Settlements and judgments from civil cases involving fraud and false claims continue to skyrocket, making it increasingly important for companies that do business with the government to know how to avoid liability or effectively defend any claims.

The False Claims Act (FCA) is the government’s primary civil remedy to redress false claims for government funds and property under government programs and contracts. It pertains to a broad range of industries—including healthcare, life sciences, defense, financial, transportation, food, agriculture, and many more. In fiscal year 2016, the Department of Justice obtained more than $4.7 billion from FCA cases—the third-highest annual recovery in FCA history.

Recent issues involving the FCA and what defense tactics to use in such cases took center stage during a panel last week at the Downtown Harvard Club in Boston, where federal and state officials, corporate defense attorneys, and whistleblower representatives alike offered a rare, contrasting take on the ins and outs of FCA cases.

One specific subject under discussion was whether a company should self-disclose a potential FCA violation and how to make that determination. “It is the right thing you do,” said Gregg Shapiro, assistant U.S. attorney for the District of Massachusetts. “If you do something wrong, or if your company has done something wrong, it makes sense to come forward.”

Self-disclosing a potential violation is not only morally the right thing to do, but “it’s an extremely risky undertaking to cover up a problem,” Shapiro added. If the government hears about an FCA violation—whether through a current or former employee, media outlet, contractor, competitor, or elsewhere—the chances of a criminal resolution increases exponentially, he said. “There are all sorts of ways cases come to us,” he said.

“It really behooves the target of an investigation to be responsive to a government subpoena,” said Gillian Feiner, head of the False Claims Division at the Office of the Massachusetts Attorney General. Work with the government to try to figure out where their concerns lie and fix the problem, she said. “That buys a lot of goodwill.”

Joe Savage, a partner at law firm Goodwin who represents corporate defendants, retorted that the government often takes the position that “the truth will set you free.” The decision to self-disclose a potential FCA violation, however, is “slightly more complicated than that,” he said.

“If you do something wrong, or if your company has done something wrong, it makes sense to come forward.”
Gregg Shapiro, Assistant U.S. Attorney, District of Massachusetts

In some cases, for example, if the company discovers a problem and fixes it, self-disclosure might not make sense, particularly when financial and reputational damage can result. The specific circumstances of each situation must be weighted carefully.

Whistleblower FCA claims. The role of whistleblowers in FCA cases also sparked contentious debate among the panel. The government views the role of whistleblowers as fighting the good fight; “I view them as odious mercenaries,” Savage quipped.

Whistleblowers routinely steal sensitive information to take to the government that constitutes attorney-client privilege, Savage continued. They often claim they want to “right the ship,” that a monetary award wasn’t the reason for going to the government. “That’s probably not accurate,” he challenged.

Suzanne Durrell of the Whistleblower Law Collaborative—a group of attorneys who assist whistleblowers in FCA cases—disagreed. She stressed that whistleblowers take a big risk when they approach the government. Many face retaliation, get passed over for promotions, or even get fired for reporting an issue internally. Often, too, they may suffer financial and reputational damage. “By the time they come to us, they generally feel like they’re out of options,” she said.

All panelists agreed, however, that fostering a speak-up culture where employees feel comfortable reporting issues internally is of utmost importance. That includes taking the employee’s report seriously, following up on it, and keeping the employee in the loop about the status of the investigation.

At one point in the panel, Shapiro cited the case of Millennium Health (formerly Millennium Laboratories) as a compelling example of a company that did not encourage a speak-up culture—and, in fact, used scare tactics to discourage reporting.  In that FCA case, prosecutors showed evidence of Millennium’s general counsel giving a presentation at the company’s national sales meeting, in which he depicted images of a former employee whom Millennium had sued. The former employee’s face was shown on a target range being shot repeatedly, and another slide depicted Millennium’s competitors and the former employee in body bags.


Below is a sample of False Claims Act cases announced by the Department of Justice in fiscal year 2016.
Drug makers Wyeth and Pfizer in April 2016 paid $784.6 million to resolve federal and state claims that Wyeth knowingly reported false and fraudulent prices on two drugs used to treat acid reflux, Protonix Oral and Protonix IV. The government alleged that Wyeth (before Pfizer acquired it) failed to report deep discounts available to hospitals, as required by the government to ensure that the Medicaid program enjoyed the same pricing benefits available to the company’s commercial customers. Wyeth paid $413.2 million to the federal government, and $371.4 million to state Medicaid programs.
Millennium Health (formerly Millennium Laboratories) agreed in October 2015 to pay $260 million to settle allegations that it billed Medicare, Medicaid, and other federal health care programs for excessive and unnecessary urine drug and genetic testing and also that it gave free items to induce physicians to refer expensive and profitable lab tests to Millennium, in violation of the Anti-Kickback Statute and Stark Law. The settlement included $214.8 million in alleged false claims against federal programs, $26 million in alleged false claims against state Medicaid programs, and $19.2 million in related administrative claims.
Source: Department of Justice

“If we get a slide like that, where the general counsel during a sales meeting displays a picture of someone who is supposed to be a whistleblower and shows them at a shooting range, and they’re the target with a bullet hole in their head, that’s going to increase the chances of us bringing that case immensely,” Shapiro said. “Evidence like that is extraordinarily powerful and a symbol of what the company is really about.”

Panelists also warned companies to be careful about retaliation risk, which can quickly turn a civil matter into a criminal matter. Whenever an FCA whistleblower lawsuit gets filed under seal, one of the first questions a company asks is, “‘Who is the whistleblower?’ They’re obsessed with the identity of the whistleblower,” Savage said. “If you don’t know who it is, you could never be accused of retaliating.”

Most false claims actions are filed by whistleblowers. In total, whistleblowers filed 702 lawsuits in fiscal year 2016, with whistleblower awards totaling $519 million that year.

Robust compliance vs. poor compliance. Panel members also stressed the importance of having in place a robust compliance program. A good compliance program has at least one compliance officer who is knowledgeable about the relevant regulations that govern the company and the industry, Shapiro commented. The opposite of that would be a company that has a compliance program and a compliance officer in place that is ignored, which potentially makes a company worse off than not having in place a compliance program at all, he said.

If it came down to a whistleblower claim for ignoring compliance controls, a compliance officer is “potentially the most dangerous whistleblower for the company,” Shapiro added. “They’re going to be a very credible witness.”

Compliance officers as whistleblowers also increases the likelihood of the government pursuing an FCA whistleblower case. With limited resources, the government cannot pursue every FCA case, Shapiro said. “We focus on the ones that look good on their face.”

Less common is in-house counsel as whistleblowers, due to the thorny issue of attorney-client privilege. In those circumstances, in-house counsel should “tread cautiously,” said Feiner of Massachusetts’ FCA Division.

Contract violations. Another thorny issue that companies must watch for is the language in government contracts. In several recent FCA investigations, the bidder “didn’t engage in an appropriate feasibility analysis before responding,” Feiner said. They didn’t ensure the representations they were making in their bids were consistent with what they could deliver, she said.

When a bidder applies for a public contract, it’s “highly advisable,” she said, to make sure that people other than sales personnel have oversight over the process and what ultimately gets submitted to the government. “You don’t want people whose salaries and incentives are driven by sales to be … making representations to the government on multimillion dollar contracts,” Feiner said.

Another word of caution: “You can have a false claim without ever making a false statement,” Savage said. In one example, a waste-to-energy plant contracted with the government to pick up trash for cities and towns and properly dispose of it. After the company sent its invoice to the city, however, the state filed an FCA case, claiming the company violated environmental regulations in the burning of the waste.

Although the company did the job it was contracted to do, it legally agreed in the contract to abide by all environmental laws. The government’s position is that sending an invoice upon violating any law that violates the contract constitutes a false claim, “because you have impliedly certified that you’ve met all these other standards,” Savage said. Such cases serve as a warning to all companies to read the conditions of a government contract carefully.

As the number of FCA whistleblower claims continues to grow and as related FCA penalties continue to reach billions, companies should heed these warnings and be more cautious about listening to the concerns of employees and addressing and stopping any potential fraud or false claims before they turn into a government investigation.