Last November, we reported that Michael Granston, Director of the DOJ Commercial Litigation Branch, Fraud Section, announced at a health care conference that in the future DOJ would move to dismiss meritless qui tam cases. We doubted that much would change, especially given that the speech was not accompanied by any type of policy memorandum. We also understood that DOJ had denied any formal change in policy, and yet, last week the other shoe dropped. The New York Law Journal obtained a copy of a memorandum issued by Granston and dated January 10 to all attorneys in the Fraud Section and all Assistant U.S. Attorneys handling FCA cases. The memorandum purports to encourage DOJ to “seek dismissal” of non-intervened qui tam cases that “lack substantial merit” and discusses at some length the factors that should guide the exercise of dismissal discretion. Perhaps the memorandum is some reason for optimism, but we at LLB will wait, as we do, for the statistics to see if this marks any real shift in government thinking on FCA enforcement or is mere window dressing.
The memo — likely soon to be memorialized in defendants’ briefs everywhere as “The Granston Memorandum” — admits that “[h]istorically” DOJ has been “sparing” and “circumspect” in its use of the provision of the FCA that allows DOJ to dismiss qui tam cases, 31 U.S.C. § 3730(c)(2)(A). But at least per the memo, the government now embraces its role as “an important gatekeeper” responsible for pruning out weak FCA cases in order to “advance the government’s interests, preserve limited resources, and avoid adverse precedent.” The memo lists out seven factors that could justify dismissing a qui tam case, and cites cases (including sealed cases) where DOJ has done so in the past: (1) “curbing meritless cases,” (2) “preventing parasitic” cases that only provide the government “duplicative information,” (3) “preventing interference with agency policies and programs,” (4) “controlling litigation” and “avoid[ing] the risk of unfavorable precedent,” (5) “safeguarding classified information and national security interests,” (6) “preserving government resources” in cases “when the government’s expected costs are likely to exceed any expected gains,” and (7) addressing “procedural errors” by relators.
Of these factors, perhaps the most notable for defendants is the third — “preventing interference with agency policies and programs.” Here, more than anywhere else in the memo, the government recognizes that weak FCA cases are costly to industry (a point we have made many times in amicus briefs): “[T]here may be instances where an action is both lacking in merit and raises the risk of significant economic harm that could cause a critical supplier to exit the government program or industry.” Granston then cites, seemingly favorably, the Fifth Circuit’s 2017 decision in United States ex rel. Harman v. Trinity Industries, 872 F.3d 645, in which the Fifth Circuit reversed a $680 million judgment because the relevant agency had decided that the relator’s purported violations were not material to the government’s decision to pay. These two points seem to suggest that DOJ should be more inclined going forward to dismiss cases where potentially significant FCA liability for a defendant hinges on a minor contractual or regulatory violation likely not material under Escobar but that may cost real dollars to defend in FCA litigation. Given that, at least under cost-reimbursement contracts, the government has to pay up to 80% of the tab of the contractor’s successful FCA defense, there is a true cost to the government in DOJ’s simply standing by while meritless cases proceed on claims that the client agency does not even care about.
We welcome the memorandum, but like the Congressman who gave Missouri its famous motto, “frothy eloquence neither convinces nor satisfies us,” we have to be shown. Recall that the 2017 statistics only recently released show that a whopping 92% of FCA recoveries came from relator-initiated cases, and a quarter of the overall recoveries were from qui tam cases where DOJ did not intervene. DOJ has a powerful incentive to keep the tips coming, and, given that the FCA exempts qui tam cases from usual venue requirements, U.S. Attorney’s Offices will continue to encourage forum shopping by relators by being viewed as attractive places “to do business.” A footnote in the memorandum claims DOJ will create a “reporting mechanism” for senior officials to track DOJ dismissals. We certainly hope that data will be shared with the public, so that we can see if the policy is more than a paper tiger.