Posted by Ellyce Cooper and Patrick Kennell
The ongoing saga regarding privilege and work product issues continues in United States ex rel. Barko v. Halliburton Co., No. 05-cv-1276 (D.D.C. 2005). (Our previous blog posts on the case can be found here, here, and here.) As we previously reported, in June of 2014, the D.C. Circuit ordered the lower court to reconsider its order that Halliburton turn over to the relator the results of an internal investigation. The D.C. Circuit held that “[s]o long as obtaining or providing legal advice was one of the significant purposes of the internal investigation, the attorney-client privilege applies, even if there were also other purposes for the investigation.” In re Kellogg Brown & Root, Inc., 756 F.3d 754 (D.C. Cir. 2014) (emphasis added). However, the court directed the District Court to examine the other reasons advanced by the relator as to why the documents at issue were “not covered by either the attorney-client privilege or the work product doctrine.” Id. at 764.
In a recent opinion in United States ex rel. Martin v. Life Care Centers of America Inc., No. 08-cv-251 (E.D. Tenn. April 27, 2015), a federal district Court provided guidance regarding the standard for evaluating the government’s assertion of the deliberative process privilege. DOJ alleges that Life Care, a provider of skilled nursing services comprised of more than 200 facilities, submitted fraudulent claims to Medicare as part of a nationwide scheme to provide medically unnecessary services. The defendants’ discovery requests to the government sought, among other things, drafts of government reports, documents relating to funding for skilled nursing facilities, briefing papers, press releases; documents reflecting responses or comments on regulatory rules, and notes from meetings and emails of government officials. DOJ objected to many of the requests and provided thirteen privilege logs setting forth various claims of privilege, including the deliberative process privilege.
The deliberate process privilege “protects from discovery ‘documents reflecting advisory opinions, recommendations and deliberations comprising part of a process by which governmental decisions and policies are formulated.'” NLRB v. Sears, Roebuck & Co., 421 U.S. 132, 149 (1975). Once an agency has made a sufficient showing that documents are entitled to the privilege, the deciding court must “balance the competing interests of the parties. Additionally, the party requesting the information may overcome the privilege by showing a “sufficient need for the material in the context of the facts or the nature of the case . . . or by making a prima facie showing of misconduct.” Redland Soccer Club Inc., v. Dep’t of Army of U.S., 55 F.3d 827, 854 (3d Cir. 1995).
Defendants filed a motion challenging DOJ’s assertion of the deliberative process privilege. DOJ filed a response that included affidavits from government officials in support of the assertions of privilege. The Defendants asked the Court to overrule the deliberative process privilege claims because the agency officials who submitted affidavits did not personally examine each document over which they claimed the privilege. The Court held that while the agents may not have individually reviewed each document, it was sufficient that they used their experience and professional background to reach the conclusion that the requested documents were covered by the deliberative process privilege. The Court noted that general consideration in lieu of a individualized review is “by no means a best practice,” but it was unable to conclude the government’s process resulted in an improper assertion of the privilege.
While the Court found that DOJ’s claims of privilege were properly supported by affidavits, it nevertheless appointed a special master to review each of the documents to determine whether the deliberative process privilege applies. The court set out a list of factors for the special master should consider when determining whether the documents fall under the deliberative process privilege:
1. Documents that are inter-agency or intra-agency which comprise part of a process by which governmental decisions and policies are formed that are both predecisional and deliberative and whose disclosure would affect candid deliberations within an agency shall fall within the scope of the deliberative process privilege, subject to specific exceptions:
i. A document from a subordinate to a superior officer is more likely to be predecisional, whereas a document from a superior officer to a subordinate is more likely to involve a decision that has already been made.
i. A document is deliberative when it reflects the give-and-take of the consultative process.
2. Communications made by outside consultants may fall under the privilege so long as they were acting as an employee.
3. Factual information within privileged documents shall not be covered by the deliberative process privilege as long it can be severed from the privileged document.
4. Communications which were made subsequent to an agency decision shall not be covered by the deliberative process privilege.
A copy of the court’s order can be found here.
On April 28, 2015, the Senate unanimously approved S. 304, the Motor Vehicle Safety Whistleblower Act. The bipartisan legislation was reported out of the Committee on Commerce, Science, and Transportation and placed on the Senate Legislative Calendar on April 13, 2015. The Committee modified the legislation, including additional provisions regarding the protection of whistleblower identities, extending the deadline for the Secretary to promulgate regulations consistent with the statute from 12 to 18 months, and providing that the Secretary may make an award to a whistleblower prior to the promulgation of the regulations. The legislation, as passed, can be found here, and the Committee Report can be found here. We first reported on the proposed legislation here.
The legislation now moves to the House of Representatives for consideration. We will continue to monitor the legislation.
On February 26, 2015, the Senate Committee on Commerce, Science, and Transportation approved the Motor Vehicle Safety Whistleblower Act. The full text of the Motor Vehicle Safety Whistleblower Act can be found here. Introduced by Senators John Thune (South Dakota) and Bill Nelson (Florida), the proposed legislation prescribes certain incentives to whistleblowers who voluntarily provide information relating to motor vehicle defects that are likely to cause unreasonable risk of death or serious physical injury. The proposed whistleblower provisions are very similar to those of the Dodd-Frank Act. Highlights of the proposed legislation include:
- Financial incentive to whistleblowers up to 30% of collected sanctions in excess of $1 million.
- Applies to original information relating to any motor vehicle defect, noncompliance, or any violation or alleged violation of any notification or reporting requirement likely to cause unreasonable risk of death or serious physical injury.
- Applies to violations that predate legislation.
- Whistleblowers must first report or attempt to report the information to the company, with limited exceptions, and those who are convicted of a crime in connection with the violation would not be eligible for an award.
- Protection of the whistleblowers’ identities.
The proposed legislation will now head to the Senate floor for a vote. We will continue to follow the legislation and provide updates.
Late last month, in a closely watched False Claims Act case (about which we have previously written here, here, and here), a federal judge in the Eastern District of Virginia rejected the government’s argument that Government Logistics NV (“GovLog”) should be held liable for a $100 million FCA judgment against Belgian shipping company Gosselin World Wide Moving NV (“Gosselin”) under a theory of successor liability.
On August 4, 2014, a jury levied a verdict of $100.6 million in damages and $24 million in civil penalties against Gosselin based on a finding that its repeated submissions of false invoices for moving services amounted to thousands of individual violations of the federal False Claims Act. After the verdict, and DOJ’s ensuing difficulties collecting a judgment from Gosselin, which had sold its US business assets to GovLog, the government sought to hold GovLog liable for the verdict against Gosselin on the theory that GovLog was Gosselin’s successor in interest.
In September 2014, Judge Anthony Trenga ruled that GovLog could be Gosselin’s successor in interest only if the government could establish the elements of successor liability under the more-demanding common law rule instead of the more-lenient “substantial continuity” rule. Under the common law (or “traditional”) rule of successor liability, a corporation that acquires the assets of another corporation does not also assume its liabilities under the FCA unless either: (1) the successor agrees to assume liability; (2) the transaction is a de facto merger; (3) the successor is a “mere continuation” of the predecessor; or (4) the transaction is fraudulent. Judge Trenga ordered the parties to brief the question of successor liability, requesting that the parties devote particular attention to whether GovLog’s acquisition of Gosselin would satisfy the fraudulent transfer prong.
On December 23, 2014, Judge Trenga granted summary judgment in favor of GovLog, holding that the plaintiffs had neither adequately pleaded nor submitted sufficient evidence to establish that GovLog was a successor to Gosselin. On the court’s invitation, Plaintiffs had pursued the “fraudulent transaction” prong of establishing successor liability, contending that Gosselin had transferred its US business to GovLog fraudulently for the purpose of avoiding paying a judgment in this or other cases. The court noted that there was insufficient evidence to prove that Gosselin intended through its transaction with GovLog to avoid or delay payment judgment creditors. But, the court went on, even if there had been sufficient evidence to prove the plaintiffs’ contentions, “alleged intent, restructuring [to avoid liability], and knowledge [that judgment creditors would have difficulty collecting a judgment], standing alone, would not be sufficient to impose successor liability.” Otherwise, the court reasoned, “imposing liability under a fraudulent transaction theory without a fraudulent transaction, solely because of the incidental effects of that transaction, turns that theory, in effect, into a theory of strict liability.” Thus, the court concluded, GovLog could not be held liable for Gosselin’s FCA judgment. A copy of the court’s ruling on the successor liability issue in the combined cases U.S. ex rel. Bunk v. Gosselin World Wide Moving, No. 1:02-cv-01168 (E.D. Va.), and U.S. ex rel. Ammons v. Gosselin World Wide Moving NV, No. 1:07-cv-01198 (E.D. Va.) can be found here.
On January 8, 2015, in United States ex rel. Badr v. Triple Canopy, Inc., No. 13-2190, — F.3d — (4th Cir. 2015), the U.S. Court of Appeals for the Fourth Circuit revived a False Claims Act suit brought by the U.S. Government and a qui tam relator against security firm Triple Canopy, Inc., explicitly recognizing for the first time the implied certification theory of FCA liability.
The case arose out of a contract between Triple Canopy and the government under which Triple Canopy was to provide security services at an airbase in Iraq. Among several provisions in the contract, each of the security officers that Triple Canopy hired would have to obtain a passing score on a qualifying U.S. Army-grade rifle marksmanship course. In fact, according to the relator, very few guards were capable of meeting this requirement. Nevertheless, Triple Canopy continued to submit monthly invoices to the government for the guards’ services. Triple Canopy allegedly ordered one of its medics, relator Omar Badr, to retroactively falsify marksmanship scorecards for 40 guards. Badr subsequently filed a qui tam suit against Triple Canopy. The government then intervened as to certain counts.
The district court granted Triple Canopy’s motion to dismiss the case, largely on the ground that the defendants had never submitted a demand for payment that contained an objectively false statement. The court reasoned that the Government never alleged that Triple Canopy “invoiced a fraudulent number of guards or billed for a fraudulent sum of money.” Rather, citing Fourth Circuit precedent regarding the “crucial distinction between punitive FCA liability and ordinary breaches of contract,” the court reasoned that the defendant’s actions amounted at most to a breach of contract, not an FCA suit.
Although it affirmed the district court’s dismissal of certain claims, the Fourth Circuit reversed as to the bulk of the plaintiffs’ claims, holding that the district court’s interpretation of the distinction between breach-of-contract suits and FCA suits was too rigid. Instead, after reviewing the relevant circuit opinion and distinguishing its prior precedents, the Fourth Circuit held, “the Government pleads a false claim when it alleges that the contractor, with the requisite scienter, made a request for payment under a contract and withheld information about its noncompliance with material contractual requirements. The pertinent inquiry is whether, through the act of submitting a claim, a payee knowingly and falsely implied that it was entitled to payment.”
In so holding, the Fourth Circuit, for the first time, has expressly endorsed the implied certification of FCA liability, at least in certain circumstances. The Court noted that, since its 1999 opinion in U.S. ex rel. Harrison v. Westinghouse Savannah River Co., 176 F.3d 776 (4th Cir. 1999), “the weight of authority has shifted significantly in favor of recognizing this category of claims at least in some instances. Thus, the opinion states, “[c]ourts [may] infer implied certifications from silence where certification was a prerequisite to the government action sought.” The court noted its awareness of the fact “that this theory is prone to abuse by parties seeking to turn the violation of minor contractual provisions into an FCA action,” and took pains to highlight the “several key distinctions between this case and . . . garden-variety breaches of contract,” including the government’s active intervention and the clear falsehood at issue here (as opposed to vague contract provisions in other cases promising “diligence” or the like). It also clarified its view that the best way to prevent most contract suits from morphing into FCA suits is “strict enforcement of the Act’s materiality and scienter requirements,” which it concluded were readily met in this case.
A copy of the Fourth Circuit’s opinion can be found here.
On August 4, 2014, a federal jury in the Eastern District of Virginia levied a verdict of $100.6 million in damages and $24 million in civil penalties against Belgian shipping company Gosselin World Wide Moving NV (“Gosselin”), based on a finding that Gosselin’s repeated submissions of false invoices for moving services amounted to thousands of individual violations of the federal False Claims Act (a case we previously wrote about here and here). However, the government is seeking to hold a third-party, Government Logistics NV (“GovLog”), liable for the verdict against Gosselin under the theory of successor liability.
Whether and how successor liability can be assessed is a critical issue underlying many False Claims Act cases, especially given the magnitude of the potential exposure FCA cases routinely involve. Courts around the country have split on which rule to apply in the False Claims Act context. As Judge Trenga explained, under the common law (or “traditional”) rule of successor liability, a corporation that acquires the assets of another corporation does not also assume its liabilities unless either: (1) the successor agrees to assume liability; (2) the transaction is a de facto merger; (3) the successor is a “mere continuation” of the predecessor; or (4) the transaction is fraudulent. More recently, some courts in assessing successor liability under the FCA have turned to what is known as the “substantial continuity” test, which had previously been confined mostly to the labor context. Under that approach, successor liability is established based on a flexible, easier-to-satisfy, multi-factor analysis that considers: (a) whether the business of both companies is essentially the same; (b) whether the employees of the new business are doing the same jobs; and (c) whether the new entity has the same production processes and customers.
U.S. District Judge Anthony Trenga ruled on September 12, 2014, that relator may recover from GovLog only if plaintiffs can establish that GovLog is Gosselin’s successor in interest using the more-demanding common law rule instead of the more-lenient “substantial continuity” rule. Although noting that many courts have used the substantial continuity test in contexts beyond labor cases, and even in FCA cases, Judge Trenga reasoned that the Supreme Court’s decision in United States v. Bestfoods, 524 U.S. 51 (1998), states that a federal statute may abrogate common-law corporate-liability precepts only if the statute does so in express terms. Because the False Claims Act contains no provisions that would modify the common law of successor liability, the court held, there is no justification for imposing a less-stringent standard. In the court’s order, Judge Trenga requested that the parties pay particular attention in their arguments to whether GovLog’s acquisition of Gosselin would satisfy the fraudulent transfer prong.
The cases are U.S. ex rel. Bunk v. Gosselin World Wide Moving, No. 1:02-cv-01168 (E.D. Va.), and U.S. ex rel. Ammons v. Gosselin World Wide Moving NV, No. 1:07-cv-01198 (E.D. Va.).
Posted by Ellyce R. Cooper and Patrick E. Kennell III
In U.S. ex rel. De’von Cannon v. Rescare, Inc., No. 09-3068 (E.D. Pa. Sept. 16, 2014) (Dkt. No. ___) (“Slip Op.”), Judge Diamond of the Eastern District of Pennsylvania ruled that in its third try the Relator pled facts sufficient to survive a motion to dismiss. This time the Relator argued the applicability of the amended (2009) version of § 3729(a)(1) rather than the pre-2009 version. Judge Diamond’s ruling follows the majority of courts around the country that have found that the 2009 amendment can be applied retroactively because it is civil and not punitive in nature.
In dismissing the first two versions of Relator’s complaint, Judge Diamond applied the pre-2009 version of § 3729(a)(1), and found that the Relator did not meet the intent requirement found in Allison Engine, Co., Inc. v. United States ex rel. Sanders, 553 U.S. 662, 668-69 (2008) (“[A] person must have the purpose of getting a false or fraudulent claim ‘paid or approved by the Government’ in order to be liable under § 3729(a)(2).”). (Slip Op. at 4-5). However, in his Second Amended Complaint, Relator alleged for the first time that he was proceeding under the post-2009 Amendments to § 3729(a)(l) (specifically, Section 3729(a)(l)(B)) (“Any person who…knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim . . . is liable to the United States Government for a civil penalty.).
The amendments to the FCA took effect in May of 2009, and Relator’s allegations dealt with acts that took place “from November 2008 to March 2009.” (Slip Op. at 7). The Court noted that “Congress singled out subsection [3729(a)(1)(B)] to apply retroactively to all ‘claims made under the FCA that are pending on or after’ June 7, 2008.” (Slip Op. at 6). Judge Diamond ruled that the retroactive application of the Amendment would not violate the Ex Post Facto Clause because the FCA is civil in nature, the monetary penalties of the FCA were not punitive in nature, and the “FCA’s penalty provision is . . . not excessive, given its remedial purposes: encouraging would-be qui tam relators and compensating the Government for investigative costs and the fraud itself.” (Slip Op. at 7-9, 12).
Posted by Ellyce Cooper and Patrick Kennell
Last Friday, the D.C. Circuit issued an opinion in In re Kellogg Brown & Root, Inc., No. 14-5055 (D.C. Cir. June 27, 2014), reversing the much discussed privilege ruling in U.S. ex rel. Barko v. Halliburton Co., 1:05-CV-1276 (D.D.C. Mar. 6, 2014), a case we previously wrote about here and here. In reversing the District Court’s opinion, the Court of Appeals held that “[s]o long as obtaining or providing legal advice was one of the significant purposes of the internal investigation, the attorney-client privilege applies, even if there were also other purposes for the investigation.” (Slip Op. at 7-8) (emphasis added).
As readers may recall, in Barko, the D.C. District Court applied a test that would only extend attorney-client privilege to documents if “the communication would not have been made ‘but for’ the fact that legal advice was sought” and required the defendant to turn over documents from a related internal investigation. (Slip Op at 3) (quoting United States ex rel. Barko v. Halliburton Co., No. 05-cv-1276, 2014 WL 1016784, at *2 (D.D.C. Mar. 6, 2014)). In applying this “but for” test to deny attorney-client protection for various documents, the District Court focused on the fact that the investigation was undertaken to comply with federal regulations and corporate policy and was conducted at the behest of in-house counsel as opposed to outside counsel. The district court’s ruling threatened to eliminate work product protection for investigative materials where there was arguably a non-litigation (business) purpose for conducting the investigation.
The D.C. Circuit rejected the trial court’s “but for” test and provided a straightforward test for the applicability of the attorney-client privilege in internal investigations: “Was obtaining or providing legal advice a primary purpose of the communication, meaning one of the significant purposes of the communication?” (Slip Op. at 10). If so, the court of appeals held, work product protection applies.
Importantly, the Court stated that this test applies “regardless of whether an internal investigation was conducted pursuant to a company compliance program required by statute or regulation, or was otherwise conducted pursuant to company policy.” (Id.). The Court reasoned: “the District Court’s novel approach would eradicate the attorney-client privilege for internal investigations conducted by businesses that are required by law to maintain compliance programs, which is now the case in a significant swath of American industry.” (Slip Op at 9).
Moreover, the Court reaffirmed that the attorney-client privilege applies in internal investigations to both consultations with in-house and outside counsel. (Slip Op. at 6). The Court explained “the District Court noted that in Upjohn the interviews were conducted by attorneys, whereas here many of the interviews in [the company]’s investigation were conducted by non-attorneys. But the investigation here was conducted at the direction of the attorneys in [the company]’s Law Department. And communications made by and to non-attorneys serving as agents of attorneys in internal investigations are routinely protected by the attorney-client privilege.” (Id.)
Finally, it should be noted that the Court reaffirmed the longstanding maxim that “the attorney-client privilege ‘only protects disclosure of communications; it does not protect disclosure of the underlying facts by those who communicated with the attorney.'” (Slip Op. at 17-18) (quoting Upjohn Co. v. United States, 449 U.S. 383, 395 (1981)).
The relator has indicated that he will seek en banc review of the case. Stay tuned to Original Source for any additional updates on the case.
Posted by Ellyce Cooper and Patrick Kennell
On May 7th, a three-judge panel (Judges Thomas Griffith, Brett Kavanaugh and Sri Srinivasan) of the U.S. Court of Appeals for the D.C. Circuit heard oral argument on the privilege issues raised by documents created as part of an internal investigation. As previously reported in this blog, in U.S. ex rel. Barko v. Halliburton Co., 1:05-CV-1276 (D.D.C. Mar. 6, 2014) the D.C. District Court required that the defendant in an FCA case turn over documents from a related internal investigation. The Court reasoned that since the investigation was not conducted at the behest of in-house counsel, the documents were ordinary business records created to comply with federal regulations and corporate policy. In other words, the Court ruled that they were not created to obtain legal advice.
The petition sets forth the significance of this matter to internal investigations: “It is no exaggeration to say that if the district court’s ruling stands, no defense contractor—and indeed, no public company, given widespread internal-control and auditing requirements under laws such as Sarbanes-Oxley and the Foreign Corrupt Practices Act  —can claim privilege over materials generated in internal investigations, because all such companies face obligations under ‘regulatory law’ (comparable to those the court held rendered KBR’s investigative documents unprivileged.” (Petition at 8) (emphasis in original).
The United States Chamber of Commerce, Association of Corporate Counsel, the National Association of Manufacturers, Coalition for Government Procurement, and American Forest & Paper Association, filed an amicus brief in support of the appeal. The brief argued that the District Court’s ruling “threatens to work a sea change in the well-settled rules governing internal corporate investigations.” (Amicus Brief at 1). As the amicus brief states: “stripping the attorney-client privilege where corporate policy drives employees to report legally significant facts to in-house lawyers would  penalize companies that have effective compliance policies.” (Amicus Brief at 14) (emphasis in original).
Regardless of the Court’s ruling, the decision is almost certainly going to have an impact on compliance policies and internal investigations going forward. Stay tuned to the Sidley FCA Blog for further updates as this case moves forward.