On September 9, 2015, U.S. Department of Justice, Deputy Attorney General Sally Quillan Yates announced how the Department of Justice (including U.S. Attorneys’ Offices) will investigate and prosecute business entities (the “Yates Memo”). The Yates Memo provides that “attorneys investigating corporate wrongdoing should maintain a focus on the responsible individuals, recognizing that holding them to account is an important part of protecting the public fisk in the long term.” As seen in a recent False Claims Act case, the Yates Memo’s principles are not just limited to criminal cases but potentially apply to False Claims Act cases as well.
Take for example the case of U.S. v. Berkley Heartlab, Inc., et. al., No. 9:14-cv-00230, Docket Entry 75, (Aug. 7, 2015 Dist. S.C.), a qui tam case in which DOJ recently intervened. The United States alleges that the defendants paid $80 million in kickbacks to physicians in the form of improper “process and handling fees” to induce physicians to refer blood samples to three different laboratories, including Health Diagnostics Laboratory (“HDL”). As a result of these improper inducements the subject laboratories allegedly submitted false claims to Medicare and Tricare, which in turn reimbursed which the subject laboratories more than $500 million. The United States alleges that the claims were false because (1) the laboratories were not entitled to reimbursement for claims resulting from illegal kickbacks, and (2) many of the claims were for tests that were medically unnecessary but were ordered as a result of illegal inducements.
Among the defendants being sued in the case is Tonya Mallory, the co-founder and former Chief Executive Officer of HDL. Named the Ernst & Young Entrepreneur of the Year for 2012 and the 2013 Virginia Business Person of the Year by Virginia Business Magazine, and formerly lauded as having “revolutioniz[ed] the practice of medicine,” Ms. Mallory now finds herself a defendant in a federal qui tam lawsuit seeking hundreds of millions of dollars in damages. Importantly, HDL settled with the government in March 2015 for $47 million, but the government continues to pursue Ms. Mallory personally, naming her as a defendant in its August 2015 Complaint in Intervention. The pursuit of Ms. Mallory in her individual capacity, even after her former employer HDL has settled, is an example of the type of cases that are certain to become more prevalent in the wake of the Yates Memo.
The Yates Memo lays out six “key steps” intended to strengthen the DOJ’s pursuit of corporate officials. The fourth key step is of particular relevance to Ms. Mallory’s current plight: “absent extraordinary circumstances or approved departmental policy, the Department will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation.” (emphasis added). Thus, although HDL has settled with the government, and likely cooperated in its investigation, such cooperation did not spare Ms. Mallory. In fact, according to the first key step, HDL’s assistance in building the case against its former CEO appears to have been a pre-condition of the settlement. The first key step provides, “in order to qualify for any cooperation credit, corporations must provide to the department all relevant facts relating to the individuals responsible for the misconduct.” In turn, HDL’s FCA settlement with the government provides just that:
"HDL agrees to cooperate fully and truthfully with the United States' investigation of individuals and entities not released in this Agreement. Upon reasonable notice, HDL shall encourage and agrees not to impair, the cooperation of its directors, officers, and employees and shall use its best efforts to make available, and encourage, the cooperation of former directors, officers, and employees for interviews and testimony, consistent with the rights and privileges of such individuals. HDL further agrees to furnish to the United States, upon request, complete and unredacted copies of all nonprivileged documents, reports, memoranda of interviews, and records in its possession, custody or control concerning any investigation of the Covered Conduct that it has undertaken or that has been performed by another on its behalf."
Targeted corporation should no longer expect to reach a settlement without providing specific information about the individual corporate officers involved in the alleged corporate misconduct. This emphasis on the prosecution of individuals, coupled with DOJ’s insistence that cooperating corporate defendants provide information regarding individuals involved in corporate wrongdoing, further complicates the decisions of corporate counsel regarding whether, and to what extent, to cooperate with federal investigators. It also creates an increased risk of conflicts of interest between corporate counsel and corporate officers and executives. These risks are compounded by the upward trend in the number of False Claims Act cases being pursued each year by the Department of Justice and/or relators’ counsel.