Mixed Messages: DOJ Releases New FCA Cooperation Guidelines, while Study Questions Whether Cooperation Actually Garners Credit

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The U.S. Department of Justice (DOJ) routinely encourages the subjects of False Claims Act (FCA) enforcement actions to make voluntary disclosures and fully cooperate with the government on the premise that cooperation leads to reduced liability. The DOJ recently issued guidance on the types of activities that will earn “cooperation credit.” But how much is cooperation worth, in terms of actual dollars? According to recent data and an analysis by Seton Hall Law School Professor Jacob T. Elberg, perhaps not much.

Discretion over Damages Multiplier Incentivizes Cooperation

The government’s basis for incentivizing cooperation lies primarily in its discretion in seeking damages and penalties allowable under the FCA. A defendant can be liable under the FCA for three times the amount of damages the government sustains, plus a civil penalty for each false claim. But such severe damages and penalties are not required, particularly where the government and a defendant negotiate a settlement to resolve FCA allegations without a court judgment or any finding of liability.

As Elberg noted, there exists a “significant range between single damages (which make the government whole) and the maximum recovery available under the statute. And this multiplier range provides a clear opportunity for the government to motivate business organizations to engage in compliant behavior.” There can be a meaningful difference, for instance, between settling an FCA action for 1.5 times the government’s damages versus 2.5 times the government’s damages. The possibility of a lower multiplier serves as a significant financial incentive for cooperation.

The DOJ Has Repeatedly Encouraged Cooperation

In public statements, high-ranking DOJ officials have consistently stated that cooperation can, will, and does lead to “cooperation credit” resulting in lower settlement amounts. In 2016, for example, then-Acting Associate Attorney General Bill Baer explained that “[w]here a company satisfies the threshold requirement of disclosure as to individuals and otherwise cooperates with the government’s investigation, the department will use its significant enforcement discretion in FCA matters to recognize that cooperation.” Baer analogized DOJ’s exercise of discretion to “the concept of the ‘downward departure’ in the federal sentencing guidelines.”  “[W]e are committed,” he stressed, “to taking into account the disclosures and other cooperation provided by defendants and to resolve matters for less than the matters would otherwise have settled for based on the applicable law and facts.” According to Baer, “[o]ur lawyers do this all the time in negotiating settlements.”

Other DOJ officials have echoed these remarks. To cite just one example, in 2019 Deputy Associate Attorney General Stephen Cox reiterated that “the Department is committed to rewarding companies that invest in strong compliance programs and who cooperate with our investigations into wrongdoing.” “False Claims Act investigations are no exception to the Department’s policy of incentivizing cooperation,” he said. “Corporate defendants can receive a more favorable resolution for cooperating with our False Claims Act investigations.”

DOJ Announces Cooperation Guidelines

Despite the government’s many overtures regarding the benefits of cooperation, precisely what constitutes effective cooperation worthy of credit for a defendant has not always been clear.  Perhaps to provide greater insight as to how a defendant can obtain cooperation credit, on May 7, 2019, the DOJ announced new guidance on the types of activities that federal prosecutors will consider when resolving FCA matters. This guidance has been incorporated into the Justice Manual, which contains the DOJ’s publicly available policies and procedures.

The DOJ guidelines strongly encourage companies and individuals to voluntarily self-disclose misconduct to the government. In public remarks accompanying the release of the guidance, Assistant Attorney General Jody Hunt referred to self-disclosure as “the most valuable form of cooperation.” According to the guidelines, entities or individuals who self-disclose “will receive credit during the resolution of a FCA case.” The guidelines reserve “maximum credit” for self-disclosure, explaining that maximum credit can mean a reduction in liability to the government’s single damages amount.

The guidelines make clear, however, that “partial” cooperation credit may also be earned for cooperating with an ongoing government investigation. The government provided non-exhaustive examples of steps companies and individuals can take to earn partial credit. These include:

  • Preserving, collecting, and disclosing relevant information beyond existing business practices or legal requirements.
  • Identifying individuals responsible for or aware of the misconduct.
  • Making relevant officers and employees available for interviews or depositions.
  • Disclosing relevant facts learned during a company’s independent investigation.
  • Facilitating review and evaluation of data or information that requires access to special or proprietary technologies.
  • Admitting liability or accepting responsibility for misconduct.
  • Assisting in determining or recovering the government’s losses.

The guidelines clarify that cooperation does not include disclosure of information required by law or in response to a subpoena or investigative demand. Cooperation credit may be earned, however, by disclosing additional relevant information or proactively aiding the government’s understanding of documents or information produced.

The DOJ guidelines also instruct the government to consider remedial measures taken in response to an FCA violation, which include analyzing the cause of the misconduct, disciplining or replacing those responsible for the misconduct, accepting responsibility for the violation, and improving compliance programs to prevent a recurrence.

Tracking Cooperation Credit Has Been Difficult, Until Recently

The timing of providing additional transparency to cooperation considerations may relate to recent changes that have pulled back the curtain somewhat on how damages in FCA settlements were calculated.  Measuring cooperation credit has historically been difficult because FCA settlements do not disclose the multiplier used to calculate damages. That changed with the passage of the 2017 Tax Act. Prior to the Tax Act, an FCA settlement was tax deductible to the extent it was compensatory and not punitive. The Tax Act, by contrast, now provides that FCA settlements are deductible only to the extent they “constitute[] restitution” or an amount “paid to come into compliance with” the law. 26 U.S.C. § 162(f). Critically, the Tax Act also contains a disclosure mechanism to help administer this change. The portion of the settlement amount that constitutes “restitution” must be explicitly identified as restitution in the settlement agreement. Because restitution is the amount paid to make the government whole, this disclosure allows the government’s single damages to be gleaned from the face of the settlement agreement.

Analysis Reveals No Clear Historical Benefit of Cooperation

Taking advantage of this new data, Elberg studied FCA settlement agreements entered since early 2018. His analysis yielded two key findings. First, the mean multiplier across FCA settlements was 1.75. Drilling down further, the mean multiplier was 1.59 in cases involving Main Justice in D.C., but higher at 1.84 in cases handled only by localized U.S. Attorney’s Offices.

Second, his analysis also showed that “the data reveals no consistent benefit for cooperation – those cases where defendants cooperated were frequently not treated more leniently than cases where defendants did not cooperate, or even cases where defendants refused to accept responsibility for the misconduct.”

“It was notable,” Elberg found, “that several defendants received the default 2.0 multiplier despite clear evidence of substantial cooperation, including references to the defendant’s cooperation in some of the [settlement agreements] and the DOJ press releases.” “At the same time, several defendants received multipliers below 2.0 despite clear evidence that they did not cooperate.” Elberg concluded that “as currently calculated, any credit given for cooperation or for investing in strong compliance programs is dwarfed by the credit given for the simple act of settling.”

Of course, Elberg recognized that it is too soon to draw any definitive conclusions. He noted that the government is not transparent in explaining whether cooperation credit factored into any settlement amount, and so could not rule out the possibility that some defendants received undisclosed cooperation credit and otherwise would have been tagged with even higher multipliers. Elberg published his analysis here and here.

Potential Chilling Effect on Cooperation

For years the DOJ has expressly encouraged cooperation with FCA enforcement actions on the direct and unequivocal assurance that such cooperation will, at the very least, be considered in any potential resolution of the action. Yet Elberg’s study casts doubt on whether such consideration has had any material effect on the amount ultimately paid by the defendant. That analysis raises the possibility that defendants armed with this new data will be disincentivized—rather than incentivized—to cooperate.

With the release of its new cooperation guidelines, the DOJ has doubled down on its assurances of cooperation credit for defendants but also has provided its most detailed guidance to date about what constitutes effective cooperation. FCA enforcement actions often take significant time to be resolved, and it is possible that new data will begin to paint a different picture.  It’s also possible that the new guidance will allow defendants to gain cooperation credit more effectively or more regularly.  Until the available data illustrates concrete credit provided for cooperation, however, it may not be sufficient for the DOJ simply to promise cooperation credit absent some additional indication that it is following up on its public statements of rewarding cooperation.  In the meantime, FCA defendants should consider the DOJ’s newly released cooperation guidelines when responding to an enforcement action but also keep in mind what cooperation appears to have bought other defendants to date based on the most recent data.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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