On May 5, 2011, Senators Leahy (D-Vt.), Grassley (R-Iowa), Klobuchar (D-Minn.), and Coons (D-Del.), introduced a bill titled “Fighting Fraud to Protect Taxpayers Act of 2011,” (the Bill) which would require the Attorney General to make annual reports to Congress summarizing False Claims Act, 31 U.S.C. § 3729 et. seq., (FCA) settlements, including the details of damages calculations. The Bill also would allocate a percentage of FCA and other fraud recoveries to the Department of Justice (DOJ) to offset administrative costs of investigating fraud, and it includes miscellaneous fraud-fighting provisions. The Senate Judiciary Committee reported on May 19, 2011.
Section 9 of the Bill would require the Attorney General to report annually to the Senate and House Judiciary Committees settlements of FCA violations and violations of the Major Fraud Act, 18 U.S.C. § 1031, when the settlements result from a “claim for damages of more than $100,000.” The annual report must include 14 elements for each settlement. These include, among others:
- the total amount of the settlement and portions allocated to various statutory authorities;
- the amount of actual damages as well as minimum and maximum potential civil penalties;
- the basis for any estimates of damages or civil penalties;
- the division of the settlement amount between damages and multipliers;
- the amount representing civil penalties and the percentage of maximum civil penalties;
- whether the defendant previously settled an FCA or Major Fraud Act matter;
- whether a Corporate Integrity Agreement (CIA) or Deferred Prosecution Agreement (DPA) has been negotiated in the instant matter and whether the defendant previously entered into a CIA or DPA;
- whether Civil Investigative Demands were issued in investigating the matter; and
- the percentage of the settlement amount awarded to the FCA relator.
The intent of the Bill is to place pressure on DOJ to drive harder bargains in resolving FCA suits. Senators Grassley and Leahy’s press release explains that the Bill’s goal is to increase “accountability by requiring the Justice Department to better manage and account for key spending.” Moreover, it seeks to ensure that “’False Claims Act lawsuits aren’t being settled for pennies on the dollar.’”
If enacted, the Bill has the potential to significantly impact current FCA settlement negotiation practices in a number of ways. For example, the prevailing practice in settling FCA cases is that the act of entering into settlement negotiations takes off the table the potential for civil penalties of $5,500 to $11,000 per claim provided in the FCA, which can be particularly extreme in the healthcare industry due to the large volumes of claims. In light of the Bill’s requirements to specify the upper and lower ranges of civil penalties, the amount of the settlement that constitutes civil penalties, and the percentage of the potential civil penalties the defendant ultimately paid, DOJ might feel compelled to raise the issue of civil monetary penalties in addition to damages in settlement negotiations. Additionally, the tax implications of FCA settlements would be changed in important ways. Currently, DOJ will not specify in settlement agreements the percentage of the payment allocated to base damages and the percentage allocated to multipliers, which the Bill would require. This is important for the settling entity’s tax liability, as the repayment of the base amount of damages may be deductible as an offset to income, whereas penalties typically are not deductible. Finally, congressional oversight of the percentage of FCA settlements awarded to relators may have the effect of driving up the percentage paid to relators, which may be against the interest of a settling defendant that feels wronged by the relator’s actions.