Although the False Claims Act (FCA) is used most frequently to address allegations of fraud in health care and government procurement, the statute can be used quite effectively in any situation in which government funds are at issue. Accordingly, whistleblowers and the government are broadening their focus to other areas, including education and financial services. In this issue of False Claims Act Focus, we provide short updates on FCA efforts/cases/examples in those four areas, and will continue to examine these areas into which the FCA is expanding in future editions of False Claims Act Focus.
In this edition we also look at how issues arising out of lobbying efforts by trade associations and corporations can impact an FCA investigation and litigation. In the future, we will continue to focus on topics that affect practice under the FCA. We welcome your comments and feedback regarding the types of topics you find useful.
Financial Services Fraud
Over the last few years, there have been intense expectations that the U.S. Department of Justice and private “qui tam” (whistleblower) plaintiffs will aggressively use the federal False Claims Act (FCA) to allege fraud against the financial industry. The financial industry has received billions of dollars in federal funding through the Troubled Asset Relief Program (TARP), the Capital Purchase Program (CPP), and the $200 Billion credit pool for the financial industry through the Term Asset-Backed Securities Loan Facility (TALF). Observers also have expected cases alleging mortgage fraud, fraud involving federally backed pension funds, and fraud based on federal insurance for residential mortgages though the Federal Housing Administration (FHA).
These expected enforcement efforts are now hitting financial institutions. In May 2012, Deutsche Bank agreed to pay the United States $202.3 million to settle allegations that it knowingly mislead the Department of Housing and Urban Development (HUD) about the quality of mortgages that later defaulted. The Department of Justice (DOJ) had sued Deutsche Bank and its subsidiary, MORTGAGEIT (acquired by Deutsche Bank in 2007), under the FCA in May 2011, alleging that MORTGAGE IT repeatedly made false certifications to HUD in connection with the residential mortgage origination and sponsorship practices. The Federal Housing Authority (FHA) had paid insurance claims on more than 3,100 mortgages, totaling $386 million, for mortgages endorsed by MORTGAGEIT. Between 1999 and 2009, MORTGAGEIT was an approved direct endorsement lender, and endorsed more than 39,000 mortgages for FHA insurance, totaling more than $5 billion in underlying principal obligations. As part of the settlement, the United States required that MORTGAGEIT make a series of admissions and accept responsibility as to a range of conduct pre-January 2007, and Deutsche Bank also make a series of admissions for the post-acquisition time period, which is unusual in a FCA settlement and can give rise to substantial collateral liabilities.
This is part of a series of settlements under the FCA against major lenders for mortgage fraud. On February 15, 2012, the government settled its civil fraud lawsuit against CITIMORTGAGE, INC. for $158.3 million. On February 24, 2012, the government settled its civil fraud suit against FLAGSTAR BANK, F.S.B. for $132.8 million. In this matter, the DOJ worked in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force. On February 12, 2012, the Bank of America agreed to pay $1 billion to resolve claims under the FCA against its subsidiary, Countrywide, including an immediate payment of $500 million to provide a recovery for the harm done by Countrywide's conduct, and a second $500 million to later fund a loan modification program for Countrywide borrowers with underwater mortgages.
Health Care Fraud Highlight
While pharmaceutical cases and criminal actions often take the spotlight, there is no abatement in the blitz of enforcement actions against hospitals and other traditional providers. For example, on June 21, 2012, the Department of Justice announced a settlement under the False Claims Act (FCA) against Overlook Hospital in New Jersey. The hospital and its owners agreed to pay $8,999,999 to settle FCA allegations that they allegedly overbilled Medicare for patients who were treated on an inpatient basis when they should have been treated as either observation patients or on an outpatient basis. This settlement partially resolves an FCA suit filed by former employees of Overlook Hospital. U.S. ex rel. Doe et al. v. AHS Hospital Corp. In announcing this settlement, the HHS Inspector General stated that, in addition to financial harm, this conduct “also requires hospitalizing people who don’t need it, causing inconvenience, discomfort and worse. The size of this settlement underscores the seriousness of the conduct.” This case was handled by the United States Attorney’s Office for the District of New Jersey, increasingly prominent in health care enforcement, in conjunction with the Department of Justice (DOJ) in Washington, D.C.
For questions on these recent developments, please contact Larry Freedman.
Lobbying Documents May Not Be Privileged
Lobbying documents pertaining to the legislative or policy initiatives of trade associations and corporations are commonly sought by government investigators and litigants in the course of False Claims Act (FCA) investigations and litigation. Clients and their lawyers typically assume that lobbying-related communications and documents are protected by attorney-client, work product or other privileges, especially because so many lobbyists are lawyers. In fact, a little discussed exception to the privilege rules that protect documents created by lawyers for their clients could make these lobbying documents discoverable by government investigators and litigants.
Numerous federal courts have determined that lobbying documents are not entitled to privilege protection, even when created by lawyers for their clients. See, e.g., In re Bisphenol-A Polycarbonate Plastic Prods. Liab. Litig., Master Case No. 08-1967-MD-W-ODS, MDL No. 1967, 2011 U.S. Dist. LEXIS 34202, at *33 (W.D. Mo., May 10, 2011); see also Vacco v. Harrah’s Operating Co., Civil Action No. 1:07-CV-0663, 2008 U.S. Dist. LEXIS 88158, at *24-*25 (N.D.N.Y. Oct. 28, 2008) (“[C]ommunications between a lobbyist and his or her client are not entitled to attorney-client protection solely by virtue of that relationship, even though the lobbyist may also be a licensed attorney.”); In re Grand Jury Subpoenas Dated March 9, 2001, 179 F. Supp. 2d 270, 285 (S.D.N.Y. 2001) (“If a lawyer happens to act as a lobbyist, matters conveyed to the attorney for the purpose of having the attorney fulfill the lobbyist role do not become privileged by virtue of the fact that the lobbyist has a law degree or may under other circumstances give legal advice to the client, including advice on matters that may also be the subject of the lobbying efforts.”).
For any document to be protected by the attorney-client privilege, generally, the client must have a reasonable expectation that the statements in the document will be confidential, and the documents must tend to reveal a client confidence. Courts’ rationale for ordering disclosure of lobbying documents tends to center, then, on the conclusion that the parties intend to reveal the content to third parties (the lobbying targets), and therefore are not intended to be kept confidential. See, e.g., In re Grand Jury Subpoenas Dated March 9, 2001, 179 F. Supp. 2d at 285.
A court’s analysis of this question will be entirely fact specific, and consider the content, context and audience of the document. See id.; U.S. Postal Service v. Phelps Dodge Refining Corp., 852 F. Supp. 156, 164 (E.D.N.Y. 1994) (holding that letter from in-house counsel to outside lawyer/lobbyist was not privileged because “the letter simply describes the current status of certain matters to disclose in lobbying efforts and specifically in response to concerns raised by a legislator”); North Carolina Elec. Membership Corp. v. Carolina Power & Light Co., 110 F.R.D. 511, 517 (M.D.N.C. 1986) (“Although these ‘lobbying’ efforts seem to have been coordinated by the legal department, the resultant communications do not refer to legal problems but instead are summaries of various town meetings or reports on the progress of the EPIC project. Such communications from counsel to management are not legal advice. Nor are updates on lobbying activities requests for legal advice.”) (internal citations omitted).
That a document involves a lobbyist/lawyer does not mean that a party cannot protect the document as privileged, however. Courts routinely determine that these documents retain their privilege if they reflect that the client was seeking traditional legal advice from the attorney. See, e.g., Vacco, 2008 U.S. Dist. LEXIS 88158, at *24-*25 (“[T]he fact that an attorney also engages in lobbying does not automatically divest communications between that individual and his or her client of attorney-client protection.”); but see In re Grand Jury Subpoenas Dated March 9, 2001, 179 F. Supp. 2d at 274 (rejecting defendant’s privilege claim because his lawyers “were acting principally as lobbyists” and not “as lawyers or providing legal advice in the traditional sense”); In re Bisphenol-A Polycarbonate Plastic Prods. Liab. Litig., 2011 U.S. Dist. LEXIS 50139, at *33 (holding that lawyer/client communications related to lobbying efforts were not privileged, because “[t]o be privileged, the purpose of the communication must be to secure legal advice”) (citations and internal quotes omitted). Further, the document may be privileged even if the document relates to legislation about which the party is lobbying. See, e.g., United States v. Illinois Power Co., Case No. 99-cv-0833-MJR, 2003 U.S. Dist. LEXIS 24866 (S.D. Ill. April 24, 2003) (“If a lawyer-lobbyist gives advice that requires legal analysis of legislation, such as interpretation or application of the legislation to fact scenarios, that is certainly the type of communication that the privilege is meant to protect.”) (quoting, citing cases, citations and quotes omitted).
There is, by no means, a cohesive body of law on the question, and many of the decisions are unreported. Further, even those courts that refuse to protect communications between lawyers and clients because of their lobbying-related content acknowledge that such documents may nonetheless be privileged if the client is seeking legal advice about those lobbying efforts. Given the complexities and the fact-specific nature of a court’s inquiry on this question, however, trade associations and corporate clients should consult litigation counsel about how best to protect their communications with lobbyists.
For questions on this practice analysis, please contact Alex Chopin.
THE FALSE CLAIMS ACT GOES TO COLLEGE
Institutions of higher education often find themselves in the crosshairs of government regulators. As recipients of vast amounts of federal dollars who are subject to complex regulations, these institutions are also the likely targets of False Claims Act (FCA) suits. This article examines how the combination of the past attention, the economic downturn, and the year-old revisions to the Department of Education’s (DOE) program integrity rule can be expected to expand the risk of FCA cases against these organizations. The interaction of the new rule changes with FCA precedent should also prove instructive to other industries at risk of FCA lawsuits.
As highly regulated recipients of federal funds, universities are prime targets for allegations of fraud, waste and abuse. Title IV of the Higher Education Act (HEA) authorizes various forms of federal financial aid to students. In order to be eligible to receive Title IV funding for its students, an educational institution must meet certain requirements. The institution must enter into a Program Participation Agreement (PPA) with DOE, and consequently certify to compliance with the regulatory and other requirements placed on Title IV fund recipients.
Because compliance with DOE’s Title IV regulations is a condition for receipt of student financial aid, it should not be surprising that the PPA certifications and other program regulations have generated significant FCA litigation against educational institutions – particularly, for-profit institutions. Put simply, these suits allege that “but for” the schools’ false certifications or representations of compliance with the applicable provision, the schools would not have been able to enter into a PPA and have access to Title IV funding.
An example of these suits recently in the news is an FCA suit against Education Management Corporation (EDMC) alleging violations of the HEA’s incentive compensation ban. The statute prohibits schools from compensating employees and consultants based solely on the number of students recruited, admitted, enrolled or awarded financial aide. In 2002, DOE adopted a “safe harbor” provision. This provision permitted bonus or incentive payments so long as the school employee received a fixed salary that could not be adjusted more than twice in a 12-month period and the adjustments were not based solely on recruitment or financial aid recipient numbers. In August 2011, DOJ intervened in a qui tamcomplaint, alleging that EDMC’s compensation policy and practices did not meet the incentive compensation safe harbor requirements. The suit further claims that, since 2003, EDMC has received more than $11 billion in federal aid. California, Florida, Illinois, Indiana, Massachusetts, Minnesota, Montana, New Jersey, New Mexico, New York, Tennessee and the District of Columbia also have intervened in the suit. In May of this year, the U.S. District Court for the Western District of Pennsylvania denied EDMC’s motion to dismiss. The court found that although EDMC’s written policies complied with the safe harbor provisions, the plaintiffs could proceed on their claims that EDMC’s employee compensation plan as applied violated the Title IV incentive compensation ban. United States v. Education Management Corp., PICS No. 12-0917 (May 11, 2012, W.D. Pa.).
The economic downturn exacerbates the regulatory risk. More students are seeking financial aid. More students are looking for online and other non-traditional education options in order to accommodate work and finance constraints. Schools are competing with one another to draw from the same pool of students and thus have built significant recruiting, marketing and financial aid departments. The size of these operations, many of whom also use third-party consultants, makes them difficult to govern and monitor. Indeed, in 2010, the General Accountability Office (GAO) sent undercover student applicants to visit a number of for-profit schools. They reported encountering a variety of practices violating Title IV requirements, such as exaggerating to the undercover applicants their potential salary after graduation and failing to provide clear information about the colleges’ program durations, costs or graduation rates. Undercover Testing Finds Colleges Encouraged Fraud and Engaged in Deceptive and Questionable Marketing Practices, GAO-10-948T, Aug 4, 2010.
DOE’s revised program integrity regulations introduced further risk into this environment. Announced in October of 2010, the rules became effective one year ago. Several of the rule changes introduce potential opportunities for FCA theories of liability. Two of these areas are discussed below.
1. The Definition of Misrepresentation
The HEA prohibits educational institutions from making misrepresentations concerning the nature of the institution’s educational programs, the institution’s financial charges, and the employability of the institution’s graduates. 20 U.S.C. § 1094(c)(3). The program integrity regulations contain provisions that increase not just enforcement risks, but risks of FCA litigation.
First, the regulations define a broad group of entities that can make misrepresentations on behalf of a school and a virtually limitless audience to whom actionable misrepresentations may be made. They provide that a university is liable for misrepresentations made not just by the institution itself, but by any “representative” of the institution, and by persons with whom the institution has an agreement to provide educational programs, marketing, advertising, recruiting, or admissions services.” 34 C.F.R. Part F, § 668.71. An actionable representation can be verbal as well as written, direct or indirect, and can be made to a wide variety of audiences – which include a student, prospective student, family of either, accrediting agency, state agency, any member of the public, or DOE. Id. In essence, a school could be liable for a violation of the regulations, and then potentially under an FCA theory, if, for example, an off-campus alumni recruiter misstates financial aid eligibility criteria or the school’s graduation rates to an interviewee.
Second, the regulations provide specific examples of the types of covered statements. Some of the examples include statements concerning current or likely future conditions, compensation or employment opportunities in the industry or occupation for which the student is being prepared. 34 C.F.R. § 668.71. Consider this scenario: it is a violation of DOE’s regulations to misrepresent -- either in writing or verbally -- the future employment opportunities of prospective students. What if a school’s recruiting literature contains statistics and projections about a particular job market, and when it is time to order more copies of the brochure, the recruitment or marketing office does not check to determine whether the statistics and projections have been updated? Under the FCA, there need not be a specific intent to defraud. Further, the FCA encompasses both deliberate ignorance or reckless disregard of the truth as sufficient bases for a knowingly false statement. 31 U.S.C. § 3729(a). The combination of the program integrity rules’ call out of future predictive statements and the FCA’s liability provisions creates a risky environment.
Of course, the risk can be mitigated. To the extent not already doing so, educational institutions should be performing regular reviews of their marketing and promotional materials and do the same for its third-party providers. Recruitment, marketing and financial aid staff and consultants should receive training concerning the new regulations and become comfortable in their interaction with the public. Web content, as well as a school’s Facebook page and other social media functions and communications, should receive a similar periodic review.
2. Incentive Compensation
As discussed above, section 1094(a)(20) of the HEA banned incentive compensation for educational institution personnel when that compensation was based on the number of students recruited, admitted, enrolled or awarded. The 2011 program integrity regulations did away with the safe harbor provision.
While the 2011 return to an absolute ban on incentive compensation may be viewed as establishing a bright line test leaving little room for interpretation and fraud suits, several grey areas still remain. For example, the bar on incentive compensation applies not just to the institution itself, but also to third-party vendors and consultants and consortia members. Arguably, contracts for website services that are paid on a per click basis tied in some way to enrollment might run afoul of the ban. Another risk: The regulation applies not just to admissions personnel and recruiters, but also to any “higher level” employee involved in admission or recruiting activities -- which could cover an institution’s president. Accordingly, a review of the contracts of all potentially covered employees, as well as consortia and third-party contracts, is recommended to minimize the risk of litigation under the safe harbor repeal.
DOE’s changes to the program integrity rules are likely to generate new theories of FCA liability. These cases will bear watching by other FCA litigants to monitor how the regulatory provisions interact with FCA law and whether academic institutions can develop successful strategies to minimize the risk of litigation.
For questions on this practice analysis, please contact Mary Beth Bosco.
DC Circuit: Even if Government Would Not Have Paid False Claims, Damages are Limited to Difference Between What Government Paid and Value of What It Received
The D.C. Circuit issued a new decision May 15, 2012, that will affect the Circuit’s (and potentially other federal courts’) approaches to damages in False Claims Act (FCA) cases alleging conflicts of interest as well as lack of documentation. United States ex rel. Davis v. District of Columbia, 2012 U.S. App. LEXIS 9744 (D.C. Cir., 5/15/2012). The court’s decision places a greater burden on the government and relators in both such cases.
The relator in the case, Michael Davis, had through his firm prepared Medicaid reimbursement claims for the District of Columbia Public School (DCPS) for fiscal years 1995-1997. Although he began preparing the Medicaid claim for fiscal year 1998, DCPS replaced his firm with a different company to prepare this claim. Davis’s firm retained the documentation supporting the 1998 claim and completed work preparing that claim, but DCPS submitted the Medicaid claim prepared by the new entity. A few years later, in 2002, the Office of the District of Columbia Auditor publicly released a reporting stating that for years 1994 through 1998, costs incurred by DCPS for special education students were disallowed for Medicaid reimbursement due to the absence or unavailability of supporting documentation, and calling upon DCPS to immediately improve the documentation of services. Several years after that, in 2006, Davis filed this FCA case alleging that the District and DCPS had violated the FCA by submitting the 1998 reimbursement claim without maintaining adequate supporting documentation as required by regulation.
The District of Columbia moved to dismiss on the grounds that the FCA’s public disclosure bar precluded the court from exercising jurisdiction over the relator’s claims, and the court granted the dismissal on this ground. United States ex rel. Davis v. District of Columbia (Davis I), 773 F. Supp. 2d 21, 32 (D.D.C. 2011) (Davis I). Although the relator argued that the original source exception to the public disclosure applied since he had provided his information to the government before filing his case, the court rejected his argument and granted the motion to dismiss. The court also dismissed his claims for treble damages and conspiracy on the grounds that the relator had not alleged damage to the government.
On appeal, the D.C. Circuit reversed the finding that he was not an original source. 2012 U.S. App. LEXIS 9744 at *11 (Davis II). Based on affidavits provided by the relator as well as a copy of a letter he sent to the Inspector General of the Department of Health and Human Services, all of which were provided to the court during the appeal, the Circuit Court concluded that he had indeed provided information underlying his allegations prior to filing suit. Although earlier D.C. Circuit precedent had required a relator to provide the publicly disclosed information to the government prior to its public disclosure, the Davis court determined that the Supreme Court’s decision in Rockwell Internat’l Corp. v. United States, 549 U.S. 457 (2007), required only that the relator provide the information prior to filing. Since Davis did provide the information prior to filing, he qualified under the original source exception and the court had jurisdiction over his case.
Nevertheless, the appeals court affirmed the lower court’s dismissal of the relator’s damages claims. Although the relator had alleged that the government had made payments it otherwise would have withheld and thus stated a claim under the FCA, in order to establish damages the relator also had to prove “that the performance the government received was worth less than what it believed it had purchased.” Davis II, 2012 U.S. App. LEXIS 9744 at *18, quoting United States v. Sci. Applications Int’l Corp., 626 F.3d 1257, 1279 (D.C. Cir. 2010). As alleged by the Davis relator, the only failure by DCPS was the failure to maintain documentation for the services provided to special education students for which the Medicaid claims were submitted. The value of the medical services provided was not at issue, and “all agree that the services paid for were provided.” Davis II, at *19. Thus, “[t]his is the rare case in which there is no allegation that what the ‘government received was worth less than what it believed it had purchased.’” Id., quoting SAIC, 626 F.3d at 1279. The court therefore concluded that “[t]he government got what it paid for and there are no damages.” Davis II, at *20.
The fact that the Circuit Court found no damages has potentially broad ramifications for various types of false FCA cases. First and most obviously, defendants will argue that it should be applied to other situations in which required documentation is missing, an issue that arises in numerous health care cases. The government typically argues that if the services are not documented, they effectively were not provided for reimbursement and fraud purposes. Applying this decision to such scenarios, however, would require the government or relator to prove not only that the documentation is not present, but also that the services indeed were not rendered. This significantly increases the burden on the government and relators in such cases.
The broader implications of this decision will be felt, however, in the context of FCA cases predicated on conflict of interest statutes, including anti-kickback statutes in health care and government contracting. The prior case to which the Davis court looked, the SAIC case, was such a case. But the government and relators typically argue that if the government would not have paid for the claims if it had known of the kickback or other conflict of interest, then the full measure of damages is the full value of the claim. The holding in Davis flatly rejects this principle, stating clearly that the court needs to look at the value of the items or services that actually were provided and subtract that from the government’s payment, to compute damages.
For questions on this article, please contact Laura Laemmle-Weidenfeld.
Electronic discovery issues arise in subpoena responses to the same extent they do in actual litigation discovery and present many of the same challenges. After receiving a subpoena or civil investigative demand (CID) from the Department of Justice or a U.S. Attorneys Office, it is usually very helpful before actually responding to discuss the subpoena/CID with the individual who issued it, not only to address and potentially narrow the scope of the responsive documents but also to discuss how the responsive documents will be gathered and produced. Now that most responsive documents are kept electronically, and there easily can be hundreds of thousands or even millions of responsive documents, it is usually in the producing party’s interest to seek government agreement on the search approach to be utilized, particularly if it involves search terms, limiting the search to specific custodians, or using predictive coding. Although the producing party retains the burden to locate responsive documents, the government is less likely to object later as to how the documents were gathered (and less likely to succeed in such an objection) if it agreed initially to the approach used. In addition, the producing party should focus on how the government has asked to have the documents produced and propose any desired changes in the earliest discussions. The attorney issuing the CID/subpoena may not have given the production methodology much thought and may agree upfront to revisions, but likely will not appreciate receiving a production that fails to comply with its instructions.