On January 27, 2020, Deputy Associate Attorney General Stephen Cox provided insight into current DOJ False Claims Act enforcement priorities and topics such as dismissals under the Granston Memo and reliance on subregulatory guidance as the basis of enforcement. A copy of his remarks can be found after clicking Read More.
Thank you for that introduction, and thank you to the American Conference Institute and all of its sponsors for hosting me here today. I enjoyed coming to this forum last year, and it’s great to be back.
I’ve been serving in the Department of Justice for almost three years, and it’s been a terrific experience. Our office, the Office of the Associate Attorney General, oversees five litigating divisions and a number of non-litigating components. What we may spend most of our time doing is managing high-priority defensive litigation, where the department is representing the administration in the numerous lawsuits challenging federal programs and government action.
In addition to the defensive litigation, our office focuses a lot of attention on the intersection of corporate enforcement and regulatory reform, trying to promote the rule of law while avoiding potential overreach. And the False Claims Act is front and center for us. Let me first talk about the Act from an enforcement perspective, and then I’ll tie it into our regulatory reform agenda and describe some of our latest policies.
Enforcement and Recent Cases
The False Claims Act is one of the most important tools we have to fight healthcare fraud, grant fraud, financial fraud, government-contracting fraud, and many other types of fraud on the taxpayer. Enforcing the False Claims Act is a top priority for the department.
Our work here not only protects the public fisc, but serves other important goals. Fraudulent conduct can drive up consumer costs, undermine competition, and in some cases, even put people’s lives at risk. By effectively enforcing the False Claims Act, we protect the taxpayer, we deter bad actors, we protect victims, and we level the playing field in the marketplace.
As you know, the department brings its own enforcement actions under the False Claims Act, but a significant percentage of these cases come to our attention because of the statute’s qui tam provision, which allows whistleblowers to file lawsuits on behalf of the United States.
Since the 1986 amendments, which substantially strengthened the law, False Claims Act actions have returned over $62 billion to the U.S. Treasury — over $44 billion of which came through qui tam actions filed by whistleblowers.
In the past fiscal year, the department recovered over $3 billion. Most of this money — $2.6 billion — came from suits involving the health care industry, including drug and medical device manufacturers, managed care providers, hospitals, pharmacies, hospice organizations, laboratories, and physicians. This is the 10th consecutive year that the department’s civil health care fraud settlements and judgments have exceeded $2 billion.
We settled a number of large and important cases in the healthcare industry and other sectors this year. Two of the largest recoveries came from opioid manufacturers. Insys Therapeutics agreed to settle for $195 million allegations that it gave kickbacks to physicians and nurse practitioners to induce them to prescribe Subsys for their patients. The allegations involved sham speaker events, jobs for the prescribers’ relatives and friends, lavish meals and entertainment, and false statements to insurers about patients’ diagnoses to obtain payment by federal healthcare programs.
In another matter, Reckitt Benckiser Group plc paid $500 million to resolve civil allegations related to the marketing of the opioid addiction treatment drug Suboxone. The allegations centered on promotion for uses that were unsafe, ineffective, and medically unnecessary and promotion that was false and misleading.
The department also continued to investigate efforts by drug manufacturers to inflate drug prices by funding the co-payments of Medicare patients. Co-pay requirements in the Medicare program serve as an important check on health care costs, including the prices that pharmaceutical manufacturers can demand for their drugs, and this year, seven drug manufacturers paid a combined total of over $624 million to resolve claims that they illegally paid patient copays for their own drugs through conduits that were purported to be independent foundations.
The department also pursued a variety of procurement and grant-related fraud matters. For example, five South Korea-based companies paid over $362 million to resolve allegations that they engaged in anticompetitive conduct targeting contracts to supply fuel to the U.S. military in South Korea and made false statements to the government in connection with their agreement not to compete.
Additionally, Duke University settled a grant fraud case for $112.5 million. The allegations were that applications and progress reports to the National Institutes of Health (NIH) and to the Environmental Protection Agency (EPA) contained falsified research on federal grants. And North Greenville University paid $2.5 million to resolve allegations that it submitted false claims to the U.S. Department of Education by compensating a student recruiting company based on the number of students who enrolled in NGU’s programs, in violation of Title IV restrictions.
Our pursuit of individuals continued because individual accountability remains a top priority for the department. For example, Luke Hillier, the majority owner and former CEO of a Virginia-based defense contractor, paid $20 million to settle allegations that he fraudulently obtained federal set-aside contracts reserved for small businesses, which his company was ineligible to receive. The government previously resolved related claims against the company and its former general counsel.
Hopefully these cases are illustrative of our commitment to False Claims Act enforcement.
Regulatory Reform and the FCA
Now let me turn to a discussion of how False Claims Act enforcement relates to our regulatory reform agenda, and then I’ll discuss some important policies and reforms that we have developed in my time at the department.
The False Claims Act is of great significance to regulated industries. As the Supreme Court said a few years ago in the Escobar case, the False Claims Act is not supposed to be “a vehicle for punishing garden-variety breaches of contract or regulatory violations.” However, companies in highly-regulated industries can face significant False Claims Act exposure for regulatory violations anytime federal money is involved.
In that light, we have looked at False Claims Act enforcement and qui tam litigation through the prism of regulatory reform, as we look for ways to reduce unnecessary costs and burdens on regulated entities.
Qui Tam Dismissals
Let’s talk about qui tam litigation in particular.
Qui tam filings have been on the rise for many years. We might see 600 or 700 new qui tam lawsuits in a given year. The department takes over — or “intervenes” in — about 20% of the cases that are filed. The whistleblower is still involved (and will still get a cut), but the government is litigating the case. What about the other 80% of cases? Well, often the whistleblower will drop the case, but the statute allows the litigation to proceed if the relator elects to do so. When the relator does proceed in a “declined” case, the department plays more of a passive role, but our role in these cases still consumes time and resources – not only in investigating the allegations initially, but also in terms of monitoring and participating in any ensuing discovery, litigation, or settlement.
In these declined cases, the relators essentially stand in the shoes of the attorney general. Because these relators and their lawyers may not always have the same interests as the United States, we take very seriously our responsibility to monitor False Claims Act cases when we decline to intervene. Indeed, the department serves an important role as a gatekeeper. And the False Claims Act gives the department the authority to step in and dismiss or settle the case if that’s in the best interests of the United States.
In 2017, we began looking into what the department should do when qui tam cases are frivolous, abusive, or contrary to the interests of justice. These cases impose unnecessary costs not just on the government, but on the corporate and individual defendants, third parties facing discovery, and of course the judiciary. Plus, bad cases often result in bad law, which can inhibit our ability to enforce the False Claims Act in good and righteous cases. And from a resource perspective, when the department’s resources and our client agencies’ resources are consumed by unnecessary litigation, we have less time to fulfill our priorities.
In my view, if we see a qui tam action raising frivolous or non-meritorious allegations that the Department of Justice disagrees with or could not make in good faith, we should not let a plaintiff try the case on behalf of the United States.
This is why, in the so-called “Granston Memo,” we have instructed our lawyers to consider filing motions to dismiss pursuant to 31 U.S.C. § 3730(c)(2)(A) in qui tam cases when they are not in our best interests. We have also told our litigators to consider advising relators of this possibility because they may wish to voluntarily dismiss their case instead. This “(c)(2)(A)” authority is an important tool to protect the integrity of the False Claims Act, the interests of the United States, and the interests of the corporate and individual defendants, the judiciary, and the public at large.
This authority to dismiss qui tam cases has been used sparingly. Before we issued the Granston Memo, we identified about 45 cases that the department had dismissed in the previous thirty years since the 1986 amendments, and we looked to those cases to guide our exercise of this authority. In the two years since the Granston Memo, we have moved to dismiss a similar number of about 45-50 cases under (c)(2)(A). Courts have granted our motions in all but one of the roughly thirty decisions that have been rendered during that two-year period, and we are appealing the one denial.
Let me just point out a few examples. Ten of the cases that we moved to dismiss were funded by a for-profit private investment group that filed meritless copycat complaints across the country against dozens of healthcare-related companies. The affected agency expressed valid concern that allowing the cases to proceed could undermine patient care. Two other cases were filed by a different relator whose employer alleged that he shorted the stock of the corporate defendants he was suing. Nevertheless, in each of the cases we moved to dismiss, the department investigated the matter, evaluated the facts, the law, and the claims asserted, and carefully concluded that the various downsides outweighed any potential benefit of allowing the case to proceed.
Now, the uptick in dismissals that I am describing may seem significant in comparison to years past, but it’s important to recognize that there were over 1,100 qui tams filed in that period. Our exercise of this authority will remain judicious, but we will use this tool more consistently to preserve our resources for cases that are in the United States’ interests and to rein in overreach in whistleblower litigation.
Now I’d like to discuss another way in which False Claims Act enforcement touches on regulatory reform. But first let me step back to talk about what we’ve been doing on regulatory reform at the department and in the administration at large. As many of you know, we have been focused for the past three years on improving the regulatory process overall, with the goal of reducing unnecessary burdens, but also with a focus on adhering to the rule of law and the relevant process that Congress has prescribed. At the Department of Justice, we have tried to be a model for other regulatory agencies by adopting best lawmaking practices and raising the bar for what we expect of other agencies, and I think we have been successful.
One of the first areas of reform we identified relates to a practice called “rulemaking by guidance.” Under our Constitution, the Legislative Branch has the lawmaking power, and the Executive Branch takes care that those laws are faithfully executed. But Congress often passes broad legislation and then delegates further lawmaking authority to executive agencies, which then promulgate regulations to implement or clarify the legislation or fill in any gaps.
Here is how regulation is supposed to work: When an agency has the statutory authority to regulate and seeks to alter the public’s rights and obligations, the proper way to exercise that authority is through the rulemaking process governed by the Administrative Procedure Act, which usually requires notice and comment.
But rulemaking can be cumbersome and slow. It can take many years. And not surprisingly, we have seen agencies using shortcuts. In particular, sometimes agencies have issued so-called “guidance documents” — in the form of “dear colleague letters,” online bulletins, agency newsletters, “frequently asked questions,” and other communications — with the purpose of expanding the law and changing the public’s behavior. Agencies use this “guidance” to effectively make new rules, but they circumvent the appropriate process for rulemaking.
There’s a lot of guidance out there, too. Several years ago, before he went on the Supreme Court, Judge Neil Gorsuch wrote an opinion discussing the overwhelming amount of guidance from one particular agency, the Centers for Medicaid and Medicare Services, whose website contained about 37,000 guidance documents — and even that wasn’t a complete inventory.
It is hard to fathom how the public can keep up with these rules. One scholar refers to agency guidance documents as the 10,000 Commandments. Others have called it “subregulatory dark matter.” The term “#fakelaws” has not yet gained traction.
As my friend and colleague, Principal Deputy Associate Attorney General Claire Murray has put it, “subregulatory guidance isn’t law — it’s just paper. Nevertheless, there is sometimes an (understandable) sense within industry that deviation from a regulator’s guidance can carry the risk of enforcement and qui tam litigation. When you add deference doctrines . . . into the mix, there’s a real risk that guidance can, practically speaking, end up having the same effect as regulation.”
That is why, in a pair of memos sometimes called the “Sessions Memo” and the “Brand Memo,” the department announced that we would no longer engage in the practice of rulemaking by guidance, and we would not use our enforcement authority to essentially convert other agencies’ sub-regulatory guidance into rules that have the force or effect of law. For example, in a False Claims Act case, if a company does not comply with some agency’s guidance document that interprets some statute or regulation, our attorneys are not going to treat that as itself establishing a violation of law.
Let me make a few points about how these principles might apply in False Claims Act cases. As we have noted before, there are, of course, circumstances where it may be appropriate to cite agency guidance, including to show the defendant’s awareness of a valid legal requirement that is simply described in the guidance or to show the agency’s views on the materiality of that requirement.
A guidance document may also be relevant to a False Claims Act case, if, for example, a party and the government expressly agree in a contract that compliance with some specified guidance document is required. The party may even expressly certify compliance with the guidance document. In those instances, noncompliance could be relevant to the falsity element of the False Claims Act.
Of course, all of these examples need to line up with the general principle that we’re not going to use “violations” of nonbinding guidance documents to establish a violation of law. Guidance is not law. It’s not binding. And it shouldn’t be given the force or effect of law.
As I mentioned earlier, we had hoped that the Department of Justice regulatory reform efforts could serve as a model for other agencies, and we’ve seen evidence of that in the context of subregulatory guidance. In late 2017, Senator Grassley sent a letter to the President praising what we were doing and suggesting that other agencies be made to follow our commonsense principles. In 2018 and 2019, we saw six of the banking regulators, the Department of Transportation, the Department of Treasury, and the IRS following our lead by announcing their own limits on the issuance and enforcement of sub-regulatory guidance. But most notably, in a proud moment for the Department of Justice, last October the President signed two executive orders that set limitations for agencies across the Executive Branch with respect to rulemaking by guidance and relying on guidance in administrative enforcement and adjudication.
I’ll mention one other development at the Department of Health and Human Services that occurred the same month of the President’s executive orders, and it relates to the Supreme Court decision in Azar v. Allina Health Services, 139 S. Ct. 1804 (2019). In that case, the Court held that, under the Social Security Act, Section 1871, any Medicare issuance that establishes or changes a “substantive legal standard” governing the scope of benefits, payment for services, and eligibility criteria, must go through notice-and-comment rulemaking. In a memo that I’ll call the Cleary-Jenny Memo, HHS recognized meaningful limitations on the use of guidance documents in CMS’s administrative enforcement actions based on the Allina decision and pre-existing principles, as articulated in the Justice Department’s position on rulemaking by guidance. It’s a very interesting memo, and I commend it to those of you who practice in the healthcare fraud area.
Coordination with Agencies
We just discussed our policy on qui tam dismissals and our policies on subregulatory guidance and how those enforcement policies relate to our broader regulatory reform agenda. It’s probably obvious by now that the regulatory agencies have a real stake in these policies. In that light, we try very hard to coordinate with the relevant agencies to make sure our enforcement decisions are sound and carefully scrutinized.
One policy on coordination that I discussed last year discourages what we call “piling on.” Just as there is no shortage of subregulatory dark matter, there is no shortage of valid laws that cover various kinds of misconduct. As a result, often the same conduct can violate multiple statutes and regulations that are enforced by multiple authorities, federal, state, local, and foreign. Over-regulation and over-enforcement can go hand in hand.
As we see it, we think it’s unnecessary and overreaching for multiple law enforcement and regulatory agencies to pile onto a single entity for the same or substantially similar conduct, by imposing unwarranted and disproportionate penalties for that conduct. We see piling on as inconsistent with the concepts of fair play and the need for certainty and finality.
To avoid piling on, we have been promoting coordination within the department and with other agencies to apportion penalties and fines where appropriate.
I’ll give you an example. Imagine if companies are engaging in illegal bid-rigging to collusively win government contracts. That kind of misconduct could implicate the Sherman Act and Clayton Act as well as the False Claims Act. Now suppose the Antitrust Division settles its investigation of one of the companies for civil penalties and double damages under Section 4A of the Clayton Act. Then suppose there is a qui tam action against the same company based on the theory that the company made false statements to the government in connection with the same bid-rigging agreement. It would be unnecessarily duplicative for the Civil Division to independently pursue additional damages under the False Claims Act against the same company, without taking into account the fact that the government was also recovering an appropriate measure of damages under the Clayton Act. Instead, our approach would be to have the Civil Division coordinate with the Antitrust Division to attain a global settlement that is equitable and proportionate to the company’s conduct.
That was our approach last year when, as I mentioned earlier, we settled with the South Korea-based companies that engaged in bid rigging on the fuel contracts with the U.S. military. These were global resolutions of criminal Sherman Act violations, civil claims under the Clayton Act, and civil claims under the False Claims Act, and the two Divisions coordinated closely with the goal of avoiding duplicative recoveries in mind.
The piling on policy was originally announced in the summer of 2018, but let me turn to a more recent policy on agency coordination in False Claims Act cases: the HUD memorandum of understanding (MOU).
As some of you know, HUD, through the Federal Housing Administration (FHA), insures mortgages to help creditworthy low-income and first-time homebuyers to obtain a mortgage and purchase a home. The insurance program is supported by a fund (the Mutual Mortgage Insurance Fund) that pays claims when a borrower defaults. Following the Housing Crisis, HUD and the Department of Justice began investigating whether the financial woes of the fund were due in part to misconduct on the part of FHA lenders. Some in the industry called this the “Big Lender Initiative.” The results included False Claims Act settlements with over 20 lenders for more than $4.75 billion.
Following this Big Lender Initiative, there were concerns that uncertain False Claims Act liability for regulatory defects led many well-capitalized lenders, including many banks and credit unions statutorily required to help meet the credit needs of the communities in which they do business, to largely withdraw from FHA lending. The banks made no secret of this dynamic. One bank’s CEO told their shareholders that they moved away from FHA lending in part due to “aggressive use of the False Claims Act… and overly complex regulations.”
HUD has taken several steps to address these concerns, but one in particular was an MOU that Attorney General Barr and Secretary Carson signed last October.
The MOU makes clear that we expect FHA requirements to be enforced primarily through HUD’s administrative proceedings, but the MOU specifically addresses how HUD and the department will consult with each other regarding use of the False Claims Act in connection with defects on mortgage loans insured by FHA.
The MOU prescribes new standards for when HUD may refer a matter for pursuit of False Claims Act actions, and also sets forth how the department and HUD will cooperate during the investigative, litigation, and settlement phases of FCA matters in qui tam cases. For example, the MOU states that the department will solicit HUD’s views on the litigation, including whether HUD supports or opposes the case. The MOU also provides HUD the opportunity to recommend (c)(2)(A) dismissal of the case if HUD does not support the case. For example, HUD might recommend dismissal if the matter would not meet the agency’s own standards for referring FCA matters, if the alleged regulatory defects are not material, or if the litigation threatens to interfere with HUD’s policies or the administration of its FHA lending program.
Ultimately, the decision to dismiss a qui tam case is for the department to make, but as the Granston Memo makes clear, it’s important to coordinate with and solicit the input from the relevant agencies in these decisions.
It’s worth noting that, in addition to the MOU, HUD simplified the certifications that lenders make in connection with the FHA program. Through the years, the old certifications through a process of accretion had grown to include many provisions that were not required by statute or regulation. Now those certifications better track statutory requirements and address materiality and culpability considerations.
Based on the reception from the industry, we think the MOU and these other changes will give depository institutions the confidence to participate in the FHA program.
I should add one more point. The MOU is specific to HUD, the FHA program, and the unique concerns that were raised when the most capitalized lenders were leaving the program. And we don’t anticipate any need for additional MOUs. However, we codified the core of the MOU — the requirements to solicit the views of the agency on qui tam litigation, materiality, dismissal, etc. — into the Justice Manual provisions on False Claims Act enforcement. These principles now apply across the board — not just to HUD and FHA, but to every agency.
The last policy I’ll discuss is the Cooperation policy that we announced last May. The policy is the first of its kind in the False Claims Act space, but it builds on other department policies designed to incentivize corporate self-policing, cooperation, and compliance. Under our new policy, corporate defendants can earn credit — and a reduction in penalties and damages — by voluntarily disclosing misconduct, cooperating with our investigations, and taking remedial measures such as improving corporate compliance programs.
It is good for everyone when companies police themselves, detect problems early, conduct internal investigations, take corrective measures, and cooperate with law enforcement, and we want to reward companies that do these things. We have the prosecutorial discretion to do just that. For companies that provide maximum cooperation, we can provide a substantial discount down to single damages, plus lost interest, costs of investigation, and, in a qui tam case, the share that must go to the whistleblower. In addition, we may also notify the relevant regulatory agency about the company’s cooperation so that the agency can take that into consideration in connection with administrative proceedings. And in some cases we are willing to publicly acknowledge the company’s cooperation or assist in resolving qui tam litigation with the relator.
I’ll make one additional point about the policy. We are willing to take into account the nature and effectiveness of a company’s compliance system in making the determination of whether the False Claims Act is the appropriate remedy. After all, a key element of the False Claims Act is scienter, and a robust compliance program executed in good faith could demonstrate the lack of scienter. (On the other hand, a “paper tiger” compliance program could demonstrate just the opposite.)
As a former compliance lawyer, I hope companies will recognize that this new reform is a significant incentive to invest in compliance, to come forward when they identify significant false claims, and do the right thing in connection with our investigations.
In my view, this policy dovetails nicely with our regulatory reform and enforcement agenda because we recognize that good corporate citizens that effectively police themselves should not be subjected to unnecessary enforcement costs. Indeed, this concept of incentivizing voluntary disclosure and cooperation is a key part of the President’s recent executive order on administrative enforcement and adjudication. At the Department of Justice, we like to think that we are ahead of the curve on this front.
I know one of the benefits of hearing from the department in these settings is to hear about what’s on the horizon, so I’ll just add a couple small previews here. Obviously we expect to continue implementation of the policies that I’ve mentioned today. Both regulatory reform and False Claims Act enforcement are top priorities for the department, so we intend to press ahead with these two interests in mind. We will continue to pursue healthcare fraud, with particular emphasis in the opioids space, and all other serious fraud on the government, and we continue to be measured in our prosecutorial discretion, staying within the bounds of our enforcement and regulatory reform agenda.
I am sure that practitioners are particularly interested to see how the latest cooperation policy is being implemented, and I think you will see a good example in the near future. I won’t get into specifics, but we are close to resolving a significant False Claims Act investigation where the company has merited the maximum credit available under the policy. There has been voluntary disclosure, remedial action, and extensive assistance with the government’s investigation , and we expect to award the maximum discount and publicly acknowledge it. So, stay tuned for news on this front.
Finally, let me point to one issue that we are evaluating at the moment: third-party litigation financing in qui tam actions. Some of you may be aware that there are a couple proposals for disclosure of third-party litigation funding agreements in civil litigation — one is a proposal being considered within the Civil Rules Advisory Committee’s MDL Subcommittee and another is a bill sponsored by Senator Grassley and other Members of the Judiciary Committee in the Senate.
Those proposals focus on third-party litigation finance disclosure in civil litigation at large, especially with respect to multi-district litigation and class action litigation, and my understanding is that the proponents believe disclosure is appropriate for a number of reasons including potential conflicts of interests, concerns about distortion in civil justice, fairness in litigation, and transparency and accountability.
We are evaluating those proposals in the broader context, but we are particularly focused on the role that litigation funding plays in qui tam litigation. As I mentioned earlier, we have dealt with some qui tam litigation where there were investors funding the relator entity, and with a relator accused by his employer of attempting to profit from qui tam litigation through short selling stock. But aside from what the litigation finance industry says publicly, we have little insight into the extent to which they are backing the qui tam cases we are investigating, litigating, or monitoring.
You may be aware that the issue of funding — and the effect it may or may not have on the relator’s standing — arose recently in a case before the Eleventh Circuit called United States ex rel. Ruckh v. Salus Rehabilitation. We filed an amicus brief in that case, but did not weigh in on that particular issue. Nevertheless, we are considering what, if any, interests the United States has with respect to third-party litigation financing in qui tam litigation and whether it is worth seeking some disclosure, at least to the department, of such arrangements.
I’ll just close by saying that it has been a great privilege working at the Department of Justice on False Claims Act enforcement, and you should know that our lawyers are committed to exercising the department’s enforcement discretion consistent with the rule of law.
I hope in particular that my remarks today have given you a better understanding of how False Claims Act enforcement lines up with our broader regulatory reform agenda.