Who Is Keeping Their Eyes on Government Spending at Home and Abroad?

April 1st, 2020 by Pamela Coyle Brecht

In the midst of the COVID-19 pandemic, businesses and individuals around the world are rising to the occasion and ordinary people are doing extraordinary things. We have seen first responders, emergency room physicians, nurses, grocery store workers, and mail carriers go above and beyond their call of duty. One Pennsylvania manufacturer of major league baseball uniforms donated millions of dollars of fabric and labor and converted its operations to medical masks and gowns for healthcare workers; recognizing the fragile psyche of taxed cities, the Phillies’ pinstripes will stay in Pennsylvania and the Yankees’ will go to New York. However, parallel to these uplifting endeavors, there is a darker side of this historic pandemic – the underbelly of society seeking to take advantage of national, local, and state governments dealing with a crisis that is unprecedented in its medical, economic, and social impact.

The public, employees of providers of essential services, and government agencies need be on the lookout to detect and report fraud related to COVID-19. Several government agencies have vocalized this call for vigilance including Europe’s Interpol, which recently announced an investigation of at least 30 large-scale fraud schemes in Europe and Asia, and The United States Department of Justice. The Department of Health and Human Services Office of Inspector General (HHS-OIG) has also issued a COVID-19 Fraud Alert to warn against unscrupulous suppliers of testing kits and unapproved treatments, and the Treasury Department has alerted home-bound taxpayers to be vigilant when receiving offers of tax assistance in the midst of the pandemic.

Providers who bill the government or recipients who will be paying for goods and services with government funds are particularly susceptible to fraud schemes.  Essential service providers in the financial and healthcare sector including industrial cleaning companies called to disinfect public places, healthcare suppliers setting up makeshift hospitals around the country, and construction companies will need to have in place appropriate audit processes for both products and labor to maintain additional vigilance during these times.

Congressional Action

The U.S. Congress recently enacted legislation, the Coronavirus Aid, Relief and Economic Security (CARES) Act, which will release $2 trillion in federal funds into the economy at every level including corporations ($500 billion), state and local governments ($339.8 billion), public health ($153.5 billion), and small businesses ($377 billion). It should be noted with this disbursement of funds that not all U.S. dollars will land within the borders of the United States; many suppliers have corporate headquarters around the globe. As supplies and personnel are shifted from areas where COVID-19 is less of a threat, to U.S. cities over the next weeks (or dare we say months), providers based in other countries may be receiving these government dollars. Extraordinary people in ordinary places will also need to come forward to report fraud, waste and abuse in these unprecedented times.

The False Claims Act

The federal False Claims Act, more than two dozen state statutes that mirror that law, and even some municipal statutes have frameworks built in for whistleblowers to bring fraud, waste, and abuse to the attention of government prosecutors.  There are processes in place to facilitate the filing of false claims even during the pandemic. It was in the midst of the great Civil War that the False Claims Act came into existence to respond to unscrupulous suppliers who provided sawdust instead of rifles to Union soldiers.  Our first responders to COVID-19 deserve no less.

If you are aware of any person, corporation or entity that you think may be violating the Federal False Claims Act or a State False Claims Act, you should contact an attorney who can assist you in evaluating your potential claim. Be careful not to discuss the matter with anyone other than an attorney. CONTACT US TODAY.

Relator Swap Leads to Case “Droppa” Under the DRUPA

March 19th, 2020 by Pamela Coyle Brecht

The perils of substituting relators in the midst of a qui tam were the highlight of this week’s decision by the Delaware Supreme Court on certification from the Third Circuit Court of Appeals in United States v. Sanofi-Aventis United States Llc, No. 256, 2019, 2020 Del. LEXIS 97 (Mar. 17, 2020), on certification from In re: Plavix Marketing, Sales Practices and Products Liability Litigation, 19-2472 (3d Cir. June 12, 2019) [hereinafter Certification].

Three individuals (two physicians and a Sanofi sales representative) formed a Delaware limited liability partnership to act as Relator, that is, “to file and prosecute” a whistleblower action under the federal False Claims Act (“FCA”), 31 U.S.C. §3729 et seq, and state analogs, against several defendants.  Sanofi-Aventis 2020 Del. Lexis at *2. The three individuals’ partnership agreement contained the following provision: “the Partnership shall not be a separate legal entity distinct from its Partners.” Id. at 4. The Third Circuit explained the likely reason for this provision: if the original partnership was a separate legal entity, the fact that it did not exist at the time the alleged fraud occurred would prevent it from being an “original source” with direct knowledge of the fraud under the pre-amendment FCA. Sanofi-Aventis 2020 Del. Lexis at *4-5, citing In re: Plavix Marketing, Sales Practices and Products Liability Litigation (No. II), 315 F.Supp. 3d 817 at 381(D.N.J. 2018), appeal docketed, No. 19-2472 (3d Cir. July 3, 2018) [hereinafter Opinion].[1]

Nine days after its formation, the relator partnership filed the qui tam complaint against Sanofi-Aventis U.S. LLC, Sanofi-Aventis U.S. Services, Inc., Aventis, Inc., Aventis Pharmaceuticals, Inc., Bristol-Myers Squibb Company, and Bristol-Myers Squibb Pharmaceuticals Holding Partnership.  In their complaint, the relator partnership alleged that each of the original partners was an  “original source” of the information upon which their allegations were based. While the case was pending, one of the partners left the partnership and was replaced by another physician partner. The District Court, then, “sua sponte, requested that the parties brief the question of whether JKJ was a proper relator capable of continuing the litigation in light of the replacement.” Sanofi-Aventis 2020 Del. Lexis at *6. The defendants moved to dismiss the reconstituted partnership’s amended complaint, arguing that the amended complaint violated the first-to-file rule under the FCA because the earlier complaint has been filed by a separate relator. The United States District Court for the District of New Jersey agreed with the defendants and dismissed the case. Opinion at 836. Relators appealed to the Third Circuit, which later certified three questions to the Supreme Court of Delaware to determine unsettled issues under Delaware law. Certification.

On certification from the Third Circuit, the Supreme Court of Delaware addressed three legal questions, which had arisen on appeal. Sanofi-Aventis 2020 Del. Lexis at *10. The Delaware court, in agreeing with the defendants’ theory, found: (1) the change in membership of the limited liability partnership relator created a new partnership and caused a dissolution of the original partnership under the Delaware Revised Uniform Partnership Act (DRUPA) because the partnership agreement provided that the partnership was not a distinct legal entity from its partners. Id at *34-35; (2) although the Court held that the “new” partnership filed the amended complaint, the statement of undisputed facts provided to the Delaware Court did not resolve the inquiry as to whether the new partnership possessed the qui tam lawsuit (“litigation asset”). Id at 35-36; and (3) the original partnership could not continue to bring the qui tam “action as a part of its winding up process, because to do so would be inconsistent with …the Partnership Agreement, and because the action is in its beginning phases and is the sole purpose for which [the original partnership] was established.” Id. at 36.

Questions of substituting or adding relators, dismissing earlier actions, and forming corporations to act as relators are fact-specific and often dependent on state law. This case is another example of the complexities of the FCA’s  so-called “first-to-file” rule which provides:  “no other person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5). This provision bars a later case based on the essential facts of a previously-filed whistleblower case involving the same elements of a fraud scheme alleged in an earlier-filed FCA case.


[1] Under the pre-amendment language an “Original Source” must “either (i) prior to a public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (ii) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.” 31 U.S.C. § 3730(e)(4)(B).

Can I Just Be John Doe? A review of remaining anonymous in False Claims Act cases

January 23rd, 2020 by Erik Giannitrapani

There is strong appeal in the concept of remaining anonymous for many whistleblowers but unless you can prove both a fear of severe harm, and that the fear of severe harm is reasonable, two recent Circuit Court decisions illustrate how unlikely it is that you can remain in the shadows and demonstrates the risks inherent to that pursuit.

Janssen Therapeutics

In the first of the two cases, a Jane and John Doe filed a qui tam complaint under their actual names against Janssen Therapeutics, Janssen Products, LP, and Johnson & Johnson, Inc. (“Janssen Therapeutic Defendants”)[i]. In the complaint, Jane and John Doe alleged that the Janssen Therapeutic Defendants submitted false claims by promoting off-label use of two HIV medications.

After two years of investigating, Jane and John Doe (“the relators”) were informed that they were not the first-to-file an FCA lawsuit against the Janssen Therapeutic Defendants relating to the allegations in their complaint. As a result, the relators amended their complaint under seal filing the exact same complaint only replacing their actual names with the pseudonyms Jane and John Doe.

After the relators filed their amended complaint, the government filed a ‘Notice of Election to Decline Intervention’ and requested that the amended complaint and the Notice of Election to Decline be unsealed but that all other contents of the docket remain under seal. The District Court granted the motion and the original complaint remained under seal. The relators, subsequently, voluntarily dismissed their complaint.

The Janssen Therapeutic Defendants moved to unseal the original complaint and, applying the test for proceeding with a litigation anonymously set out in Doe v. Megless[ii],the District Court ordered the original complaint to be unsealed after 45 days.

Under the Megless test, a litigant must show “both a fear of severe harm, and that the fear of severe harm is reasonable.” Further, Megless indicates that once a litigant makes this initial showing, the “district court should balance a plaintiff’s interest and fear against the strong interest in an open litigation process.”[iii]

On December 27, 2019, the Third Circuit overturned the lower court’s unsealing order since the lower court applied the wrong standard. The Third Circuit stated that the appropriate standard was not the Megless test, but rather the standard for unsealing court records established in In re Cendant Corp.[iv] In re Cendant Corp. sets out that in order to overcome the presumption of access in relation to a judicial record, a plaintiff must show that its interest in secrecy outweighs that presumption.

Since the relators had already voluntarily dismissed their complaint, the Third Circuit remanded the case and instructed the District Court to “consider whether Janssen’s motion is a vehicle for improper purposes, in which case the Original Complaint may appropriately remain under seal.”[v] Even after the relators dismissed their complaint, and were no longer pursuing the litigation, only improper motives by the Defendants could overcome the presumption of openness in a court proceeding.  

In the second case which demonstrates the risks in attempting to proceed anonymously, we explore another matter related to the Janssen companies…

Volkhoff and the Janssen Defendants

On September 16, 2016, Volkhoff, LLC (“Volkhoff”), a Delaware limited liability company, filed a qui tam complaint alleging FCA violations by Janssen Pharmaceutical N.V., Janssen Pharmaceuticals, Inc., Janssen Research & Development, LLC, Johnson & Johnson, and Ortho-McNeil (“Janssen Defendants”).[vi] In the complaint, Volkhoff alleged that the Janssen Defendants fraudulently and unlawfully marketed their medications.

Neither the United States nor any state elected to intervene in the complaint, allowing Volkhoff to proceed with the original complaint on its own. The Janssen Defendants filed a motion to dismiss the Original Complaint. After the Janssen Defendant’s moved to dismiss the Original Complaint, Volkhoff did not oppose the motion, but rather, filed a First Amended Complaint (“FAC”) with the same allegations as the original complaint only replacing “Volkhoff” with “Jane Doe,” a natural person.

The FAC did not mention Volkhoff, nor did it mention Volkhoff’s relationship to Jane Doe. Further, in the filings, Jane Doe and Volkhoff acknowledged that the replacement of Volkhoff with Jane Doe was a tactical decision aimed at avoiding the Janssen Defendants’ challenge to the Original Complaint’s FCA retaliation claim.

The Janssen Defendants moved to dismiss the FAC. The District Court dismissed the FAC on the grounds that the District Court lacked subject matter jurisdiction since Jane Doe was not the first-to-file, because her allegations were the same as Volkhoff’s first-filed complaint. Since Volkhoff and Jane Doe were separate legal entities and the FAC failed to disclose the relationship between Volkhoff and Jane Doe, Jane Doe was statutorily precluded from pursuing her FCA claims.

The District Court also dismissed Jane Doe’s FCA employment retaliation claim because she failed to demonstrate a need for proceeding anonymously. Volkhoff LLC appealed but failed to include Jane Doe as a party on the appellate notice.

Since Volkhoff and Jane Doe are separate legal entities and Volkhoff chose not to meaningfully involve itself in the district court proceedings, Volkhoff failed to meet the requirements for appellate jurisdiction. Jane Doe also failed to meet the requirements for appellate jurisdiction since she was not named on the appellate notice. As a result, the Ninth Circuit dismissed Volkhoff’s appeal for lack of jurisdiction.

Conclusion

As the cases involving Janssenand Johnson & Johnsondemonstrate, the ability to successfully pursue an FCA complaint anonymously, is extremely limited and many of the statutory bars in the FCA statute, such as the first-to-file bar, may be implicated. There may be several reasons a relator may want to file an FCA complaint anonymously, but the benefits of that choice almost never outweigh the risks. A relator must have a genuine need for proceeding anonymously.

If you are aware of any person, corporation or entity that you think may be violating the Federal False Claims Act or a State False Claims Act, you need an experienced attorney who can assist you in evaluating your potential claim and help you file it in a way that will give you the best success. Please do not hesitate to contact us today.


[i] United States v. Janssen Therapeutics, No. 19-1376, 2019 U.S. App. Lexis 38780 (3d Cir. Dec. 27, 2019) (“Janssen Therapeutics”)

[ii] Doe v. Megless,654 F.3d 404 (3d Cir. 2011)

[iii] Doe v. Megless,654 F.3d at 408

[iv] In re Cendant Corp., 260 F.3d 183 (3d Cir. 2001). 

[v]. Janssen Therapeutics at *5

[vi] United States ex rel. Alexander Volkhoff, LLC v. Janssen Pharmaceutica N.V., No. 18-55643, 2020 U.S. App. LEXIS 70 (9th Cir. Jan. 2, 2020)

What’s It Like Blowing the Whistle in Ukraine?

January 16th, 2020 by Ashley Kenny

What Happened

On January 1, 2020, Amendments to the Law of Ukraine On Prevention of Corruption (“Amendments”) came into effect that introduced groundbreaking protections for whistleblowers in Ukraine that rival the protections offered under the United States False Claims Act (“FCA”).

The Motivation

Ukraine has suffered through a longstanding history of corruption. In the United States Agency of International Development’s 2019-2024 Country Development Cooperation Strategy for Ukraine, Ukraine was categorized as the most corrupt country in Europe. In attempt to change its global perception and become a member of the European Union, the Ukrainian government has implemented reforms targeted towards anti-corruption and transparency. The recent enactment of the Amendments is a significant step towards fighting the country’s deep-rooted corruption.

Who Can Be A Whistleblower in Ukraine?

According to the Amendments, a whistleblower is defined as an individual who reports possible acts of corruption, or corruption-related offenses, that the whistleblower has firsthand knowledge of through their professional, economic, social, scientific, professional or educational activities. To qualify as a whistleblower, the individual must present reliable information that is not publicly available that supports their report of corruption.

What Protections Can a Whistleblower Receive?

The Amendments permit the whistleblower to anonymously report acts of corruption and protect the whistleblower’s confidentiality. The Amendments also protect the whistleblower and the whistleblower’s family from retaliation of any kind including, but not limited to, physical violence, adverse employment actions, and civil and criminal liability. Under the Amendments, the whistleblower and the whistleblower’s family are entitled to free legal assistance, psychological aid, reimbursement of expenses, and reimbursement of legal fees. The Amendments also provide remuneration of up to 10% in cases where the damage to the state is more than ₴10 million Ukrainian Hryvnia, UAH (approximately $417,219.70 United States Dollar, USD). The percentage a whistleblower receives is largely based upon the importance of the whistleblower’s information.

How to Blow the Whistle in Ukraine

The Amendments do not prescribe a particular way in which the whistleblower must report acts of corruption. The whistleblower may choose to make their report to the National Anti-Corruption Bureau of Ukraine, National Agency, and other specially authorized entities in the sphere of corruption via the agencies’ telephone number, website, or designated email address. The whistleblower may also report acts of corruption to their employer, trade unions, public organizations, governmental agencies, journalists, and the media.

All government agencies, state-owned businesses, and select private companies that participate in public procurement for contracts must implement internal reporting channels, assist employees with reporting, define internal procedures related to reporting and reviewing complaints, and introduce a culture of reporting possible corruption and related incentivizes.

The Take Away The Amendments have been compared by many to the FCA. While both laws provide vast protections and potential remuneration to the whistleblower, the potential award for the whistleblower under the FCA is 30% of the government’s recovery while the potential award under the Amendments is only 10%. Given Ukraine’s longstanding history of corruption, only time will tell if the protections and minimum monetary award offered under the Amendments will be enough to encourage Ukrainians to join the fight against corruption and blow the whistle.   

International Whistleblowing Legislation and America’s False Claims Act

January 6th, 2020 by Marc Raspanti

This is the second part of a two-part article.

In the first of this two-part series, we discussed the success of the United States’ federal False Claims Act (FCA),[1] the rise of international whistleblowers through a study of the Michael Epp case,[2] and what global companies need to do to prepare. In this follow-up, we review exemplary international whistleblowing laws that have been recently enacted and what they mean for global corporate compliance. Our review is not exhaustive but reflects a fair cross section of non-American whistleblowing laws.

Why aren’t international whistleblower laws modeled on the FCA?

Over the last several years, a number of foreign countries have passed whistleblower laws. Implemented purportedly to bolster anti-corruption efforts around the globe, these international whistleblower laws, when compared to the FCA, lack the hallmark elements of a strong and effective whistleblower program.

First, most of these international laws provide no financial incentive to whistleblowers. Of the handful of countries that do provide a monetary award, many cap recoveries at levels that may be deemed inconsistent with the risk taken by whistleblowers. Second, although most laws provide some confidentiality and anti-retaliation protections to whistleblowers, a number require whistleblowers to report in “good faith,” “without malice or negligence,” and based on a “reasonable suspicion” of misconduct, which are fairly subjective standards. Some actually expose whistleblowers to liability if their reports are deemed untrue or not in the public interest. Although the defense bar and industry welcome these prefiling requirements, these limitations do little to promote whistleblowing outside the United States. Third, very few offer whistleblowers financial compensation for retaliatory actions taken against them. We could only find one, the European Union (EU) Whistleblower Directive, that provides for payment of whistleblowers’ attorney fees and costs in litigating retaliation claims. Fourth, unlike the FCA, these laws often lack a clear and distinct regulatory authority or prosecutorial agency in charge of enforcing specific whistleblower laws.

By comparing a broad cross section of these international whistleblower statutes to the FCA, a clear pattern emerges. These laws lack the teeth and scope of the FCA.

Whistleblowing English style

The United Kingdom (UK) was one of the earliest countries to enact whistleblower protection, defined in the Public Interest Disclosure Act of 1998.[3] This act includes both confidentiality and anti-retaliation provisions and provides for financial compensation for retaliatory actions. Notably, there is no cap on the amount of retaliation award. But, unlike the FCA, the Public Interest Disclosure Act does not provide any financial incentives solely for whistleblowing. Whistleblowers must demonstrate that they reasonably believe that their disclosures were made in the public interest to receive anti-retaliation protection. The lack of a monetary incentive and the requirement that a whistleblower reasonably believes that disclosure is in the public interest have led to a lack of any meaningful impact.

Whistleblowing Italian style

Italy first enacted protections for whistleblowers in the public sector in 2012. But it was not until 2017 that Italy extended these protections to whistleblowers in the private sector, the first set of whistleblower private-sector protections ever passed in Italian legislative history. Under the Italian whistleblower laws, entities are prohibited from discriminating or retaliating against whistleblowers, and can be sanctioned if they do. Whistleblowers’ confidentiality is also protected. Despite this recent revitalization, these laws fail to offer any financial incentives for whistleblowing. In addition, whistleblower protection does not attach to reports that are slanderous, defamatory, or maliciously or negligently unfounded. To date, Italy has not fully embraced the concept of private attorneys general vetting out fraud for profit.

Whistleblowing Irish style

In July 2014, Ireland’s Protected Disclosures Act (PDA)[4] came into effect. The PDA established whistleblower protections for both public- and private-sector employees for the first time in Irish history. The PDA provides whistleblowers with both confidentiality and anti-retaliation protections, including immunity for making a report. It also provides whistleblowers with a private right of action and compensation for retaliation. There is no monetary award for blowing the whistle, and any disclosure must first be made to the whistleblower’s employer with a reasonable belief that the disclosure is in the public interest. Ironically, Ireland is home to many of the largest American-controlled companies in the world. Although the PDA includes a private right of action for retaliation, without any financial incentive, it is unlikely that whistleblowers in Ireland will pursue the PDA.

Whistleblowing French style

In 2016, the French Parliament enacted Sapin II: the law on transparency, the fight against corruption, and the modernization of French economic life. For the first time in French history, this law afforded protection to whistleblowers. In fact, the concept is so new that the Council of Europe issued a 2014 pamphlet explaining what whistleblowing is.[5] Unlike the FCA, however, Sapin II offers no financial reward to whistleblowers and actually prohibits any monetary award. Sapin II also defines a “whistleblower” to be one who reveals or reports in a “selfless manner” and in “good faith.”

Although whistleblowers in France do not receive any monetary award, Sapin II does offer protections to whistleblowers, including confidentiality, protection from retaliation, and a promise of no punishment for reporting a violating company. A whistleblower, however, must report the violation to their employer first as a condition of moving forward, a concept eschewed long ago in the FCA. Although Sapin II signifies the French government’s intent to eliminate corruption, and it seems to be evolving legislation, the lack of any financial incentives and the requirement that a whistleblower report in a selfless manner and in good faith are unlikely to motivate French whistleblowers.

Whistleblowing Dutch style

In 2016, the Dutch Whistleblowing Act became law. It requires all employers with 50 or more employees to implement internal reporting procedures and bans retaliation against employees who report fraud. The act also created the House for Whistleblowers to perform both advisory and investigative functions. Again, although whistleblowers in the Netherlands receive identity and retaliation protections, the Dutch act offers no monetary award. Additionally, whistleblowers must both have a reasonable suspicion of wrongdoing and first report wrongdoing internally to their employers in order to be protected.

Whistleblowing German style

In 2016, Germany amended the German Act of Financial Services Supervision. For the first time in the country’s history, it created whistleblower protections for employees of all companies. Prior to 2016, whistleblowers in Germany faced civil and criminal liability under German labor laws for reporting alleged wrongdoing. Whistleblowers in Germany are now entitled to confidentiality protections, along with anti-retaliation protections. However, this protection attaches only so long as the whistleblowers do not intentionally or negligently submit an untrue disclosure. Finally, there is no monetary award in German law. Accordingly, Michael Epp, who received $16 million under the FCA, would have received nothing under German law, had he chosen that alternative. Although Germany has progressed from the days of criminal and civil liability for blowing the whistle, it still has a long way to go to spur German whistleblowers to come forward.

Whistleblowing Canadian style

The Canadian provinces have taken varying and innovative approaches to whistleblower laws. In 2016, the Ontario Securities Commission (OSC) adopted a whistleblower program that included financial rewards for whistleblowers for the first time in Canadian history. Ontario’s program is one of the very few that offers a financial incentive to whistleblowers. By including this financial incentive provision, the OSC confirmed that the key to a successful whistleblower program is financial award, as in the American system.

The amount of a whistleblower award is discretionary. It ranges from 5% to 15% of the total judgment, but it is capped at $5 million. Opponents of this cap believe it may prevent high-level executives from blowing the whistle. Multiple factors determine a whistleblower’s award, including the timeliness and importance of the report, the whistleblower’s cooperation, and any involvement by the whistleblower in the reported misconduct. Whistleblowers only receive a reward if their report results in an enforcement action of more than $1 million. Three recent awards totaling $7.5 million were the first of their kind by a Canadian securities regulator and have garnered a fair amount of attention; however, little information about the cases or the whistleblowers has been revealed.

As with the FCA and almost all the international whistleblower laws, the Ontario law protects whistleblowers against retaliation and offers some measure of confidentiality. Whistleblowers may also file a civil suit against their employer for retaliation, and remedies may include reinstatement and double damages, similar to the FCA. And, as in the FCA, a Canadian whistleblower can be someone other than a company employee, such as a supplier, contractor, or client. Since the Ontario law’s enactment, more than 200 tips have been received by the OSC, making it one of the more currently successful international whistleblower programs. The OSC has made it easy for interested whistleblowers to submit information, via an online web form.[6]

Although the provinces of Quebec and Alberta also recently implemented whistleblower programs, neither offers any financial incentives. There are other interesting differences as well. Of note, under the Alberta Securities Act,[7] a whistleblower is defined as an “employee.” Although this term is widely interpreted to include contractors and affiliates, it does not sweep as wide as the FCA or Ontario law. Quebec’s law recently came under fire for not providing anti-retaliatory protections after a government employee whistleblower was fired after blowing the whistle.[8] In sum, these other Canadian provinces should model themselves after Ontario if they want to truly encourage whistleblowers.

Whistleblowing within the European Union

In April, the European Parliament overwhelmingly approved (591 for, 29 against, 33 abstentions) the EU Whistleblower Directive (Directive), which provides universal whistleblower protections for all potential reporting persons located within EU member states. Interestingly, these protections apply whether or not the reporting person is a citizen of an EU member state. Any EU member state without a whistleblower law (18 of the 28) has two years within which to enact one. This will be an interesting process to watch unfold.

The Directive does not include any financial incentive to whistleblowers. Thus, its potential impact is questionable. Without a comprehensive system of whistleblower protections, many alleged violations may go unreported. Although the Directive requires that whistleblowers reasonably suspect that misconduct occurred, it protects whistleblowers from civil and criminal liability if they had reasonable grounds to believe the disclosures were necessary. The Directive also provides compensation for retaliation, such as reinstatement, lost wages, and damages, including attorney fees.

The Directive has motivated at least one EU country to progress in enacting whistleblower laws. In June, a proposed bill was submitted to the Spanish Parliament that would make Spain the first EU country to apply the Directive. Previously, Spain did not have any specific whistleblower legislation. Of note, the legislation was proposed by Spanish anti-corruption activist group Xnet,[9] not by the legislature itself. In the coming years, it will be interesting to see who drives EU countries to enact whistleblower laws—activist groups, such as Xnet, or the country’s legislators.

In addition to parts of Canada, only a small handful of countries follow the FCA in providing financial incentives for whistleblowers to come forward. For example, in South Korea, the Act on the Protection of Public Interest Whistleblowers became effective in 2011, offering whistleblowers confidentiality and an award of 4% to 20% of recovered funds, up to $2 million.[10] The Ghanaian Whistleblower Act includes a bounty of 10% of the recovered amount or an amount determined by the attorney general, in consultation with the inspector general of police. It also gives whistleblowers the right to apply for police protection if they reasonably believe that they, their families, or their properties are endangered.[11] Slovakia’s newly established Office for the Protection of Whistleblowers, which began operating in March, provides protection to whistleblowers—along with a reward for those reporting on unlawful activities.[12]

Strong anti-bribery laws but weak whistleblower laws

Interestingly, Europeans have demonstrated a clear appetite for passing strong anti-corruption and anti-bribery statutes, such as the U.K. Bribery Act.[13] Violations of the U.K. Bribery Act result in a maximum of 10 years’ imprisonment, along with an unlimited fine and the potential for property confiscation. The act has been characterized as one of the toughest anti-corruption statutes in the world, given its strong penalties and broad extraterritorial reach. Many other EU member states have enacted anti-bribery laws with steep fines.

For example, in the Netherlands, active bribery is an offense pursuant to sections 177 and 178 of the Dutch Criminal Code (the DCC),[14] and passive bribery is an offense pursuant to DCC Sections 363 and 364. Offering or receiving a bribe carries a maximum sentence of six years or a maximum fine of EUR 82,000. Judicial bribery carries a maximum sentence of nine years, or even 12 years if the bribery occurs in criminal proceedings, and a maximum fine of EUR 82,000. Both individuals and entities can be held criminally liable with maximum fines of up to 10% of a company’s annual turnover. Austria’s Criminal Code Amendment Act makes public sector bribery (“Bestechlichkeit”) punishable by imprisonment for terms varying with the amount of advantage obtained (e.g., if the advantage is greater than EUR 50,000, up to 10 years’ imprisonment). For offering a commercial bribe, corporate entity violations are punishable by fines of 15% to 20% of annual revenue.

France’s newly invigorated Sapin II, which focuses on how to prevent bribery and corruption, recognizes the importance of whistleblowers in rooting out fraud. The French authorities have been very vocal in promoting these efforts. Under Sapin II, larger public and private sector entities must adopt an internal whistleblowing system that ensures alerts are documented and addressed. And companies failing to implement measures to prevent and detect corruption can be fined up to EUR 1,000,000 for the breach—even if misconduct has not actually occurred. Directors can be fined up to EUR 200,000.

In Germany, penalties include five years’ imprisonment (10 years’ imprisonment in severe cases involving a member/official of a public body), a criminal fine, and disgorgement. Thus, European legislatures understand that in order to effectively deter companies and individuals from engaging in bribery and corruption, the law must have teeth.

For example, in 2012 the Government of Kazakhstan adopted “Rules on rewarding those who disclose facts of corruption offences or otherwise assist in the fight against corruption.” Under the rules, individuals who report corruption can receive remuneration from the government if the reported facts are confirmed and a court sentences the target of the report.[15] But when it comes to whistleblower statutes, the laws are mostly ineffective. Philosophically, many countries have not embraced the concept or benefits of private whistleblowers. With the number of international whistleblower laws growing, however, only time will tell if they will measure up to the FCA without identified financial incentives and stringent whistleblower protections.

Conclusion

The 1986 amendments to the American FCA revealed the untapped potential of whistleblowers to uncover fraud, waste, and abuse and to be the engine leading the billions of dollars in recoveries. We believe the confluence of increasingly global business, coupled with worldwide laws that normalize whistleblowing without financially incentivizing it locally, has set the stage for the next big wave of FCA development: a rise in international whistleblowers.

To avoid being caught in the growing riptide, US companies with worldwide operations must take compliance seriously and manage their FCA risk globally. As more international whistleblowers come forward, a legitimate global compliance program must have effective procedures for employees and others to report concerns and provide protections against retaliation.

Acknowledgments

The authors acknowledge and express their thanks to Erica Jaffe, Esq., for her contributions to this article. Jaffe is an associate in Morgan Lewis’s litigation practice in Philadelphia. They also thank Pamela Coyle Brecht, Esq., chair of Pietragallo’s Qui Tam/False Claims Act National Practice Group, for her insight, scholarship, and assistance with this article.

About the authors

Marc S. Raspanti, Esq., founded both the firm’s White Collar Criminal Defense Practice Group and its National Qui Tam/False Claims Act Practice Group. He previously served as a Philadelphia prosecutor. Meredith S. Auten, Esq., concentrates her practice on defending FCA investigations and related fraud litigation. Raspanti and Auten serve as longstanding co-chairs of the American Bar Association National Qui Tam Subcommittee.

Takeaways

  • Many foreign countries have passed whistleblower laws in the last few years.
  • Unlike the False Claims Act, most of these international whistleblower laws lack financial incentives and anti-retaliation protections to encourage whistleblowing.
  • These international whistleblower laws lack the punch of international anti-corruption laws.
  • Global business and worldwide laws that normalize whistleblowing without financially incentivizing it locally have set the stage for a rise in international whistleblowers.
  • Companies with robust compliance programs and processes will be the best prepared to address the rise in international whistleblowers.

1 31 U.S.C. § § 3729-3733.2 United States of America ex rel. Michael Epp v. Supreme Foodservice AG, No. 10-CV-1134 (E.D. Pa. 2014), .3 Public Interest Disclosure Act 1998, c. 23 (U.K.), .4 Protected Disclosures Act 2014, no. 14 (Ir.), .5 Council of Europe, La Protection Des Lanceurs D’alerte, 2014, .6 “Submit a report,” Office of the Whistleblower, accessed October 25, 2019, .7 Securities Act, R.S.A. 2000, cS-4 (Can.)8 Benjamin Shingler, “Quebec’s ombudsman slams Agriculture Ministry for firing pesticide whistleblower,” CBC News, June 13, 2019, .9 Xnet, Template for a Law on Full Protection of Whistleblowers, last updated May 9, 2015, .10 Anti-Corruption Helpdesk, Whistleblower Reward Programmes, Transparency International, May 26, 2017, .11 Anti-Corruption Helpdesk, Whistleblower Reward Programmes.12 Spectator Staff, “A new authority will protect Slovak whistleblowers,” SME, February 19, 2019, .13 Bribery Act 2010, c. 23 (U.K.).14 Dutch Criminal Code, amended 2012, .15 OECD, OECD Integrity Scan of Kazakhstan, June 15, 2017, .

Copyright 2020 CEP Magazine, a publication of the Society of Corporate Compliance and Ethics (SCCE).

Genetic Testing Gold Rush Gives Rise To Fraud Allegations

December 10th, 2019 by Alexander Owens

On Sept. 27, the U.S. Department of Justice announced criminal charges against 35 individuals across various jurisdictions, allegedly involved in genetic testing fraud schemes that cost taxpayers over $2.1 billion.

The government asserted that the individuals had engaged in audacious schemes to target seniors and the disabled through the ordering of cancer genetic screening, or CGx, laboratory tests. CGx tests are performed to screen patients for genes that may show that a patient is predisposed to developing certain cancers.

The DOJ alleged that physicians were bribed to order these very expensive DNA tests. The government claimed that in many cases the physicians did not even treat the patients or only saw them via a cursory telemedicine consultation.

U.S. Attorney Bobby L. Christine of the Southern District of Georgia warned that “[w]hile these charges might be some of the first, they won’t be the last.” Christine’s warning may prove prescient.

Just last month, Reuters labeled genetic testing in the elderly as the “[n]ew frontier in health fraud.” Genetic testing fraud indeed appears to be very much on the rise and these recent indictments are not the DOJ’s first foray into the area. The federal government has launched over 300 investigations into alleged fraud in the genetic testing industry, many of which are almost certainly ongoing.

Just as several years ago the toxicology industry became inundated with fraudulent schemes, genetic testing, which is similarly lucrative and prone to abuse, is particularly fertile ground for fraudulent diagnostic testing schemes.

Genetic Testing: The Basics

Genetic tests are not limited to CGx cancer screenings. Genetic testing can be used in various other respects, both legitimate and illegitimate. For example, pharmacogenetic/pharmacogenomic, or PGx, tests are another major growth area in the genetic testing arena where concerns over fraudulent conduct have grown substantially in recent years.

PGx tests, when used legitimately, are aimed at identifying genetic variations suggesting that a patient may have an unusual reaction to a specific medication (e.g., a certain genetic variation may show that a patient may metabolize a medication at an unusually low or high rate). PGx tests may, therefore, be useful if a patient has shown an otherwise unexplained reaction to a certain medication.

Yet, the scientific evidence supporting PGx tests (and genetic testing generally) in the vast majority of cases remains quite slim. To date, Medicare has generally recognized that PGx and other genetic tests are medically necessary in only a very narrow set of cases. Medicare administrative contractors have issued numerous local coverage determinations making that clear.

Even where no local coverage determination is at issue, to be reimbursable, a test must still be medically necessary and thus the absence of an local coverage determination addressing a particular test does not mean that the test meets the medical necessity standard.

Further, the Medicare claims processing manual explains that screening tests (genetic or otherwise) are generally not covered by Medicare.[1] A practitioner who routinely performs genetic tests on patients, regardless of each patient’s clinical history and presentation, would almost certainly run afoul of Medicare’s requirements.

Despite the currently limited utility of genetic tests, Medicare has paid billions for these services. Between 2015 and 2018, Medicare payments for genetic tests more than doubled, to well over $1 billion in 2018. As the recent indictments show, the widespread use of these tests may have less to do with clinical utility and more to do with financial incentives.

Other genetic testing cases show that the DOJ’s recent crackdown is not a flash in the plan.

Given the sums of money at issue, the genetic testing industry has become a magnet for enterprising individuals. As has occurred in health care bonanzas of past, with the potential for great riches have come bad actors. Fraudulent schemes vary from the more nuanced to the facially egregious.

Regulators and whistleblowers have taken notice. In the indictments discussed above, the scheme fell on the latter end of the spectrum, involving payments to doctors to issue referrals for patients that, in some cases, they never even saw. More nuanced but not doubt troubling schemes have drawn the DOJ’s ire. Recent False Claims Act settlements are instructive.

Just weeks after the September indictments, the DOJ announced a False Claims Act settlement on Oct. 9, with pharmacogenetic lab UTC Laboratories Inc. and three of its principals. The lab agreed to pay $41.6 million with the three individuals responsible for another $1 million. The case resolved allegations, brought to light via numerous whistleblower complaints, that the lab paid kickbacks to doctors as well as marketers and relatedly billed for medically unnecessary tests.

The physician kickbacks were, as the government described them, thinly disguised as seemingly legitimate payments for physician work on a UTC-led clinical study. In fact, the government alleged, the payments were used to leverage referrals from the physicians. The clinical study work was purportedly no more than smoke and mirrors.

The UTC case, more so than that set out in the recent indictments, is likely more indicative of the sort of kickback schemes most common in the genetic testing industry, where the kickback is, at least to some degree, concealed as a seemingly legitimate form of remuneration.

In fact, the physician kickback in the UTC case is remarkably similar to that alleged by the DOJ in another multimillion dollar genetic testing fraud settlement involving Primex Clinical Laboratories LLC and its owner, where Primex purportedly concealed its kickbacks as payments to doctors for providing clinical data to the lab. Whenever there is a remuneration arrangement between a laboratory and a referral source (be it in cash or otherwise), the DOJ and relators are likely to take note.

The fact that the DOJ, in both the UTC and Primex civil cases, held individuals to account is notable. Despite robust revenue, oftentimes labs may be thinly capitalized and may move funds to individuals, trusts or shell companies to hide assets from regulators. Individual accountability helps to mitigate those concerns.

That is to say, if the DOJ, consistent with the Yates Memo, continues to hold individuals accountable, the government may be able to avoid what so often occurred during the (still ongoing) toxicology lab crackdown that started earlier this decade: Labs billed the government for billions, moved assets out of their corporate coffers, sought bankruptcy protection once regulators placed them in the crosshairs and avoided the full brunt of FCA liability.

In an earlier January FCA settlement, GenomeDx Biosciences Corp. agreed to pay $1.99 million to resolve allegations that it billed Medicare for medically unnecessary genetic tests. Unlike in Primex, there was no claim that the lab had paid kickbacks to obtain its referrals. While the DOJ has shown a preeminent focus on holding companies and individuals accountable for kickback schemes, GenomeDx serves as a warning to labs that are engaged in billing government payors for tests that are simply unnecessary, a substantial concern given the narrow set of circumstances where genetic testing has been deemed necessary by the Centers for Medicare and Medicaid Services and its contractors.

Ultimately, genetic testing schemes are likely to fall into a discrete number of fact patterns (which may overlap in the event multiple arrangements are at play).

Remuneration to Physicians

As the UTC and Primex cases show, remuneration to physicians for referrals may be disguised as superficially legitimate payments (e.g., consultation fees), services or other forms of remuneration. In some cases, a physician (or his or her practice) may have an equity (or other financial interest) in the genetic testing lab which may give rise to violations of the Anti-Kickback Statute and/or Stark Law.

Payments to Marketers

DOJ has made clear that paying commissions to independent contractors for referrals runs afoul of the Anti-Kickback Statute. In the UTC case, the lab allegedly paid independent marketers for referrals on a commission basis. The facts of UTC are not unusual. It is common practice in the genetic testing industry for labs to pay independent marketers for referrals. In such cases, both the marketers and the lab may be held liable.

Waiving Copays and Other Forms of Remunerations to Patients

Given that genetic testing services can cost upwards of $5,000 per test, patient copays tend to be substantial. In order to avoid scaring off patients via sticker shock, laboratories may waive or substantially reduce copays or similar patient payment obligations. If copay waivers (or other forms of financial assistance) are provided systemically or otherwise without legitimate consideration of a patient’s financial condition, then regulators may find that the arrangement violates the Anti-Kickback Statute.

Policies That Lead to Medically Unnecessary Tests

Practices, particularly those with a financial interest in a genetic testing lab, may institute policies that coerce their practitioners to order genetic tests when they are otherwise unnecessary. These policies may be issued under the guise of the standard of care, claiming that the practice is providing cutting-edge personalized or precision medicine services to its patients. Even in the rare case when a genetic test is necessary to identify a specific genetic variation, an entity may have a policy that pushes physicians to order additional, unnecessary tests to identify other genes.

Upcoding

In some cases, labs may be upcoding, which means billing payors for a more expensive test (or panel of tests) than that which was actually performed. In that genetic testing is relatively new, Medicare and other insurance auditors may find it difficult to adequately crack down on such practices as the auditors may not be fully familiar with the relevant coding standards.

Conclusion

If fraud hotbeds of the past are any indication (e.g., toxicology labs and compounding pharmacies), once the federal government and relators take notice of rapid growth and noncompliance in a specific corner of the health care industry, they are not likely to sit idly by as untoward amounts of government funds are siphoned off to bad actors. The recent indictments as well as the UTC, Primex and GenomeDx cases are likely just the tip of the genetic testing iceberg as whistleblowers and regulators continue to scrutinize this still growing industry.

[1] Medicare Claims Processing Manual, Ch. 16, § 120.1 (“Tests that are performed in the absence of signs, symptoms, complaints, personal history of disease, or injury are not covered except when there is a statutory provision that explicitly covers tests for screening as described.”).

Alexander M. Owens, Genetic Testing Gold Rush Gives Rise To Fraud Allegations, Law360 (November 12, 2019), https://www.law360.com/articles/1218668/genetic-testing-gold-rush-gives-rise-to-fraud-allegations

The Third Circuit Rules that the FCA’s “Alternate-Remedy Provision” Does Not Provide a Relator the Right to Intervene in a Criminal Proceeding for a Piece of the Criminal Restitution

November 15th, 2019 by Erik Giannitrapani

On October 28, 2019, the Third Circuit became the most recent circuit court to determine that the False Claims Act’s (“FCA”) other alternate-remedy provision, 31 U.S.C. § 3730(c)(5), does not give a relator the right to intervene in a criminal proceeding. United States v. Wegeler, 2019 WL 5538568, — F.3d — (3d Cir. Oct. 28, 2019). The Third Circuit, in an opinion written by Judge Joseph A. Greenaway, Jr., joined the Ninth and Eleventh Circuits in prohibiting a relator from intervening in a criminal proceeding.

The relator, Jean Charte, filed a qui tam lawsuit against defendants American Tutor, Inc., James Wegeler Jr., James Wegeler Sr., and Sean Wegeler, alleging that the defendants submitted false reimbursement claims to the United States Department of Education. Charte cooperated with the government as required under the FCA statute and provided the government with information that “directly led to an investigation that resulted in the criminal prosecution of Wegeler, Sr., for tax fraud and tax evasion.” Id. at *1. Wgeler Sr. ultimately entered into a plea agreement that required him to pay $1.5 million in restitution. Charte tried to intervene in the criminal proceeding, claiming that the criminal plea was an alternate-remedy under the FCA and that she was entitled to a relator share of the recovery but was denied.

Charte appealed based primarily on the theory that a criminal proceeding constitutes an alternate-remedy, entitling her to intervene in the criminal action and recover a share of the proceeds. The Third Circuit rejected her claim on the grounds that “[s]uch a holding would be tantamount to an interest in participating as a co-prosecutor in the criminal case of another.” Id. at *2.

The Relator’s Position

The relator asked the Court to adopt the position that a relator has the right to intervene to recover a share of the proceedings derived from a proceeding that the government pursues under the alternate-remedy provision. Id. at *5.  The relator did not seek to “intervene in the criminal proceeding proper.” Id. at *7.The relator merely wanted to intervene “to protect her interest and that of the United States in her share.” Id. The Third Circuit did not find this argument persuasive holding that the relator did not have standing to intervene in the criminal prosecution of another and that even if the relator did have standing, the sole remedy would be to commence or continue an FCA action.

The Courts Decision

In denying the relators appeal, the Third Circuit reviewed the plain text of the FCA statute as well as Article III of the Constitution. The FCA provides a relator the “right to continue as a party to the action.” 31 U.S.C. § 3730(c)(1). This encompasses “a suite of rights to participate in a proceeding pursuant to the alternate-remedy provision” and the “right to 15 percent but not more than 25 percent of the proceeds that result from such an action.” Wegeler, 2019 WL 5538568 at *5.

According to the Court, asserting the rights provided to a relator under § 3730(c)(1) would be squarely at odds with Article III of the Constitution and the “long held tradition of American prudence that ‘a private citizen lacks a judicially cognizable interest in the prosecution or non[-] prosecution of another.” Id. at *6 (quoting Linda R.S. v. Richard D., 410 U.S. 614 (1973).

The Court analyzed the relator’s contention that her vested interest in a share of the restitution confers standing to the relator on matters relating to FCA complaints. See Vermont Agency of Natural Resources v. U.S. ex rel. Stevens, 529 U.S. 765 (2000). The Court recognized that the relator has standing to prevent the violation of the relator’s award but found that “the district court in the FCA suit remains responsible for adjudicating the Relator’s share of the alternate proceeding.” Wegeler 2019 WL 5538568 at *7. Since the District Court was the appropriate place to adjudicate the relator’s share under the statute, relator did not have standing to intervene in a criminal matter.

The Third Circuit expressly did not opine on whether criminal restitution constitutes an alternate-remedy, or whether the relator would have been precluded from receiving proceeds from a claim ultimately resolved under the Internal Revenue Code.

Conclusion

While the Third Circuit did not rule on whether criminal restitution ultimately constitutes an alternate-remedy as defined by the FCA, Wegeler provides a reminder to relators that their rights in criminal matters are extremely limited. In light of the instruction in the “Yates Memo” that the government seeks to hold individuals who perpetrated the fraud responsible, often criminally, it is important for whistleblowers to be cognizant of the fact that they may not have a right to criminal restitution and that a proactive and diligent counsel can help ensure that the government recognizes their contributions.


Storm Clouds: Private Equity and the False Claims Act

October 24th, 2019 by Alexander Owens

The United States recently filed a False Claims Act Complaint in Intervention against Florida-based compounding pharmacy Patient Care America (“PCA”), two PCA employees, as well as the private equity (“PE”) firm that acquired PCA and helped manage the company.1 The scheme alleged by the government was a common one: the payment of kickbacks for referrals of expensive compound drugs, which were often paid for by Tricare, a federal healthcare program. What was uncommon was the federal government’s intervention against a PE firm. The government’s efforts have paid off. On September 18, 2019, the government announced that it had settled the case, with the pharmacy and its private equity owner agreeing to pay over $21 million to the government.2

Similarly, in Commonwealth ex rel. Martino-Fleming v. South Bay Mental Health Center, Inc.,3 the relator filed suit against a mental health services provider and its PE firm owner. While the United States declined to intervene, the Commonwealth of Massachusetts intervened in the case and has sought to hold the PE firm liable.4

The Patient Care America and Martino-Fleming cases may reflect a renewed focus on PE firms in the False Claims Act (“FCA”) arena. While it remains to be seen whether the cases are omens, outliers, or indicative of a potentially more longstanding, but unstated, governmental focus on private equity,5 PE firms should proceed with caution when investing in and managing healthcare companies and other entities subject to FCA enforcement. Meanwhile, their counsel should endeavor to understand the unique financial and managerial dynamics that may place PE firms in the government’s crosshairs. Unlike, say, mutual fund investments, which a typical defense attorney is likely to fully grasp, private equity remains a niche investment area largely limited to institutional investors and high net worth individuals. Private equity operates in a fundamentally different manner than mutual funds and similar investments. Defense counsel must fully appreciate the unique dynamics that define private equity investments in order to represent their clients in FCA investigations and lawsuits. To that end, counsel should understand the financial structures of such investments, the due diligence process leading up to PE transactions, and the oversight role played by PE firms in managing their investments.

I. Private Equity Deals: A Primer
Private equity transactions nearly always operate under a “buy to sell” model. The PE firm (or a consortium of firms investing together) effectuates a leveraged buyout (“LBO”) of the target company, using substantial amounts of debt (the titular leverage) to finance the acquisition. Oftentimes the debt to equity ratio is in the range of 2:1 to 3:1. The cash flow from the acquired company is used to service the multimillion dollar debt from the LBO, which takes years to pay off. The debt is substantial as to size and interest rates, which, for subordinated debt, can eclipse 15 percent per year.

PE firms believe that by acquiring the company and taking over its management they can drive growth and profitability, allowing them to sell a larger, more profitable company at a later date (typically around four to six years after the LBO) at a substantial profit. The problem with the managerial facet of the PE model is that the more the PE firm takes over operations, the more likely it is that the government (or a relator) may accuse the firm of knowingly playing a role in fraudulent conduct occurring at its portfolio company, raising the specter of FCA liability.

The risk is particularly acute in highly regulated industries like healthcare. Healthcare is not just a perennial focus of FCA enforcement but has, particularly in recent years, become a major area of PE investment, creating a regulatory perfect storm for PE firms. Healthcare companies often operate in fragmented, high-growth markets and have robust profit margins, making them (at least absent compliance problems) ideal targets for an LBO. Yet PE dealmaking as a whole remains down, with such transactions declining nearly 20 percent since 2014, the private equity peak during the current bull market. That likely reflects that PE firms, flush with cash from still relatively low interest rates, are engaged in stiffer competition for target companies. Rather than risk overpaying for a safer company, some PE firms may be tempted to purchase companies that appear to be relative bargains but which may be lemons due to compliance shortcomings. While investing in a company that becomes the target of government enforcement may itself prove financially devastating (the road to healthcare riches is littered with companies pushed into bankruptcy due to compliance issues), when the PE firm itself becomes the target of government scrutiny (and particularly government intervention), the financial and reputational risk is far more acute.

II. Due Diligence
Before any acquisition, a PE firm engages in extensive due diligence into both the financial and regulatory facets of the target company.6 Given the massive amount of debt that the PE firm will be obtaining, there is little room for error in this regard. A single misstep in analyzing the target company’s legal compliance could spell disaster if, following the acquisition, the company faces an enforcement action. This is, in some respects, helpful in terms of contesting FCA liability, given the FCA’s requirement that wrongdoing be knowing. A PE firm may be able to argue that, had it known that the portfolio company was engaged in fraud, it never would have invested in the company. Yet that may be no silver bullet. A PE firm may be seen as turning a blind eye toward compliance concerns in the pursuit of profits (particularly in cases where the target company sports remarkable growth and profits).

Government attorneys and investigators will likely seek all analyses performed and communications made during due diligence, at least when the allegedly fraudulent conduct began before the buyout. Once retained, counsel for the PE firm should do the same. Much of the information a PE firm collects via due diligence is retained in a virtual “data room,” a digital repository of documents provided during due diligence, making it easy for defense attorneys (as well as the government) to collect. The data room will also tend to be organized by subject matter (e.g., compliance, financial statements, and marketing documents will be grouped together), greatly facilitating document searches and review. Thus, not only will the data room provide an extensive cache of documents concerning the origin of the PE firm’s relationship with the portfolio company, but this may also very well be the easiest evidence in the case to collect and review.

The review of due diligence evidence should not necessarily be limited to the client PE firm’s own due diligence efforts. When multiple PE firms consider an acquisition as part of a consortium (a “club deal,” in industry lingo), the partner PE firms will often perform their own due diligence and share their analysis, questions, and concerns about the target company. Debt lenders, who put up most of the funds for any LBO, tend to perform fairly extensive due diligence as well that may be shared with their PE firm partners. If another PE firm or a lender has performed due diligence that puts the target company’s compliance in question, that will likely be the subject of government scrutiny. Even worse, if a potential partner lender or partner PE firm backs out of a transaction due to compliance concerns, that may reflect poorly on the PE firm that ultimately purchases the target company.

Accordingly, the due diligence process may cut both ways. If the due diligence was vigorous and unearthed no compliance concerns, the PE firm may be able to argue that it relied on its experts and had no knowledge of wrongdoing when it purchased the company. Even then, defense counsel must carefully consider that relying on a due diligence report may amount to an advice of counsel defense, which will waive the attorney client privilege over the operative subject matter, including any attorney-client communications suggesting that the scrutinized practice was illegal.7 In some cases, the waiver may be so broad as to waive privilege over relevant advice offered to the PE firm up to and including trial.8 In crafting a defense that relies on legal advice offered during due diligence (or at any other juncture), defense counsel should make certain to review all legaladvice offered to the PE firm.

If due diligence has raised substantial concerns over compliance — particularly if those concerns go unaddressed following an acquisition — then the due diligence process may become a focal point of the government’s case. Even beyond the question of conventional “direct” liability under the FCA, a PE firm that knowingly acquires, in whole or in part, a company engaged in fraud may face claims of conspiratorial liability — the theory being that the PE firm has paid the target company’s owners for an opportunity to partake in the management and fruits of the fraudulent enterprise. Conspiratorial liability is particularly concerning given the wide net it casts as to both liability and damages. Pertinent considerations include the following:

  1. a tacit agreement, even shown entirely through circumstantial evidence, can establish conspiratorial liability;9
  2. a conspirator need not engage in an “over act” to be held liable, only a single member of the conspiracy needs to do so;10
  3. the intracorporate conspiracy doctrine’s application is unsettled in the context of the FCA generally and the PE firm/portfolio company relationship specifically;11
  4. a party that enters into a conspiracy may be liable not just for conduct going forward but also for conduct occurring before his or her entrance into the conspiracy;12 and
  5. conspiratorial liability under the FCA is joint and several.13

The financial dynamics of a PE deal may also go under the microscope as sunk cost dynamics come into play. Due diligence is typically a lengthy, multimillion dollar endeavor and many of the PE firm’s employees working on the proposed transaction will be focused on the transaction at the expense of other potential or actual investments. The enemy of a PE firm is client money sitting idle (so-called “dry powder”), and this is doubly true when interest rates rise and the window for economically ideal private equity transactions begins to close. In some transactions, a termination fee may be triggered if the PE firm backs out of the deal. Particularly if compliance issues arise late in the due diligence process, then the government may claim that the PE firm was “in too deep,” such that it was unwilling to back out despite compliance qualms. Defense counsel must be able to explain why, at all times, the client was engaged in a good faith assessment of the acquired company, instead of one swayed by the attractive financial figures that so often go hand in hand with fraudulent business practices.

Defense counsel should therefore focus on four issues:

  1. what due diligence was performed by the PE firm;
  2. what due diligence was performed by lenders and any proposed or actual partner PE firms;
  3. whether the PE firm, after the acquisition, received any additional compliance analyses (from counsel or other sources); and
  4. the financial implications for the PE firm if the deal was terminated due to compliance concerns.

III. A Fish Rots from the Head Down:
Management and FCA Liability Private equity’s edge compared to mutual funds and other passive investments (in addition, of course, to high leverage) is managerial know how. That same edge becomes an Achilles’ heel in the context of the FCA. As previously noted, PE firms operate under a “buy to sell” model. The government and relators are likely to argue that PE firms are not passive investors and have knowingly taken a role in facilitating fraudulent conduct. Notably, in the Martino-Fleming matter, in adjudicating the PE firm’s motion to dismiss the relator’s complaint, the district court recognized that:

Because it is alleged that H.I.G. [the private equity firm] members and principals formed a majority of the [portfolio companies] C.I.S. and South Bay Boards, and were directly involved in the operations of South Bay, the motion to dismiss the H.I.G. entities is also denied. A parent may be liable for the submission of false claims by a subsidiary where the parent had direct involvement in the claims process.14

The district court’s logic in the Martino -Fleming decision is generally consistent with another district court case (albeit not one involving a PE firm), United States ex rel. Schagrin v. LDR Industries, LLC,15 where the district court held that individuals who own and manage a company knowing it to be engaged in fraud “can be liable under the False Claims Act for failing to rectify the situation.”16 Ultimately, Martino-Fleming, Schagrin, and the wide breadth of FCA liability generally, may put PE firms at risk.17

The recent scrutiny on private equity is understandable. PE firms tend to be highly active managers of their portfolio companies and, given the “buy to sell” approach, are typically focused on effectuating high growth in the acquired company. PE firms do not just pore over balance sheets but often get involved in various managerial tasks in the quest for growth and profits.18 By providing managerial knowhow, the PE firm can take the reins and build a more profitable company that can then be sold at a handsome profit. This managerial role is one of the key characteristics differentiating PE investments from more conventional passive investments.

Either individually or with partner PE firms, a PE firm will tend to own a majority of the portfolio company’s equity. Few PE firms will take the risk of a sizable investment in an illiquid asset unless they hold a controlling portion (either alone or with partner PE firms) of the portfolio company’s voting shares. Given the sums of money at issue, small margin for error (given the need to service the heavy LBO debt), and the need to drive growth and profitability for a future sale, PE firms tend to have multiple seats on the acquired company’s board, have full power (given their equity stake) to hire and fire executives, and may also take part in management decisions outside the scope of the board.

Yet whether the PE firm’s management of its portfolio company is sufficient to create FCA liability is a fact-intensive matter. The question may largely boil down to whether the PE firm was handson enough to be aware of any compliance failures and, if it was so aware, what steps it took to remediate any compliance problems. The inquiry will depend not just on the general nature of the PE firm’s managerial activity (which may range from nearly day-to-day management to only high-level oversight) but also on the extent of the problematic activity. If the fraud afflicts a substantial part of the company’s business model, then it will be more difficult for the PE firm to argue that it was unaware of the conduct. For example, in the Patient Care America case the alleged kickback appeared to be a major facet of the portfolio company’s business model, one that arguably could not have fallen through the cracks of private equity oversight given its size and nature. Unlike more nuanced regulatory mandates, the Anti- Kickback Statute, at issue in Patient Care America, is likely to be well within the ken of most healthcare investors. Whether the government would have sought to hold the PE firm liable had the alleged fraud been subtler is unclear. Meanwhile, if the scrutinized conduct is limited in time and scope, then a PE firm may be able to prove it was unaware of the allegedly improper activity. PE firms are, after all, not omniscient. Yet this is a troubling dynamic. It is likely to be the case that the greater (and, thus, more obvious) the fraud, the greater the risk that the government will seek to hold the PE firm liable.

Individual PE firms also frequently focus on certain industries. If a PE firm is familiar with a specific industry, it will make it more difficult for the firm to claim that it was ignorant of the regulatory mandates governing that industry, either in relation to its pre-LBO due diligence or its subsequent oversight of the company. In fact, in the government’s Complaint in Intervention in Patient Care America, prosecutors noted that the private equity firm was a serial investor in the healthcare space.19 Accordingly, defense counsel should fully investigate the role of the PE firm as an owner and a manager of the portfolio company, focusing on the following:

  1. the percentage of shares owned by the firm and any partner PE firms;
  2. the PE firm’s role on the portfolio company’s board and any other managerial roles it may have (e.g., whether the PE firm has members on the compliance committee);
  3. the PE firm’s experience, if any, in the specific industry;
  4. the PE firm’s knowledge of the legal requirement(s) that the portfolio company has potentially violated;
  5. the extent of any compliance failures;
  6. the PE firm’s knowledge of any compliance concerns; and
  7. the PE firm’s efforts (if any) to reign in the scrutinized conduct and effectuate compliance.

IV. Financial Undercurrents
Given that the lifeblood of privateequity is the LBO, the financial structure at play makes a PE firm an attractive target for FCA enforcement. PE firms may siphon off much of the portfolio company’s profits in the form of distributions (e.g., dividends) and fees. As the Patient Care America case shows, at least in some cases, the government may think twice about allowing PE firms to profit off the alleged fraud without facing liability. Defense counsel should also keep in mind that, because of the substantial debt service from an LBO, much of the cash flow from an acquired company will be used to service debt. In addition, PE firms typically do not want a cash-rich portfolio company and thus will push the company to spend any excess cash, typically on growth initiatives (e.g., acquisitions) or by paying down debt early.

This all creates a dynamic in which the portfolio company may be unable to fund an agreeable settlement with the government, as the allegedly ill-gotten gains have already been sent to investors (or reinvested into the portfolio company). Even companies sporting $100-million-plus valuations may have only a few million dollars in cash on hand.20 This financial reality may force the government’s hand in pursuing a PE firm in that the lowest hanging fruit may not have the funds to finance an adequate settlement. Relatedly, and perhaps more obviously, PE firms tend to have deep pockets and access to additional capital, making them particularly appealing targets when damages are substantial and the entity in which they have invested is strapped for cash.

Even if due diligence fails to unearth any problems, a PE firm that unwittingly invests in a company that it later learns is noncompliant may find itself between a rock and a hard place. On the one hand, the PE firm can allow the problematic conduct to continue and potentially face the full wrath of regulators if the government takes notice, a particularly risky gambit. On the other hand, the PE firm can use its power to ensure compliance. This is the safer approach but one that is not without financial consequences.21 In cases where the portfolio company is financially dependent upon the alleged fraud, a shift away from such practices could put the company’s ability to service its debt at risk, leading to insolvency or the need to expend substantial sums of money to pivot toward other high profit, yet compliant, business opportunities.

Defense counsel should understand these financial dynamics not just in the context of internal investigations and contesting liability, but also in approaching any settlement with the government. In cases where settlement is prudent but the portfolio company is too financially stretched to finance an acceptable settlement, the PE firm may consider providing the portfolio company with funds to effectuate the settlement. If the government can be provided a fair recovery via the portfolio company (even if financed, in part, by the PE firm), that may head off an enforcement action against the PE firm itself, saving it from additional liability and the untoward reputational harm that would flow from a direct action against the PE firm.

The reputational harm from an FCA lawsuit can hardly be gainsaid. PE firms, which make big, long-term, and relatively undiversified bets using client money, live and die on their reputation and ability to show investors that they are investing in, and managing, companies in a prudent manner. A PE firm subject to an enforcement action may be put in a particularly unenviable position if it has failed to enforce compliance at its portfolio company. In defending itself, the PE firm could be forced to argue that it was unaware of the alleged fraud. While that may be singularly helpful in contesting the government’s case, it may reflect poorly on the PE firm’s due diligence and managerial ability, skills which are paramount in the eyes of a PE firm’s clientele.22 Defense counsel should approach cases in a manner which can, to the extent possible, minimize reputational harm.

V. Conclusion
Ultimately, as private equity firms continue to invest in industries that have high FCA exposure like healthcare, it may be that cases like Patient Care America and Martino-Fleming become more common. Defense counsel should become attuned to the complex workings of private equity, both before and after the operative transaction, and how those dynamics may lead to government scrutiny.

Notes
1. United States ex rel. Medrano, et al. v. Diabetic Care RX, LLC, et al., 15-cv-62617, Dkt. 36 (S.D. Fla.) [hereinafter Patient Care America].
2. Compounding Pharmacy, Two of Its Executives, and Private Equity Firm Agree to Pay $21.36 Million to Resolve False Claims Act Allegations, U.S. Dept. of Justice, Sep. 18, 2019, https://www.justice.gov/ opa/pr/compounding-pharmacy-two-its -executives-and-private-equity-firm -agree-pay-2136-million.
3. Commonwealth ex rel. Martino- Fleming v. South Bay Mental Health Center, Inc., 15-13065-PBS (D. Mass.).
4. Martino-Fleming, 15-cv-13065, Dkt. 84 (D. Mass.).
5. While historically the government has rarely intervened against private equity firms, lack of intervention does not equate to lack of scrutiny. In many cases involving PE-backed companies, the government may still investigate the PE firm and the PE firm may help to fund any settlement. Thus, even if in those cases, if formal intervention against the PE firm is avoided, the PE firm is still forced to face a not insubstantial regulatory burden.
6. Evidence from the due diligence process will, of course, be less pertinent if the portfolio company began its allegedly fraudulent conduct following the buyout.
7. E.g., United States ex rel. Lutz v. Berkeley Heartlab, Inc., 9:11-CV-1593-RMG, 2017 WL 1282012, at *3 (D.S.C. Apr. 5, 2017) (“When a party asserts an advice of counsel defense, he waives the attorney-client privilege as to the entire subject matter of that defense.”); United States ex rel. Cairns v. D.S. Med., L.L.C., 1:12CV00004 AGF, 2017 WL 3887850, at *3 (E.D. Mo. Aug. 31, 2017) (“When a party raises an advice of counsel defense, all advice on the pertinent topic becomes fair game.”) (internal quotation marks omitted).
8. E.g., Lutz, 2017 WL 1282012, at *3 (“Courts in this circuit [the Fourth Circuit], have found that when a party asserts an advice of counsel defense that the privilege waiver applies to advice received during the entire period the misconduct is alleged to have been ongoing — even up to and during trial”).
9. United States ex rel. Millin v. Krause, 1:17-CV-01019-CBK, 2018 WL 1885672, at *12 (D.S.D. Apr. 19, 2018) (“A plaintiff need not provide proof of express agreement, but must establish a tacit understanding between the parties which may be shown wholly through the circumstantial evidence of each defendant’s actions.”) (internal quotation marks omitted).
10. See, e.g., United States ex rel. Amin v. George Washington U., 26 F. Supp. 2d 162, 165 (D.D.C. 1998) (“The court is mindful that an overt act need not be pleaded against each defendant in a conspiracy, because a single overt act by one of the conspirators can support a conspiracy claim, even on the merits.”).
11. The court in Martino-Fleming found the intercorporate conspiracy doctrine applied, at least on the pleadings, to a PE firm’s relationship with its portfolio company, but explicitly noted that the complaint could be amended should discovery reveal that the PE firm and its portfolio company were “independent centers of decision-making.” Martino -Fleming v. S. Bay Mental Health Ctr., Inc., 334 F. Supp. 3d 394, 403 (D. Mass. 2018). It should be kept in mind that whether the intracorporate conspiracy doctrine applies at all in FCA cases remains an open question. E.g., Krause, 2018 WL 1885672, at *12 (describing split in authority over whether the intracorporate conspiracy doctrine applies in the context of the FCA). Further, where the alleged conspiracy precedes the buyout, application of the doctrine may be more difficult to establish because the parties would then be corporate strangers.
12. See, e.g., In re Lower Lake Erie Iron Ore Antitrust Litig., 710 F. Supp. 152, 154 (E.D. Pa. 1989) (finding, in antitrust case, the “prevailing” view that the “late joinder” rule applies equally to civil as well as criminal conspiracies); In re Am. Principals Holdings, Inc. Securities Litig., M.D.L. 653, 1987 WL 39746, at *19 n.10 (S.D. Cal. July 9, 1987) (applying the late joinder rule in a securities case).
13. See, e.g., United States v. Bd. of Educ. of City of Union City, 697 F. Supp. 167, 177 (D.N.J. 1988) (holding that FCA conspirators were jointly and severally liable).
14. Commonwealth ex rel. Martino- Fleming v. South Bay Mental Health Center, Inc., CV 15-13065-PBS, 2018 WL 4539684, at *5 (D. Mass. Sept. 21, 2018).
15. United States ex rel. Schagrin v. LDR Industries, LLC, 14-cv-09125 (N.D. Ill.).
16. United States ex rel. Schagrin v. LDR Industries, LLC, 14-cv-09125, 2018 WL
6064699, at *6 (N.D. Ill. Nov. 20, 2018); see also United States v. Pres. and Fellows of Harvard College, 323 F. Supp. 2d 151, 187 (D. Mass. 2004) (finding that a defendant “operat[ing] under a policy that causes others to present false claims to the government” may be liable under the FCA and further explaining that “[w]here the defendant has an ongoing business  relationship with a repeated false claimant, and the defendant knows of the false claims, yet does not cease doing business with the claimant or disclose the false claims to the United States, the defendant’s ostrich-like behavior itself becomes a course of conduct that allowed fraudulent claims to be presented to the federal government.”) (internal quotation marks omitted).
17. While the Intervenor Complaint in Patient Care America was subject to a Motion to Dismiss, resulting in a partial dismissal without prejudice (the Complaint was later amended), the district court’s adjudication of the Motion did not address the PE firm’s liability visà-vis its role in the portfolio company. United States ex rel. Medrano v. Diabetic Care RX, LLC, 15-CV-62617, 2019 WL 1054125 (S.D. Fla. Mar. 6, 2019). While the government’s Amended Complaint was subject to a second round of dismissal motions, on July 1, 2019, the case was stayed pending an imminent settlement. Patient Care America, 15-62617, Dkt. 178 (S.D. Fla.) Accordingly, Patient Care America is unlikely to yield any helpful case law concerning PE firm liability.
18. In some cases, a PE firm may, in addition to any distributions from the portfolio company, obtain a management fee for its role in the portfolio company’s oversight, which may suggest to the government how involved the PE firm is in managing its portfolio company.
19. Diabetic Care RX, LLC, Dkt. 36, Compl. ¶ 39.
20. Ideally, the portfolio company has obtained insurance policies covering FCA liability. However, the presence of such an insurance policy is no sure thing and, even when available, the policy may not sufficiently cover the full extent of FCA liability.
21. Depending on the facts, it may be in the PE firm’s best interest to self-report the compliance failures to avoid the full brunt of the FCA. This can limit liability and put a bookend on regulatory overhang. Such finality may be important to the PE firm, as it will likely find its shares in the portfolio firm unmarketable while the company remains under investigation (assuming liability is substantial), a tough reality in the “buy to sell” world of private equity. However, self-reporting may create instant financial liability that may be particularly difficult to finance given the debt burden from the LBO.
22. These concerns may be lessened in cases where the sellers of the portfolio company affirmatively misled their PE suitors as to the relevant compliance shortcomings. In those cases, a PE firm may be able to claim, in a more palatable manner, that it was merely the victim of investment fraud.

“The Champion” © 2019, National Association of Criminal Defense Lawyers. Reprinted with permission.

First of Its Kind? Private Equity Firm Riordan, Lewis & Hayden Inc. and its Portfolio Company Patient Care America Settle False Claims Act Lawsuit

September 23rd, 2019 by Alexander Owens

On September 18, 2019, the Department of Justice announced a $21.35 million settlement with compounding pharmacy Patient Care America, PCA executives Patrick Smith and Matthew Smith, and, most notably, the pharmacy’s private equity backer, Riordan, Lewis & Haden Inc.  The private equity firm and the pharmacy will fund substantially all of the settlement ($21.036 million).  The case has been closely watched for the Department of Justice’s targeting of a private equity firm.  The case appears to be the first time the federal government has intervened against a private equity firm in an FCA matter.  The government’s efforts have proven fruitful. 

The case stems from a whistleblower complaint filed in 2015 in the Middle District of Florida.  United States ex rel. Medrano, et al. v. Patient Care America, et al., 15-62617 (S.D. FL.)  In early 2018, the United States, joining in the action, filed a False Claims Act Complaint in Intervention against the defendants.  The government alleged that the pharmacy had paid kickbacks to independent marketers to procure prescriptions for compound pain medications, a violation of the Anti-Kickback Statute and False Claims Act.  The government sought to hold the private equity firm liable as well, alleging that the investment firm knew and approved of the illegal referral arrangement. 

While the settlement with a private equity defendant appears to be a first of its kind, it is unlikely to be the last.  See, e.g., Commonwealth ex rel. Martino-Fleming v. South Bay Mental Health Center, Inc., CV 15-13065-PBS, (D. Mass.) (state of Massachusetts intervened in FCA complaint against healthcare company and its private equity firm).  In recent years, private equity firms have been investing more and more heavily in the healthcare space, particularly in retail healthcare companies, which have perhaps the highest level of exposure to FCA liability.  As the allegations in Patient Care America show, private equity firms often take a very hands management role in their portfolio companies. That level of control brings with it the potential for extensive FCA liability.  FCA liability is not limited to the individual or entity that files a false claim.  In fact, the law is clear that individuals owning or managing companies engaged in fraud may be held liable under the FCA.   See, e.g., Martino-Fleming, CV 15-13065-PBS, 2018 WL 4539684, at *5 (D. Mass. Sept. 21, 2018) (refusing to dismiss claims against private equity firm that owned healthcare company allegedly involved in fraud); U.S. ex rel. Schagrin v. LDR Industries, LLC, 14-cv-09125, 2018 WL 6064699, at *6 (N.D. Ill. Nov. 20, 2018) (individuals that owned and managed company engaged in fraud could be held liable for failing to stop fraudulent conduct).  In announcing the settlement, United States Attorney Ariana Fajardo Orshan referred to the government’s “commitment to hold all responsible parties to account for the submission of claims to federal health care programs that are tainted by unlawful kickback arrangements.”  The comment echoes the DOJ’s Yates memo which reminded individuals that liability does not end at the corporate boundary.  Patient Care America may serve as a corollary to the Yates memo, putting private equity firms on notice that their liability may not be limited to just their financial exposure in the portfolio company.  A private equity firm may itself face direct liability.  The settlement in Patient Care America is likely to embolden relators and prosecutors in future cases where private equity firms have benefitted from their investment in, and management of, enterprises alleged to have engaged in fraud.

You Didn’t Ask – 3rd Cir. Affirms DOJ Dismissal of Whistleblower Case Without a Hearing

September 13th, 2019 by Pamela Coyle Brecht

The Third Circuit ruled on September 12, 2019 that a relator is not automatically guaranteed a hearing when the government moves to dismiss a whistleblower action – they need to ask for one. In United States ex rel., Chang v. Children’s  Advocacy Center of Delaware, No. 18-2311, at 3 (3rd Cir. Sept. 12, 2019), the Court affirmed the District of Delaware’s dismissal of a whistleblower lawsuit  pursuant to 31 U.S.C. § 3730(c)(2)(A), which allows the government to “dismiss the action notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.” 

The whistleblower had alleged that a child advocacy organization had applied for and received funds from the United States and the state of Delaware by misrepresenting certain material information. After the federal and state plaintiffs declined to intervene, the whistleblower amended his complaint and the defendant answered. Thereafter, the United States and Delaware each moved to dismiss the case, asserting that the investigation had found the allegations to be “factually incorrect and legally insufficient.” Chang at 4. The whistleblower opposed the government’s request for dismissal, arguing that the case should proceed to summary judgment. Critically, according to the Third Circuit, the whistleblower did not request oral argument or a hearing. After the district court granted the government’s request for dismissal without conducting an in-person hearing or issuing a supporting opinion, the whistleblower appealed.

The Third Circuit noted that Chang provided “an opportunity for us to take a side in a putative circuit split” on the issue. The Court acknowledged that both the Ninth and Tenth Circuits had adopted a standard requiring that the government to first show “a valid government purpose” in dismissal and a rational relationship between the requested dismissal and that purpose, and if met, the burden shifts to the whistleblower to show that “dismissal is fraudulent, arbitrary and capricious, or illegal.” Id. at 4-5 (citing United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145–46 (9th Cir. 1998)); see also United States ex rel. Ridenour v. Kaiser-Hill Co., LLC, 397 F.3d 925, 934–35 (10th Cir. 2005). The Court then noted countervailing D.C. Circuit cases holding that the government has “unfettered discretion to dismiss.” Chang at 5 (citing Swift v. United States, 318 F.3d 250, 252–53 (D.C. Cir. 2003)); see also Hoyte v. Am. Nat’l Red Cross, 518 F.3d 61, 65 (D.C. Cir. 2008).

The Chang Court concluded the whistleblower failed to meet either test. The Court noted the federal and state government’s goal in dismissing the whistleblower’s case was: “minimizing unnecessary or burdensome litigation costs,” to the taxpayer for the “enormous internal staff costs” of litigating the non-intervened FCA claims. Chang at 5.

The Court then held that the district court had not erred in failing to schedule a hearing on its own initiative, citing 31 U.S.C. § 3730(c)(2)(A) and Delaware Code Title 6, § 1204. The Court reasoned that the term “opportunity for a hearing” required that the relators seek the “opportunity,” and that the whistleblower failed to even ask. Chang at 6-8.