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.

Whistleblowing Down Under

September 4th, 2019 by Ashley Kenny

What Happened

On July 1, 2019, The Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill 2019 (“Bill 19”) came into effect that amended the Corporations Act 2001 and Taxation Administration Act 1953 to provide more protections for whistleblowers in Australia.

The Background

Prior to Bill 19, Australia did not have legislation specifically pertaining to the protection of whistleblowers. This made individuals hesitant to blow the whistle as they were unaware of the protections available to them under the law. For years, whistleblower organizations and attorneys lobbied for a reform to Australia’s whistleblowing laws. In response, Parliament enacted Bill 19.

Who Can Be A Whistleblower in Australia?

According to Bill 19, a whistleblower may be a current or former employee, contractor, officer, supplier, or associate of a regulated entity that is incorporated or registered in Australia. Interestingly, a family member or dependent of the previously mentioned individuals may become a whistleblower as well. A whistleblower must make a disclosure concerning specific subject matter to specific parties to be eligible for whistleblower protection under Bill 19.

A whistleblower will only receive protection if the disclosure concerns danger to the public or financial system, offenses against the Commonwealth punishable by imprisonment for at least one year, breaches of financials acts prescribed in the Corporations Act, or misconduct related to tax affairs of regulated entities. The whistleblower must have reasonable grounds to suspect that the misconduct is occurring.

What Protections Can a Whistleblower Receive?

Bill 19 permits a whistleblower to anonymously disclose misconduct and protects the whistleblower’s confidentiality. Bill 19 also protects the whistleblower from a wide range of detriments including, but not limited to, dismissal, alteration of employment position, harassment, intimidation, physical and psychological harm, and damage to whistleblowers’ property, reputation, and business and financial position.

If the court finds that a whistleblower’s confidentiality was breached, or the whistleblower suffered a detriment, the breaching party may be subject to criminal charges resulting in imprisonment and/or fines. The court may also impose a civil penalty on the breaching individual of up to $1.05 million and on the breaching entity for $10.5 million, or 10% of the entity’s annual turnover [maximum of $525 minimum].[1]

The court may grant an injunction to prevent, stop or remedy the detrimental conduct. It can order an apology to the whistleblower, order the whistleblower to be reinstated if terminated, order the breaching individual or entity to compensate the individual for any loss or harm suffered from the detrimental conduct, or issue any other order that the court deems appropriate. Bill 19 also provides criminal and civil immunities for whistleblowers.

How to Blow the Whistle in Australia

A whistleblower will only qualify for protection if the disclosure is made to an eligible recipient such as an officer, senior manager, auditor, or actuary; legal practitioner for the purposes of obtaining legal advice or representation; trustee; or entity prescribed in Bill 19 such as ASIC or APRA. Bill 19 also permits the whistleblower to make an emergency disclosure and a disclosure in the public interest.

A whistleblower may make an emergency disclosure to the government or media if the whistleblower has reasonable grounds to believe there is a substantial and imminent danger to the health or safety of the public or the environment. 

A whistleblower may make a public interest disclosure to the government or media if the whistleblower 1) made a protected disclosure; 2) 90 days have passed since making the protected disclosure; 3) the whistleblower does not have reasonable grounds to believe that the disclosure is being addressed; 4) the whistleblower has reasonable grounds to believe that making a public disclosure would be in the public interest; 5) the whistleblower notified the authority of their intention to make a public interest disclosure in writing; and 6) the information disclosed is narrowly tailored to inform the recipient of the misconduct.

The Take Away

Bill 19 has been compared to the United States False Claims Act (“FCA”). While the two acts offer some similar protections, Bill 19 is missing a distinct feature of the FCA: the whistleblower award. Bill 19 only compensates whistleblowers if they were harmed, whereas the FCA compensates all whistleblowers who bring successful claims – regardless of harm. The FCA was designed to reward whistleblowers for the inherent risk of being a whistleblower. As time progresses it will be interesting to observe if the protections offered under Bill 19 are enough to motivate whistleblowers to come forward, or if other modifications to the law are needed.


[1] Note, this penalty only applies to disclosures made under the Corporations Act.

Information on the Internet is not Necessarily a Public Disclosure

August 8th, 2019 by Erik Giannitrapani

On July 16, 2019, a district court in California found that not all information that is posted on the internet is considered a public disclosure by the “news media.” United States ex rel. Integra Med Analytics Llc v. Providence Health & Servs., No. CV 17-1694 PSG (SSx), 2019 U.S. Dist. LEXIS 125352 (C.D. Cal. July 16, 2019). Judge Phillip S. Gutierrez analyzed the text of news media public disclosure bar and declined to follow the trend of cases applying the news media public disclosure bar to all documents posted on the internet.

The Relator, Integra Med Analytics LLC, filed a qui tam lawsuit against Defendants Providence Health and Services, seven of its affiliated hospitals (collectively the “hospital defendants”) and Defendant J.A. Thomas and Associates, Inc. (JATA) alleging that the hospital defendants and JATA worked together to train doctors to describe medical conditions so that the hospital defendants could increase the acuity level and receive higher reimbursements from Medicare in violation of the False Claims Act (“FCA”). [1] The Relator was not an insider and had no “first-hand knowledge” of its allegations. Instead the Relator based the claims on CMS claims data and “information it gathered about JATA’s business practices.” Id. at *4-5.

The Defendants moved to dismiss the case based primarily on the public disclosure bar, as well as failure to adequately allege all elements of an FCA claim, failure to adequately plead a reverse FCA claim, failure to adequately plead FCA conspiracy, and failure to adequately plead an FCA violation based on the Anti-Kickback Statute (“AKS”).  Judge Gutierrez granted the Defendants motion to dismiss the claims that were based on the public disclosure of CMS Claims Data and denied the remaining Defendants’ motions.

Defendants Position

The Defendants asked to court to adopt the position that “information publicly available on the Internet generally qualifies as news media.” Id. at *31 (quoting United States ex rel. Hong v. Newport Sensors, Inc., No. SACV13-1164 JLS (JPRx), 2016 WL 8928246, at *5 (C.D. Cal. May 19, 2016) (Hong I). For this position the defendants stated since ninety-three percent of Americans get their news online, according to a poll by VOX, all information on the internet must qualify as news media. The defendants argue that Congress implicitly ratified previous holdings that all information on the internet was news media because Congress did not change the language of news media section while they amended the public disclosure bar in 2010. Judge Gutierrez did not find these arguments persuasive and noted that the Ninth Circuit had explicitly not adopted the “broad holding that most public webpages … generally fall within the category of news media.” United States ex rel. Hong v. Newport Sensors, Inc., 728 F’App’x 660, 662-663 (9th Cir. 2018) (Hong II).

Courts Position

In denying the defendants motion for claims based on JATA’s business practice information, Judge Gutierrez reviewed the plain text of the FCA statute as well the Supreme Court Case Schindler Elevator Corp. v. United States ex rel. Kirk, 563 U.S. 401 (2011). A claim is barred if “substantially the same allegations or transactions, as alleged in the action or claim were publicly disclosed… from the news media.” 31 U.S.C. § 3730(e)(4)(A)(iii). The bar does not capture all information that is public but applies to “some methods of public disclosure and not others.” Schindler Elevator, 563 U.S. at 414. 

In deciding that everything posted on the internet is not subject to the public disclosure, Judge Gutierrez defined news media as methods of communication used to transmit information. Judge Gutierrez then used common sense to contrast a restaurant’s menu or a doctor’s website posting next available appointment, with intent to transmit information.

Having found that not everything on the internet is news media for the purpose of the public disclosure bar, Judge Gutierrez did not specifically address whether “proprietary and confidential” information posted only on “internal staff homepages” or internal newsletters, were news media. However, he did state that those facts “could be relevant to whether the sources at issue were ‘news media’ sources within the meaning of the FCA.”  

Conclusion

A Relator’s personal information is always the most important thing that they bring to the case. It is often the difference between a successful and an unsuccessful qui tam action. This holding potentially broadens the categories of information upon which a successful qui tam action can be based.


[1] Of note, The Relator recently had similar claims based on CMS Data dismissed with prejudice for failure to state a claim in the Western District of Texas. U.S. ex rel. Integra Med Analytics, LLC v. Baylor Scott & White Health et al., No. 5:17-cv-00886-DAE (W.D. Tex. August 5, 2019).

Whistleblowing: Dutch Style

June 14th, 2019 by Ashley Kenny

What Happened

On July 1, 2016, the Dutch Whistleblowers Act (Wet Huis voor klokkenluiders, “Whistleblowers Act”) came  into effect, requiring all employers in the Netherlands with 50 employees or more to implement internal reporting procedures and ban retaliatory acts against employees who report wrongdoing.  The Act also created an external administrative entity to assist whistleblowers, the House for Whistleblowers (“House”). The House performs both advisory and investigative functions.

What Did NOT Happen

Like other whistleblower laws in Europe, the law in the Netherlands did not create a mechanism for the whistleblower to commence an action on behalf of the government, or provide any award as an incentive for whistleblowers to come forward.

The Background

Before the July 2016 implementation of the Act, all whistleblower reports were handled by the Advice Center for Whistleblowers in the Netherlands. However, at the time, there was no specific legislation dedicated to whistleblowing.

The Motivation

As we have noted in separate blogs related to whistleblower laws in France, Canada, and Germany, a lack of uniform and meaningful whistleblower legislation leads to a shortage of whistleblowers. The lack of reporting motivated the Dutch Parliament to enact the Dutch Whistleblowers Act. The Act created the House for Whistleblowers that includes departments for Advice, Investigation, and Research and Prevention. Despite the enthusiasm and optimism in the Dutch Parliament for the Whistleblowers Act, the progress for moving reports through the House was slow. In 2017 and 2018, changes in the House leadership, increases in staffing, and new processes were aimed at streamlining whistleblower reporting.

Who Can Be A Whistleblower in the Netherlands?

Whistleblowers are broadly defined under the Whistleblowers Act as individuals in an employment relationship with a Dutch organization who report wrongdoing related to a public interest. Whistleblowers can be current employees, former employees, trainees, or volunteers. The wrongdoing must relate to non-compliance with legislation, risk to public health, danger to public safety, environmental hazards, or risk to a governmental organization. To receive protection under the Act, whistleblowers must have a reasonable suspicion of wrongdoing. A reasonable suspicion requires the whistleblowers to personally observe the wrongdoing, not base their reports on secondhand knowledge or rumors.

What Protections Can a Whistleblower Receive?

The Whistleblowers Act amended a number of Dutch laws (the Civil Code, the Central and Local Government Personnel Act, the Police Act of 2012, the Military Personnel Act of 1931, and the Works Councils Act) to protect whistleblowers in the public sector and the private sector from retaliation. Under the Act, whistleblowers may not be disadvantaged in any way for good faith reporting of suspected wrongdoing. “Disadvantages” include, but are not limited to: bullying; demotion; refusing a promotion; transfer; or dismissal. The Act also provides psychological and social support to whistleblowers (although more guidance is expected on this provision this year).

How to Blow the Whistle in the Netherlands

In the Netherlands, employees must first report wrongdoing internally to their employer. If the employer fails to address the reported concerns, the employees must then report to an external supervisor. If the external supervisor does not adequately address the report, the employees may submit a request for investigation to the Investigation Department of the House for Whistleblowers. This request for investigation may be submitted electronically on the House for Whistleblowers’ website or through the mail.

Even though it is not mandatory, the House for Whistleblowers encourages potential whistleblowers to contact the Advice Department of the House before submitting a request for investigation. The Advice Department advises and counsels whistleblowers regarding the reporting process, follow-up steps whistleblowers should take, and risks associated with blowing the whistle.

The Take Away

The Dutch Whistleblowers Act is a good first step toward a whistleblower program, but leaves much to be desired. While the Act prohibits retaliation against whistleblowers, it does not establish penalties for employers who retaliate. The Act requires employers to set up internal reporting procedures, but does not include consequences for employers who fail to do so. The Whistleblowers Act alludes to psychological support for whistleblowers, but does not provide details or procedures for implementing them. Critically, the Whistleblowers Act does not include a financial award to Dutch whistleblowers, in spite of the recognition by the House for Whistleblowers that financial hardships associated with blowing the whistle often prevent whistleblowers from following through with the reporting process. Without such incentives it is unlikely that the Act will have its intended impact.

Why the European Union Whistleblower Laws Are All Doomed To Fail

June 3rd, 2019 by Pamela Coyle Brecht

As seen on the EU blog, LawHealthTech.com:

Member States of the European Union, over the last several years, have passed a series of so-called “Whistleblower Laws.”  These laws are being implemented allegedly to bolster anti-corruption efforts throughout Europe.  While corruption is no stranger to either side of the Atlantic, the European Union would advance their fraud fighting efforts exponentially by taking a focused look at the highly successful American False Claims Act.

France, Ireland, Italy, Greece, Germany, Netherlands, Sweden, Hungary, Lithuania, Malta, Slovakia, the United Kingdom, as well as others, have passed or amended some type of a putative whistleblower law.  Here is the issue.  None of these whistleblower statutes, in our opinion, contain the basic tenents of a strong and effective whistleblower program.  The development of the whistleblower statutes within the United States of America illustrates the bedrock elements of an effective and successful whistleblower law.

In 1986, the U.S. Congress amended the existing whistleblower statute, the False Claims Act, which was passed during the American Civil War by President Abraham Lincoln.  The 1986 Amendments to the False Claims Act included provisions that finally gave the law real fraud combatting teeth. Examining these 1986 Amendments (and even more recent Amendments) illustrates the changes needed in the European Union member States’ whistleblowing statutes.  Without such robust amendments the European Union laws will never have a real and palpable impact on fraud, waste and abuse.

The American statute, known as federal False Claims Act, or the Qui Tam Law, has at its heart the following key provisions:

  • The United States has what is known as a “qui tam[4] or whistleblower provision.
  • A whistleblower who comes forward and meets the statutory requirements is authorized by the statute to bring an action on behalf of the government and is entitled to receive a set amount of any settlement or judgment the government receives from the defendant from 15% to 30%. This strong financial incentive has, singlehandedly, made the American statute the most successful fraud, waste and abuse statute in the world.  Of this fact there is no debate.
  • The United States’ Congress has provided strong protections against professional retaliation against whistleblowers. In contrast, the European statutes contain weak non-existent or watered down versions of this protection.  In fact, some of the European laws actually put the whistleblower at risk if he or she is incorrect in their allegations. 
  • The American whistleblower statute attracts skilled lawyers who take these cases on a contingent-fee basis, award legal fees and costs to whistleblowers and their counsel, if they prevail in their claims against a defendant.
  • The American statute provides government attorneys with muscular investigative powers. For example, while the case is under seal, the government can issue document requests, written interrogatories, take depositions of key individuals, etc.  These broad investigative tools are lacking in most of the current European statutes.
  • As a result of the key amendments in 1986, the American whistleblower statute has returned more than $62 billion to the U.S. Treasury. No other whistleblower law in Europe (or anywhere) has had such success.

The European legislative bodies still do appear to be committed (culturally or legally) to the type of whistleblowing legislation that will not make a real difference for their respective countries.  Here are some of the reasons why the statutes in Europe shall continue to be as ineffective as the pre-1986 American Whistleblower Law:

  • The European statutes do not truly embrace the concept that whistleblowers need to be encouraged to come forward to expose corruption inside large, well regarded institutions. The majority of the European laws do not contain any financial reward for successful whistleblowers.  Most importantly, none of the European statutes have a strong financial reward that would balance the risks against the rewards.  The European laws seem to go through the motions of supporting, yet not incentivizing, whistleblowers.
  • There is no clear and distinct prosecutorial entity in charge of effectively enforcing the individual European statutes.
  • Many of the European statutes lack strong protections for whistleblowers who come forward and risk their careers and livelihood. While there is a lot of “lip service,” there is no economic insurance that they will be protected.

While Americans and Europeans have shared and adopted approaches to governance over the centuries, their differences in efforts to curtail fraud, waste and abuse through whistleblower statutes is considerable.  Europe need look no further than its young sister state across the Atlantic for lessons that may be worth billions of dollars in recoveries.

Supreme Court Delivers Important Victory for Qui Tam Whistleblowers

May 15th, 2019 by Qui Tam

On May 13, 2019, the Supreme Court of the United States, in a unanimous decision, delivered an important victory for qui tam whistleblowers.  United States ex rel. Hunt v. Cochise Consultancy, Inc., No. 18-315 (decided May 13, 2019) (referred to as “Hunt”). The decision, authored by Justice Clarence Thomas, held that private qui tam whistleblowers are entitled to the extended statute of limitations period in the federal False Claims Act (“FCA”) that many federal courts had previously reserved  only for FCA lawsuits filed by the government.  This decision is important because: (1) it affords whistleblowers the same amount of time as the government to file a claim against those who defraud taxpayer-funded programs; and (2) it resolves a split in the lower federal courts as to how to interpret the statute of limitations provisions in the FCA.

            The Supreme Court’s decision resolves the application of the FCA’s statute of limitations provisions, which provide:

“(b) A civil action under section 3730 may not be brought— “(1) more than 6 years after the date on which the violation of section 3729 is committed, or “(2) more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed, “whichever occurs last.” 

31 U.S.C. §3731(b).

            While federal courts have unanimously applied the 6-year statute of limitations to qui tam lawsuits, there was a split between lower federal courts as to whether section 3731(b)(2)’s 3-year limitations period also applied to qui tam lawsuits.  In its decision, the Supreme Court unanimously held that it does.

            Justice Thomas, writing for the Court, held that “both Government-initiated suits under §3730(a) and relator initiated suits under §3730(b) are “civil action[s] under section 3730.  Thus, the plain text of the statute makes the two [statute of] limitations periods applicable to both types of cases.”  Hunt Opinion, p.5. 

            The Supreme Court also made clear that when applying the 3-year limitations period in section 3731(b)(2) the relator’s knowledge of the fraud does not start the clock on the statute of limitations because private relators are not “responsible official[s] of the United States charged with responsibility to act.”  Hunt Opinion, p.8-9.  This decision is important because whistleblowers, many of whom are employees working for the defendant, might gain knowledge of the fraud long before “the responsible government official.”  The Supreme Court’s decision makes clear that the statute of limitations clock under Section 3731(b)(2) of the FCA does not begin to run as a result of the private whistleblower’s knowledge of the fraud.

            This decision will ensure that whistleblowers who file FCA lawsuits across the United States have the full benefit of the extended statute of limitations period in Section 3731(b)(2).  This will allow all whistleblowers more time to file their lawsuits and will ultimately enhance the effectiveness of the FCA’s qui tam provisions in combatting fraud, waste, and abuse in government-funded programs, like healthcare and national defense.

            On a related note, the Supreme Court’s decision appeared to signal a resolution of another, unrelated challenge to the FCA’s qui tam whistleblower provisions.  In United States ex rel. Polukoff v. Intermountain Health Care, Inc., No 18-911, the defendant had filed a petition for certiorari to the Supreme Court arguing that the qui tam whistleblower provisions in the FCA were unconstitutional as they violated the “Appointments Clause” in Article II of the Constitution.  The “Appointments Clause” specifies the permissible means of appointing “Officers of the United States” to public offices “established by Law.” U.S. Const. Art. II, § 2, Cl. 2.  Intermountain argued in its petition that the FCA’s qui tam provisions improperly appointed private citizens as “Officials of the United States.”  While similar challenges had previously been rejected by numerous federal courts, this case caught the eye of many when the Supreme Court ordered the whistleblower and the United States to file a response to Intermountain’ s petition.  Many observers questioned whether the Supreme Court was signaling its interest in taking up this constitutional challenge to the FCA’s qui tam provisions. 

While the Supreme Court’s decision in Hunt does not specifically reject the arguments made by Intermountain, Justice Thomas clearly stated that “a private relator is not an ‘official of the United States’ in the ordinary sense of the phrase.  A relator is neither appointed as an officer of the United States [] nor employed by the United States.  Indeed, the provision that authorizes qui tam suits is entitled ‘Actions by Private Persons.”  Hunt Opinion, p.8-9.  This portion of the Hunt decision appears to flatly reject Intermountain’ s challenge that the qui tam provisions violates the Constitution’s “Appointments Clause.”  However, the Supreme Court may not get to rule directly on Intermountain’ s petition.  On April 29, 2019, Intermountain requested that the Supreme Court defer its petition because it has reached a settlement in principle of the underlying FCA lawsuit, and its petition may become moot.

Thus, the Supreme Court’s unanimous decision in Hunt delivers two important victories for qui tam whistleblowers under the federal False Claims Act.

European Union-Wide Whistleblower Protection: A Growing Trend?

April 29th, 2019 by Pamela Coyle Brecht

What Happened

On April 16, 2019, the European Parliament made history with the approval of the European Union (EU) Whistleblower Directive (“Directive”) that provides universal whistleblower protections for all potential “reporting persons” located within member states of the EU. These protections apply whether or not the reporting person is a citizen of an EU member.

The Background

Prior to this Directive, individual EU member states were charged with enacting whistleblowing laws and related procedures. Of the 28 EU member states, less than half (only 10) had implemented statutes that offered whistleblowers any protection from retaliation. Without a comprehensive system of whistleblower protections, violations of EU laws or violations within EU member states would go unreported because potential reporting persons feared retaliation.

The Motivation

In 2017, the European Commission estimated the loss of potential benefits in public procurement at the UE level to be €5.8 to €9.6 billion each year. This massive loss of potential EU funds coupled with threats to public safety, the environment, banking, and a desire for transparency led to a public outcry for uniform whistleblower protections. Ultimately, in 2019, the European Parliament was motivated to approve the EU Whistleblower Directive.

Who Can Be A Whistleblower in the European Union?

A “reporting person” may be anyone in contact with the target entity through work-related activities. The idea of “work” is broadly defined to include trainees, past and present employees, shareholders, consultants, suppliers, distributors, contractors, and volunteers whether associated with private or public entities.

To receive protection, the whistleblower must report a breach of the following areas of law: public procurement, financial services, financial interests, internal market, prevention of money laundering and terrorist financing, product safety, transport safety, environmental protection, radiation protection and nuclear safety, food safety, animal health and welfare, public health, consumer protection, protection of privacy, personal data, and network security. The whistleblower must also have reasonable grounds to believe the reported breach was true at the time of the report and make the report in accordance with the Directive.

What Protections Can a Whistleblower Receive?

Under the Directive, a whistleblower is protected from retaliation of any kind including, but not limited to, demotion, discharge, or industry blacklisting. There is a presumption of retaliation if the whistleblower can prove that he or she engaged in a protected activity and suffered a detriment as a result. If retaliation is found to have occurred, the whistleblower is to be compensated in full, including: lost wages; future loss of income; and/or restoration of the whistleblower’s employment position. The whistleblower is also eligible for damages such as attorney fees, medical expenses, and pain and suffering.

The whistleblower is also protected from civil and criminal liability for claims regarding unlawfully obtained evidence, defamation, breach of contract, breach of copyright, breach of secrecy, breach of data protection rules, and disclosure of trade secrets if the whistleblower had reasonable grounds to believe that the disclosure of this information was necessary to reveal a breach under the Directive. Of note, member states may create additional protections to supplement the Directive.

How to Blow the Whistle

Pursuant to the Directive, member states (public entities) must establish external reporting channels. Private entities must establish both internal and external reporting channels. These  external and internal reporting channels must be independent and autonomous, must ensure the anonymity of the whistleblower, and be capable of receiving written and oral reports. Once the whistleblower reports a breach of the underlying standard through the appropriate reporting channel, they must receive feedback within 3 months. After that time, the whistleblower may publicly disclose the breach. In addition, a whistleblower may bypass the internal or external reporting channels altogether and make a public disclosure if the breach constitutes an imminent danger to the public interest or if there is a low probability that the reported breach will be addressed internally.

The Take Away

Even though the EU Whistleblower Directive provides broad protections for whistleblowers, it does not include a monetary award or bounty for the reporting person. While this step of providing protection against retaliation is laudable and may be enough to encourage whistleblowers in the 18 EU member states that did have previous protections in place, it may have little effect on reducing or curbing violations of laws in the 10 member states that already offered whistleblowers protection from retaliation. It has been shown that whistleblower statutes that reward the reporting person by providing a bounty actually incentivizes individuals with important information to come forward. As the EU Whistleblower Directive notes, the stakes for the reporting person are quite high. Member states have two years to implement the minimum protections provided in the Directive. It will be interesting to observe if any of the member states add their own whistleblower award, and if universal protection is enough to spur the rate of whistleblowing in the EU. There are other statutes which do afford a bounty for fraud occurring within the EU which impacts non-EU entities. For example, in the United States, the False Claims Act, the SEC Whistleblower Protection Program, and the IRS Whistleblower Program are set up to provide both protection against retaliation and a bounty for whistleblowers whose information results in a recovery.