The Department of Justice has issued a trio of memoranda in recent weeks that collectively lean in favor of companies facing whistleblower complaints or civil enforcement cases.
Broadly speaking, the three recently issued memoranda signal that the Department of Justice aims to limit the scope and pursuit of False Claims Act (FCA) cases and aggressive legal theories currently being employed by prosecutors. Concurrently, one of the memos further signals that prosecutors may start to take a more aggressive approach toward dismissing whistleblower complaints alleging FCA violations.
In November 2017, Attorney General Jeff Sessions issued a memorandum prohibiting the Justice Department from issuing guidance documents that “purport to create rights or obligations” binding outside the Executive Branch. Under the Administrative Procedure Act, a rule cannot take effect without undergoing a notice-and-comment rulemaking process.
The Sessions memo expressly prohibits the Justice Department from relying on its own interpretive guidance documents, as the agency has historically done in the past, “to coerce regulated parties into taking any action or refraining from taking any action beyond what is required by the terms of the applicable state or lawful regulation,” the memo states.
Applying the same principles laid down by Sessions, then-Associate Attorney General Rachel Brand on Jan. 25 issued a follow-on memo addressed to all those in the Justice Department with civil litigating authority, including U.S. attorneys. In that memo, Brand widened the scope of the Sessions memo by expressly prohibiting civil litigators in the Justice Department from using guidance issued by other federal agencies in affirmative civil enforcement (ACE) cases.
“Although guidance documents can be helpful in educating the public about already existing law, they do not have the binding force or effect of law and should not be used as a substitute for rulemaking,” Brand said in issuing the memo. “Consistent with our duty to uphold the rule of law with fair notice and due process, this policy helps restore the appropriate role of guidance documents and avoids rulemaking by enforcement.”
“The Trump agenda of trying to streamline regulation is taking place, and you can really see that through the Brand memo, as well as the Sessions memo.”
Jacques Smith, Partner, Arent Fox
Guidance documents may be used for “proper purposes,” such as explaining or paraphrasing legal mandates from existing statutes or regulations. But, as both the Sessions and Brand memos state, non-compliance with an agency guidance cannot be treated as a violation of law.
Both memos speak to a broader push by the Trump administration toward deregulation: “The Trump agenda of trying to streamline regulation is taking place, and you can really see that through the Brand memo, as well as the Sessions memo,” says Jacques Smith, a partner at Arent Fox, who specializes in FCA cases.
Compliance, legal, and audit professionals in highly regulated industries—healthcare and government contracting, in particular—will find the Brand and Sessions memos especially helpful for defending false claims lawsuits, off-label promotion claims, and claims involving allegations of overpayments.
“In the healthcare space, there is an awful lot of sub-regulatory guidance that the government sometimes treats as binding law,” says Tony Maida, a partner at law firm McDermott Will & Emery, who counsels healthcare clients on government investigations.
Maida says he is already starting to see some changes in how the Justice Department is approaching these cases, taking a look at the “Brand memo on its face and really looking to see, in cases where allegations are based on sub-regulatory guidance ... whether those are cases that the government should be pursuing or not.”
The Brand Memo effectively gives healthcare organizations, government contractors, and their legal counsel a new opportunity to argue that an FCA enforcement action is impermissible in cases where the government has based its defense on an interpretive guidance, rather than a substantive rule or regulation.
Beyond a defense counsel standpoint, prudent compliance officers and internal audit professionals should think about the implications of these memos in the context of internal policies and procedures, as well. The sheer complexity of rules and regulations governing federal healthcare programs makes it nearly impossible for compliance and audit professionals in the healthcare industry to know with any real certainty how and when to disclose an “overpayment” to the government.
The Granston memo lists the following seven primary factors the Justice Department has relied upon in cases where the agency has moved to dismiss whistleblower complaints:
Curbing meritless qui tam complaints: The Department should consider a motion to dismiss where a whistleblower complaint is “facially lacking in merit—either because the relator’s legal theory is inherently defective, or the relator’s factual allegations are frivolous.”
Preventing parasitic or opportunistic actions and controlling litigation: The Department should consider a motion to dismiss when the complaint “duplicates a pre-existing government investigation and adds no useful information to the investigation.”
Preventing interference with agency policies and programs: Dismissal should be considered where an agency determines that a whistleblower action “threatens to interfere with an agency’s policies or the administration of its programs.”
Controlling litigation brought on behalf of the United States: The Department should consider dismissing cases when necessary to protect the government’s litigation prerogatives.
Safeguarding classified information and national security interests: In certain cases, such as those involving intelligence agencies or military procurement contracts, the Department should seek dismissal to safeguard classified information.
Preserving government resources: The Department should consider dismissing cases when costs will exceed any expected gain.
Addressing egregious procedural errors: The Department should consider dismissing cases where the whistleblower’s action frustrates the government’s efforts to conduct a proper investigation.
Source: Department of Justice
The Brand Memo is an opportunity for compliance and audit “to take a step back and think about whether the audit results they’ve found is a violation of a federal healthcare program law or regulation,” Maida says. “That’s an issue that should be considered when doing an audit or making decisions about whether there is an overpayment or disclosure obligation, or when defending false claims allegations.”
Strictly from a compliance standpoint, the company may decide that non-compliance with an interpretive guidance—while not necessarily amounting to a violation of law that results in an overpayment—may still be something that compliance wants to remediate within its own internal processes. “It’s important to think about those two questions separately from a compliance and audit perspective,” because they may call for different responses, Maida says.
In establishing an FCA defense, in-house counsel would be remiss to not also take into consideration the Granston memo, a leaked policy memo issued Jan. 10 and addressed to all attorneys in the Civil Fraud Section. In that memo, Department of Justice Civil Fraud Section Director Michael Granston directed prosecutors to more carefully consider dismissing frivolous FCA cases brought by whistleblowers.
“The Granston memo gives private practitioners and general counsel some comfort that the Justice Department is signaling that they’re no longer going to let all of these qui tam cases continue when they don’t intervene,” says Tom Mason, a partner and leader of the Government Contracts practice group at law firm Thompson Hine.
Specifically, the memo states that, although the Department has seen record increases in whistleblower complaints filed under the FCA, “the rate of intervention has remained relatively static.” Even in cases where the Department declines to take over, the government “expends significant resources” in monitoring these cases.
The memo lists seven primary factors the Justice Department has relied upon in cases where the agency has moved to dismiss whistleblower complaints. Whether leak of the Granston memo was intentional or not, “the fact that you’re seeing the inner workings and thought process of the Department of Justice is very telling,” Smith says. It speaks to how selective the Justice Department must be on what cases it chooses to prosecute because of its limited resources and the vast number of whistleblower cases that are routinely filed, he says.
Although it’s still too early to tell what effect the Granston memo will have on regulated industries, companies should not expect civil cases involving fraud and false claims to disappear altogether, especially in the healthcare industry, which has been a cash cow for the government for a few years now. Of the 674 new whistleblower cases filed in fiscal year 2017, and of the $3.7 billion in settlements and judgments, $2.4 billion involved the healthcare industry.
From a practical standpoint, the Granston memo gives general counsel and external counsel “an arsenal of factors that we can consider,” Smith adds, not just in defending false claims, but also in educating corporate clients on what circumstances could lead to an outright dismissal of a whistleblower complaint, he says.
Collectively, the Brand and Granston memos are a welcome development for in-house counsel and those representing corporate clients. “They provide a lot of practical insight into DoJ priorities,” Mason of Thompson Hine says. “I don’t think that they change any legal responsibilities, but they change the judgment and the thinking of how we manage our legal responsibilities. At least, they should influence them.”
At the very least, it appears that Justice Department prosecutors will be more receptive to the idea of dismissing whistleblower complaints earlier in the game, before the costs of defending frivolous claims get out of control. Beyond that, it will be important for corporate counsel and compliance officers to closely monitor how Justice Department officials follow these policies in practice and what remedies they ultimately afford corporate defendants, as those outcomes may be telling indications of how similar challenges will fair moving forward.