented false or fraudulent claims to the United States government. Civil penalties can include fines of up to three times the amount the government paid for each false claim, plus an additional penalty of up to US$11,000 per false claim. Additionally, individuals can face criminal liability for violations of the False Claims Act.
The range of the False Claims Act is extremely broad and thus potentially affects a wide variety of companies (including non U.S. companies) which contract with the U.S. government or which operate in heavily regulated industries such as healthcare and financial services. The DOJ has used the False Claim Act to pursue claims of contracting fraud (including bid rigging), healthcare fraud (including claims against drug and medical device manufacturers, managed care providers, hospitals, pharmacies, hospice organizations, laboratories, and physicians), grant fraud, and financial fraud, extracting billions of dollars in fines via settlements.
Recent enforcement actions of note include:
- February 11, 2019: The federal government filed suit against Lockheed Martin Corporation, Lockheed Martin Services Inc., Mission Support Alliance LLC, and an individual, Jorge Francisco “Frank” Armijo, for alleged false claims and kickbacks in connection with a multi billion-dollar contract with the Department of Energy. The case is pending in the Eastern District of Washington. Notably, one of the defendants in the pending lawsuit, Lockheed Martin Corporation, previously entered into a False Claims Act settlement in January 2018, agreeing to pay US$4.4m in connection with allegations that it provided defective communications systems to the United States Coast Guard.
- October 1, 2018: Amerisource Bergen agreed to pay US$625m in connection with allegations that it improperly repackaged and distributed cancer drugs.
- March 15, 2018: Toyobo Co. Ltd and its American subsidiary agreed to pay US$66m in connection with allegations that they sold defective Zylon fiber used in bullet proof vests that the U.S. purchased for law enforcement agencies.
FCA Guidelines in Detail
The FCA Guidelines provide further clarification on the factors government attorneys will evaluate when assessing whether a defendant’s disclosure, cooperation and remediation merit credit in a False Claims Act matter.
Voluntary Disclosure. A defendant will receive credit for a proactive, timely, and voluntary self disclosure of misconduct that includes identifying all individuals substantially involved in or responsible for the misconduct. If a defendant comes to learn of additional misconduct going beyond the scope of known misconduct, the voluntary self disclosure of such additional misconduct will also qualify the defendant for credit.
Cooperation. The FCA Guidelines provide a non exhaustive list of cooperative actions that could qualify a defendant for credit under this factor: (i) identifying individuals substantially involved in or responsible for the misconduct; (ii) disclosing relevant facts and identifying opportunities for the government to obtain evidence relevant to the government’s investigation that is not in the possession of the entity or individual or not otherwise known to the government; (iii) preserving, collecting, and disclosing relevant documents and information relating to their provenance beyond existing business practices or legal requirements; (iv) identifying individuals who are aware of relevant information or conduct, including on operations, policies, and procedures; (v) making available for meetings, interviews, examinations, or depositions officers and employees who possess relevant information; (vi) disclosing facts relevant to the government’s investigation gathered during the defendant’s independent investigation (not to include information subject to attorney client privilege or work product protection), including attribution of facts to specific sources rather than a general narrative of facts, and providing timely updates on any internal investigation into the government’s concerns, including rolling disclosures of relevant information; (vii) providing facts relevant to potential misconduct by third party entities and third party individuals; (viii) providing information in native format, and facilitating review and evaluation of that information; (ix) admitting liability or accepting responsibility for the wrongdoing or relevant conduct; and (x) assisting in the determination or recovery of the losses caused by the misconduct.
Remedial Measures. A defendant that undertakes appropriate remedial actions may also earn credit under the FCA Guidelines. In evaluating such remedial actions, government attorneys will examine whether the defendant has (i) demonstrated a thorough analysis of the cause of the misconduct and, where appropriate, undertaken remediation to address the root cause; (ii) implemented or improved an effective compliance program designed to ensure the misconduct or similar problem does not recur; (iii) appropriately disciplined or replaced individuals identified as responsible for the misconduct either through direct participation or failure in oversight, as well as individuals with supervisory authority over the relevant area; and (iv) taken additional steps demonstrating recognition of the seriousness of the misconduct, acceptance of responsibility, and the implementation of measures to reduce the risk of recurrence, including measures to identify future risks.
As a general matter, in considering the value of any voluntary disclosure or cooperation, government attorneys will look to (i) the timeliness and voluntariness of the assistance; (ii) the truthfulness, completeness, and reliability of any information or testimony provided; (iii) the nature and extent of the assistance; and (iv) the significance and usefulness of the cooperation to the government.
The FCA Guidelines also stress that the DOJ retains the discretion to consider additional factors beyond those set out above, some of which may reduce the credit available to a defendant or even render the defendant ineligible for any credit. These factors include the nature and seriousness of the violation, the scope of the violation, the extent of any damages, the defendant’s history of recidivism, the harm or risk of harm from the violation, whether U.S. interests will be adequately served by a compromise, the ability of a wrongdoer to satisfy an eventual judgment, and litigation risks presented if the matter proceeds to trial.
If a defendant voluntarily discloses, cooperates and remediates, the FCA Guidelines provide that its cooperation credit (whether maximum or partial) may take the form of a reduction in civil penalties and the damages multiplier. However, the maximum credit earned may not exceed an amount that would result in the government receiving less than full compensation for the losses caused by the defendant’s misconduct (including damages, interest, costs, and relator share). If appropriate, DOJ may also extend other forms of credit to a defendant, such as notifying other agencies about the defendant’s voluntary disclosure, cooperation, or remediation, so that those agencies may take the cooperative actions into account in assessing administrative remedies; publicly acknowledging the defendant’s cooperation; or assisting in the resolution of qui tam litigation.
While the new FCA Guidelines provide welcome guidance for companies exposed to False Claims Act liability, there are many factors beyond the guidance that companies should consider in deciding how to deal with a potential False Claims Act issue. Companies should work with counsel to evaluate the risks and rewards of disclosure and cooperation in light of the FCA Guidelines and other considerations.