individual accountability

During a November 29, 2018 speech, Deputy Attorney General Rod Rosenstein announced changes to Department of Justice (“DOJ”) policy concerning individual accountability in corporate cases.  The announcement followed the DOJ’s year-long review of its individual accountability policies and the September 2015 memorandum issued by then-Deputy Attorney General Sally Yates, commonly known as the “Yates Memo.”

While making clear that pursuing individuals responsible for corporate wrongdoing remains a top priority in every investigation conducted by DOJ, Mr. Rosenstein drew a substantial distinction between the treatment of individuals in criminal investigations and civil investigations.

Criminal Matters

In criminal cases, the revised policy provides that to receive cooperation credit, a company “must identify every individual who was substantially involved in or responsible for the criminal conduct.”  Responding to concerns that it was inefficient to require companies to identify every employee involved irrespective of culpability, Mr. Rosenstein stated that DOJ’s focus will be on those who play “significant roles in setting a company on a course of criminal conduct.” He also noted that “investigations should not be delayed merely to collect information about individuals whose involvement was not substantial, and who are not likely to be prosecuted.”   Importantly, Mr. Rosenstein made clear that if a company fails to work in good faith to identify substantially involved or responsible individuals, it would not receive any cooperation credit.

Civil Matters

According to Mr. Rosenstein, “[c]ivil cases are different.” Recognizing that the primary purpose of civil enforcement is the recovery of money, Mr. Rosenstein noted that the “all or nothing” approach to civil cases espoused in the Yates Memo was simply not practical and, in some circumstances could be counterproductive.  In those matters where criminal culpability is not in question, the revised policy recognizes a need for flexibility.

The most significant aspect of this revision is the focus on senior officials in the company, including members of “senior management or the board of directors.”  In civil matters, entities are expected to  identify all wrongdoing by these individuals.  Indeed, Mr. Rosenstein noted that if companies make any effort to hide misconduct by senior leaders, they “will not be eligible for any [cooperation] credit.”  Companies that want to receive “maximum credit” must “identify every individual person who was substantially involved in or responsible for the misconduct.”

The revised policy also provides DOJ lawyers with the flexibility to provide “partial credit” for companies that seek to cooperate with the government.  For instance, in situations where a company “honestly” and “meaningfully” provides “valuable assistance” to the government, the revised policy envisions the ability to award at least partial credit, even if the company does not agree with the government about every employee’s individual liability.  According to Mr. Rosenstein, when credit is all or nothing, resolution of cases can be delayed without any resultant benefit.

Additionally, in settling civil cases post-Yates, the DOJ has routinely refused to include releases for individuals regardless of culpability.  The revised policy returns to the pre-Yates practice of allowing DOJ’s civil attorneys the discretion to negotiate individual releases in cases where additional investigation of those individuals is not warranted “with appropriate supervisory approval.”

Finally, the Yates Memo stated that DOJ would not consider an individual’s ability to pay a civil settlement or judgment as part of its decision whether or not to pursue that individual.  Going forward, the revised policy permits DOJ attorneys to consider “ability to pay” issues in deciding whether or not to pursue a civil judgment against an individual.  According to Mr. Rosenstein, this commonsense change has been made so that DOJ civil attorneys are not wasting valuable resources pursuing individuals from whom there is no realistic source of recovery.

Key Takeaways

While noting that it is “revising” current policy, DOJ has made clear that the pursuit of individuals, whether in criminal or civil investigations, remains a top priority.  The specific identification in civil cases of the actions of senior management, including members of a company’s board of directors, is significant and should be top of mind for entities operating in the health care arena, where enforcement efforts are so routinely focused—whether by the government directly or through the efforts of qui tam relators.  This development suggests the continued need to focus compliance efforts throughout an organization and to ensure that its most senior leaders appreciate the spotlight that will be put on their activities.

The changes referenced above can be found in the documents identified below:

https://www.justice.gov/jm/jm-1-12000-coordination-parallel-criminal-civil-regulatory-and-administrative-proceedings#1-12.000

https://www.justice.gov/jm/jm-4-3000-compromising-and-closing#4-3.100

https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations#9-28.210

https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations#9-28.300

https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations#9-28.700

 

On December 21, the Department of Justice (“DOJ”) reported its fraud recoveries for Fiscal Year 2017. While overall numbers were significant – $3.7 billion in settlements and judgments from civil cases involving allegations of fraud and false claims against the government – this was an approximate $1 billion drop from FY 2016. However, the statistics released by DOJ reflect themes significant to the healthcare industry.

Greatest Recoveries Come From The Healthcare Industry

As in years past, matters involving allegations of healthcare fraud were the driver, accounting for more than 66% of all fraud related recoveries in FY 2017. While the $2.47 billion was effectively constant from FY 2016, this was the fourth largest recovery in the past 30 years. It is also the eighth consecutive year that healthcare fraud recoveries exceeded $2 billion.  Largest recoveries came from settlements involving the drug and medical device sector.

Qui Tam Cases Lead Recoveries – and Healthcare Cases Dominate

Cases pursued under the False Claims Act’s qui tam provisions continue to drive matters pursued against healthcare entities. Of the 544 new matters brought in FY 2017, 491 were initiated by relators, down just slightly from 2016 but, nevertheless, the third largest annual filing since DOJ began keeping records in 1986.

Government intervention in these cases continues to generate the lions share of the recoveries. Of the $2.47 billion recovered in healthcare matters, $2.06 billion was generated from cases where the government intervened. While by contrast cases in which the government declined to intervene generated $380 million, this was the second-highest annual recovery from such cases in 30 years. Thus, while government intervention continues to be a significant concern, the reality is that more cases are being pursued by relators post declination, creating additional risk for healthcare entities.

DOJ statistics also confirm the significant financial incentives for relators to pursue these cases. In FY 2017, the government paid more than $392 million in relator share awards; more than $283 million of these payments came in connection with healthcare cases. Since 1987, almost $5 billion has been paid to realtors. These numbers suggest that the potential of a major financial reward is real and will continue to encourage the filing and pursuit of actions, particularly against those in the healthcare industry.

Individual Accountability Remains A Priority…Particularly in Healthcare
Finally, the report reflects the Department’s continued focus on individual accountability. Recoveries included individuals agreeing to hold themselves jointly and severally responsible for multimillion dollar settlements with the government, as well as individual settlements following, and separate and apart from, corporate resolutions.

Significantly, every case cited in DOJ’s press release on the issue of individual accountability was from the healthcare sector. This suggests that those employed in the healthcare industry remain key targets of both the government and qui tam relators.

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The FY 2017 DOJ statistics reflect that a change in Administration has done little to alter the government’s belief that devoting time and resources to FCA cases makes “good business sense.” Health care entities—and, as important, individuals in the healthcare industry—need to be mindful of this focus, the potential for violations and to ensure the existence of strong compliance functions to deal with compliance-related matters in a way that is intended to prevent claims and litigation, and to serve as strong defenses when matters are pursued.

On November 24, 2015, in United States ex rel. Purcell v. MWI Corp., No. 14-5210, slip op. (D.C. Cir. Nov. 24, 2015), the District of Columbia Circuit Court of Appeals ruled that federal False Claims Act (“FCA”) liability cannot attach to a defendant’s objectively reasonable interpretation of an ambiguous regulatory provision. While outside of the health care arena, this decision has implications for all industries exposed to liability under the FCA.

In Purcell, the government alleged that false claims had been submitted as a result of certifications made by defendant MWI Corporation to the Export-Import Bank in order to secure loan financing connected with MWI’s sale of water pumps to the government of Nigeria.

As part of the loan process, the Export-Import Bank required MWI to certify that it had paid only “regular commissions” to the sales agent in connection with the transactions. Purcell alleged that non-regular commissions had been paid and that the commissions were, in fact, so great that MWI should have disclosed them as payments other than “regular commissions.”

MWI defended that the commissions it paid were at the same level it had previously paid to the agent—hence they were “regular”—and that the term was not otherwise elsewhere defined. The case was brought alleging the knowing submission of false claims for payment and the making of false statements to obtain payment of false or fraudulent claims in violation of 31 U.S.C. § 3729(a)(1) and (a)(2).

Ultimately, a jury awarded damages after finding that MWI’s certifications that it had paid only “regular commissions” were fraudulent. However, because the damages had been offset by other payments that had been made by MWI to the government, the District Court determined that there were no actual damages to be awarded. Nevertheless, because the jury found that false claims had been submitted, the Court imposed civil penalties at the then maximum amount ($10,000 per claim) for each of the alleged 58 false claims.

On appeal, MWI contended that it could not have been found liable under the FCA. It asserted that the term “regular commissions” was ambiguous and that it was entitled to its own reasonable interpretation of that term, absent notice of another meaning from the government or a court.

Holding that this presented questions of law, the Court focused on the fact that in order to be liable under the False Claims Act, a defendant must have made the false claims “knowingly”— specifically, “(1) [with] actual knowledge; (2) acting in deliberate ignorance; or (3) acting in reckless disregard.” The court held that the FCA did not reach an innocent, good faith mistake about the meaning of an applicable rule or regulation. Nor, the Court ruled, did it reach those claims made based on reasonable but erroneous interpretations of a defendant’s legal obligations. Holding that  the term “regular commissions” was ambiguous (note: no party contested that the term was ambiguous) and that there was no record evidence of any guidance from any court or relevant agency that would have suggested that the interpretation MWI made was inaccurate, the Court ruled that there was no showing of a knowing submission of a false or fraudulent claim or the making of a false or fraudulent statement in support of a false or fraudulent claim and reversed the judgment of the District Court.

Key Takeaways

MWI prevailed because its conduct was objectively reasonable given the undisputed ambiguity of the regulation and the fact that MWI acted in a customary fashion under both meanings of the word “customary.” It is significant that the Court held that these were questions of law that a judge could decide.[1]

This is of great importance to defendants, especially in the health care space where CMS and FDA regulations often are ambiguous or created ex post facto to conduct that the government decides should be considered fraudulent.  While it is generally the case that to be liable under the FCA, a defendant must have made a false claim knowingly —and the Court here is essentially reaffirming what it correctly held last year in United States ex rel. Folliard v. Gov’t Acquisitions, Inc., 764 F.3d 19, 29 (D.C. Cir. 2014) —not all circuits have issued identical holdings. Thus, if one is not concerned about extra-regulatory acquired knowledge—the thing that could potentially send what otherwise would be a case decided on motions to the jury—this is a useful and, one hopes, transferable precedent.

As significant—in light of the Department of Justice’s recently published “Memorandum Re Individual Accountability for Corporate Wrongdoing” authored by Deputy Attorney General Sally Quillian Yates,  where the focus is on the culpability of individual executives—the Purcell decision could have even broader influence.

In the civil arena, especially with regard to health care FCA cases against executives, the government is likely to advance derivative negligence theories of intent where, as usually is the case in larger companies, there is no direct participation by the individual in the alleged fraud.  Here, the strong reiteration of the three-part standard enunciated in Folliard and reiterated in Purcell ought to have a lot of value. This is especially so, since recent amendments to the FCA, including under the Affordable Care Act, have made it more difficult for defendants to get summary relief in FCA cases. That is a particular problem in cases where the government has declined intervention but relators can now more easily perpetuate litigation and pursue settlements.

Focusing on the absence of a specifically pleaded theory of culpable knowledge may prove more fruitful than trying to take advantage of jurisdictional bars that have been grossly lowered.  Doing so also helpfully implicates the Supreme Court’s teachings in Iqbal and Twombley.

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[1] While the questions of law were dispositive here, there is a major caveat: The case was held properly to have gone to the jury on the question of fact as to whether MWI otherwise had been aware of what the government contended had become its new regulatory definition. While the DC Circuit ultimately held that the evidence was legally insufficient to demonstrate such tipping, the fact remains that the Court potentially left open the door  – depending on the particulars of a given case – for the government to seek to recover even where a defendant has made an “objectively reasonable interpretation of an ambiguous regulatory provision.”