Earlier this week, the U.S. Department of Justice (“DOJ”) announced that in the fiscal year ending September 30, 2017, it recovered over $3.7 billion in judgments and settlements from civil cases involving the False Claims Act (“FCA”). This number is actually down from the 2016 fiscal year, but it is staggering nonetheless, and demonstrates the potency of the FCA as a tool to combat alleged fraud and enforce federal laws and regulations. Two recently circulated internal DOJ memoranda, however, may provide FCA defendants with some new tools of their own.
First, a January 10, 2018 memo authored by Michael Granston, the director of the commercial litigation branch of the DOJ’s fraud section, outlined circumstances in which DOJ attorneys should consider pursuing dismissal of non-intervened qui tam actions, meaning civil actions filed by whistleblowers on behalf of the government in which the DOJ has declined to take over. The memo expands on comments made by Mr. Granston last year which appeared to indicate that the DOJ will act more aggressively to weed out qui tam suits that it views as lacking merit. The DOJ has the power to seek dismissal of qui tam suits pursuant to 31 U.S.C. § 3730(c)(2)(A), but this power has previously been used “sparingly,” as the memo notes, causing FCA defendants to have to incur substantial costs defending against nonmeritorious suits. When the government does seek dismissal, its determination is typically afforded great deference by the courts. The D.C. Circuit holds that the government has an “unfettered right” to dismiss qui tam suits, which unsurprisingly is also the DOJ’s position, while two other circuits (the 9th and 10th) have required the government to identify a “valid government purpose” rationally related to dismissal.
The Granston memo identifies several factors and circumstances that have supported dismissal under 31 U.S.C. § 3730(c)(2)(A) in the past, but its first and foremost concern is with actions that lack substantial merit. Citing statistics that show that overall FCA filings are at record highs while the government’s rate of intervention remains relatively static, the memo warns that meritless suits, if not kept in check, can drain governmental resources and also saddle the DOJ with adverse opinions affecting its ability to recover in stronger cases. Interestingly, Mr. Granston writes that DOJ attorneys should consider dismissal not only when the complaint is facially without merit, but also when the government’s investigation of facially plausible allegations reveals that the case has no merit. Defendants in non-intervened FCA cases therefore may be able to persuade the DOJ to seek dismissal at the declination stage either because the allegations do not state a claim under the FCA or because the claim is factually unsupportable based on the DOJ's own investigation of the complaint. Defendants also may have continuing opportunities to persuade the DOJ to seek dismissal at later points in the case, if there is a favorable legal or factual development. Of course, it remains to be seen what issues the DOJ will be willing to consider in evaluating the merit of a non-intervened action. For instance, will the DOJ be willing to dismiss a qui tam action because the plaintiff cannot show materiality, a highly contentious issue since the Supreme Court’s Escobar decision? Mr. Granston’s stated concern about adverse precedent suggests that the DOJ may use dismissal as a tool to dispose of cases that are weak as to materiality, an element that will often turn on the government’s own conduct, such as its decision to pay for goods or services that it knew failed to meet regulatory requirements.
Other factors supporting dismissal cited in the memo include where the action is “parasitic” and “adds no useful information to the investigation,” where it interferes with an agency’s policies or is necessary to protect the DOJ’s litigation prerogatives, where the government’s costs are likely to exceed any potential gain, and where the relator has committed “egregious” procedural errors. The memo makes clear that this list is non-exhaustive and that other reasons for seeking dismissal may exist.
The second memo, authored by Associate Attorney General Rachel Brand on January 25, 2018, could significantly impact FCA cases that rely heavily on allegations that the defendant failed to comply with non-binding agency guidance. The two-page memo builds on a November 16, 2017 memo issued by Attorney General Jeff Sessions (the “Guidance Policy”) prohibiting the DOJ from issuing guidance documents that bind members of the public without undergoing the “notice-and-comment” rule making process. Under the Guidance Policy, DOJ guidance documents (defined as “any agency statement of general applicability and future effect, whether styled as ‘guidance’ or otherwise, that is designed to advise parties outside the federal Executive Branch about legal rights and obligations”) may create binding obligations on executive branch employees, but not on members of the public.
Stating that the same principles should also “guide Department litigators in determining the legal relevance of other agencies’ guidance documents in affirmative civil enforcement,” the Brand memo instructs DOJ attorneys in affirmative civil enforcement matters (including FCA cases) that (1) they may not use the DOJ’s enforcement authority “to effectively convert agency guidance documents into binding rules” and (2) they may not use a party’s “noncompliance with guidance documents as a basis for proving violations of applicable law[.]” On this latter point, the memo is emphatic, going so far as to note that the fact “[t]hat a party fails to comply with agency guidance expanding upon statutory or regulatory requirements does not mean that the party violated those underlying legal requirements; agency guidance documents cannot create any additional legal obligations.” The new policy announced in the memo applies not only to future affirmative civil enforcement matters, but also to pending matters to the extent practicable.
Though the memo is not limited to FCA cases, it is easy to see how such actions could be impacted. In many healthcare fraud cases, for instance, the case against the defendant is based not only upon alleged violations of statutes and regulations, but also upon allegations that the defendant failed to conform its conduct to guidance issued by the Centers for Medicare & Medicaid Services, the Department of Health and Human Services' Office of Inspector General, and other agencies. Indeed, such allegations are often the tail that wags the dog. Under the Guidance Policy and the January 25 memo, however, a claim should not be permitted to proceed if the defendant’s liability depends on the existence of a legal duty that is set forth only in guidance documents.
The memo is not without significant caveats, however. Under the new policy, DOJ attorneys may still use guidance documents in civil enforcement proceedings for “proper purposes,” such as to explain legal duties and obligations that are set forth in existing statutes or regulations, or to establish that the defendant read the guidance and therefore had knowledge of relevant matters discussed therein. The full scope of the new policy is also limited. It does not expressly apply to criminal prosecutions or to any proceedings outside of affirmative civil enforcement, nor will it bind private plaintiffs (such as qui tam relators) who assert claims based on alleged violations of regulatory guidance.
Every current FCA defendant and everyone else whose involvement in highly regulated industries makes them vulnerable to FCA lawsuits should be re-evaluating their defense strategies in light of these memos. Where defendants may not have previously thought to seek dismissal under § 3730(c)(2)(A) at the declination stage, a more proactive approach may now be warranted. At the very least, it appears that the DOJ will be more receptive to the idea of dismissing qui tam actions before they begin to impose significant costs on companies defending them. Defendants also should vigorously pursue dismissal of claims that appear to be improper attempts to give legal force to nonbinding guidance.