In fiscal year 2019, the U.S. Department of Justice (DOJ) secured over $3 billion in judgments and settlements from civil cases brought under the False Claims Act (FCA).^[1]  Of that $3 billion, over $2.6 billion related to healthcare claims, and approximately $2.1 billion resulted from litigation commenced by whistleblowers (a/k/a “relators”) who effectively serve as private attorneys general under the FCA’s qui tam provisions.^[2]  Because of its potential profitability and the unfortunate prevalence of fraud in government-funded programs, qui tam litigation continues to grow.  

Qui tam litigation is almost always expensive and protracted, with some cases taking close to a decade to resolve.  Already common players in the class action and personal injury space, third-party litigation funding companies recently entered the FCA arena where they offer cash-strapped qui tam relators much needed capital now in return for a portion of any recovery later.  The extent to which third-party funders are involved in qui tam litigation is currently unknown.  As part of an effort to learn more about the role third-party funders play in qui tam litigation, the DOJ recently began requiring qui tam relators to inform it of any agreements with third-party funders.  As explained in more detail below, this is an important development that foreshadows future action by the DOJ and raises significant questions about the future of third-party litigation financing in qui tam cases.  

Brief Overview of Qui Tam Litigation Under the FCA

The FCA is a federal statute that penalizes individuals and companies who knowingly submit false or fraudulent claims for payment to the United States.  Although claims of fraud against the government would normally be pursued by the government, the FCA is somewhat unique in that it contains a qui tam provision.  Under the qui tam provision, a relator—a private individual with knowledge about the submission of false claims to the United States—may commence an action against the alleged wrongdoer in the name of the United States.  The relator’s complaint is filed under seal, and a copy is provided to the DOJ.  After being provided with the complaint and supporting evidence, the DOJ investigates the allegations.  The relator’s complaint typically remains sealed during the DOJ investigation.  Although the FCA says that the complaint shall remain sealed for sixty days, judges routinely extend the sealing period upon request by the DOJ.  

At the conclusion of its investigation, the DOJ can choose one of three paths: 

(1) it may intervene and take over litigating the relator’s claims; 

(2) it may decline to intervene and permit the relator to pursue the claims on behalf of the United States; or 

(3) it may decline to intervene and move to dismiss the relator’s claims.

The DOJ’s intervention decision is critical because non-intervention saddles the relator with the expense of litigating the case.  And, that expense is usually quite high—the issues are complex, the alleged wrongdoers well-funded, and the opposing counsel extremely skilled.  But, for a relator who can bear the costs and prevail, the payday can be significant.  A relator who prevails in an FCA case where the DOJ declined to intervene is entitled to receive 25-30% of the recovery, as opposed to 15-25% if the DOJ intervenes.  Because of the potential for large recoveries and the difficulty many relators face in funding the litigation when the DOJ declines to intervene, FCA cases are fertile ground for third-party litigation funding.  

Third-Party Litigation Funding of FCA Cases & the DOJ’s Response 

Third-party litigation funding companies are relatively new in the United States.  These companies loan money to litigants and/or their attorneys to fund the costs of litigation in return for a portion of any potential recovery.  Although most third-party funders got their start by funding plaintiffs in class actions and personal injury cases, some have branched out and developed an expertise in funding FCA relators.  The involvement of third-party funders in any litigation is controversial, but it is especially controversial in FCA cases where the relator is litigating claims on behalf of the government.  The DOJ first expressed concern about the issue in a January 27, 2020 speech delivered by then-Deputy Associate Attorney General Stephen Cox.  In that speech, Mr. Cox stated that the DOJ was “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 . . . of such arrangements.”^[3]

Nearly six months later, the DOJ’s consideration ripened into a directive to government attorneys.  On June 30, 2020, Ethan Davis, the number two official in the DOJ’s Civil Division, stated in a speech that “we have instructed our attorneys to begin asking a series of questions” of all FCA relators.  Those questions are:

1. Does the relator or the relator’s attorney have an agreement with a third-party litigation funder?  
2. If so, who is the funder?
3. What information has the relator shared with the funder?  
4. Is there a written agreement with the funder? 
5. Does the agreement entitle the funder to exercise direct or indirect control over the relator’s litigation or settlement decisions? 

Mr. Davis explained that the DOJ has an “interest in knowing who is behind” qui tam cases.  He further explained that at present the DOJ was “purely information-gathering . . . for the purpose of studying the issues.”  

Only time will tell how the DOJ uses the information gathered from these questions.  But three possibilities immediately come to mind.  First, the DOJ might move to dismiss qui tam actions brought by relators who have entered into agreements with third-party funders.  The DOJ may do so based on a concern about claims belonging to the government being assigned to profit-seeking entities.  Because the government is the real party in interest in FCA cases, the DOJ is statutorily authorized under 31 U.S.C. § 3730(c)(2)(A) to seek dismissal of a relator’s complaint regardless of whether the DOJ has exercised its right to intervene.  In the past, the DOJ rarely moved to dismiss FCA cases under § 3730(c)(2)(A), choosing instead to stay on the sidelines in cases where it had not intervened.  That changed in January of 2018 when the Director of the DOJ’s Civil Fraud Section, Michael Granston, issued a memorandum titled “Factors for Evaluating Dismissal Pursuant to 31 U.S.C. § 3730(c)(2)(A).” 

Granston’s memorandum instructed DOJ attorneys to seek dismissal of FCA cases brought by relators if dismissal would “advance the government’s interests, preserve limited resources, and avoid adverse precedent.”^[4]  Since the release of that memorandum, the DOJ has been more aggressive in moving to dismiss FCA cases—filing nearly as many motions to dismiss in two years as it had in the preceding thirty years.^[5]  If the DOJ’s current information gathering exercise shows that qui tam litigation is being controlled, even partially, by third-party funders then it is possible the DOJ will start moving to dismiss such cases.  

Second, the DOJ might adopt a policy of refusing to intervene in qui tam cases brought by relators who have entered agreements with third-party funders.  The DOJ’s decision to intervene is a discretionary one.  And a “decision not to intervene in a particular case may be based on factors other than merit.”^[6]  Based on prior statements by DOJ officials, as well as the nature of the questions that DOJ lawyers are now asking qui tam relators, the DOJ appears concerned that third-party funders will corrupt FCA litigation by making it more about private party profit than advancing the public interest in deterring fraud.  

Third, the DOJ might share the information it gathers with Congress as ammunition for legislators who have been pushing for restrictions on third-party funders.  Since at least 2015, several members of the U.S. Senate have pushed to obtain data about the operations of third-party funders with an eye toward regulating their involvement in federal court litigation.^[7]  Those legislators would certainly welcome any information about third-party funders gained through the DOJ’s questioning of qui tam relators.

Conclusion

The DOJ’s decision to ask qui tam relators about the involvement of third-party funders is an important development.  There is no way of knowing exactly what the DOJ will do with the information it gains from the relators.  But, it is highly likely that it will do something with the information.  Three possible actions have been discussed above, although it is possible the DOJ will go in an entirely different direction.  

^[1] U.S. Department of Justice Press Release, “Justice Department Recovers over $3 Billion from False Claims Act Cases in Fiscal Year 2019” (Jan. 9, 2020). 

^[2] Id.  

^[3] Stephen Cox, Address at the 2020 Advanced Forum on False Claims and Qui Tam Enforcement (Jan 27, 2020).  

^[4] Memorandum from Michael Granston, Director Commercial Litigation Branch Fraud Section 2 (Jan. 10, 2018).  

^[5] Stephen Cox, Address at the 2020 Advanced Forum on False Claims and Qui Tam Enforcement (Jan 27, 2020).  

^[6] Memorandum from Michael Granston, Director Commercial Litigation Branch Fraud Section 2 (Jan. 10, 2018).  

^[7] See, e.g., https://www.grassley.senate.gov/news/news-releases/grassley-cornyn-seek-details-obscure-third-party-litigation-financing-agreements (Aug. 27, 2015).