In a recent decision, United States v. ISS Marine Services, Inc., No. 12-mc-481, Mem. Op. (D.D.C. Nov. 21, 2012), the U.S. District Court for the District of Columbia ruled that an internal investigation report prepared by an internal auditor of an affiliate of respondent ISS Marine Services, Inc. (ISS) was not subject to the protections of the attorney-client privilege or the work-product doctrine despite the involvement of outside counsel. The opinion serves as a strongly-worded reminder that direct attorney oversight and supervision of internal investigations is the surest way to safeguard privileges.
The case involved a government petition to enforce an administrative subpoena issued by the Department of Defense Inspector General’s Office. The respondent, ISS, had agreed to produce non-privileged, responsive documents but had claimed privilege with respect to an investigative report prepared by an internal auditor of the company’s U.K. affiliate. While the facts surrounding the commissioning of the investigation and report were disputed, the court found ultimately that, although an outside law firm had initially proposed conducting the investigation, had provided advice on issues to investigate and documents to review, and was provided a copy of the finished report, neither outside nor in-house counsel directed or supervised the work of the auditor to the extent necessary to protect the final report with a privilege.
Regarding the attorney-client privilege, the court focused on the purpose for which the investigation was conducted and the audit report was created. The court applied a strict test, concluding that the party claiming privilege must demonstrate that the communication in issue would not have been made “but for” the purpose of seeking legal advice. Mem. Op. at 9. The court first noted that, despite the fact that outside counsel suggested the investigation, there was evidence that the report was prepared to allow the U.K. affiliate of respondent to make a business decision about what further action should be taken to address the issues. Id. at 11. Then, in strikingly strong language, the court found the outside law firm’s involvement too tenuous to support blanketing the internal auditor’s work with privilege:
At bottom, respondent’s claim to privilege appears to be premised on a gimmick: exclude counsel from conducting the investigation but retain them in a watered-down capacity to “consult” on the investigation in order to cloak the investigation with privilege. Unfortunately for respondent, this sort of “consultation lite” does not qualify the Audit Report for the protections of the attorney-client privilege.
Mem. Op. at 12. The court continued that “[t]his sort of arms-length coaching by counsel, as opposed to direct involvement of an attorney, undercuts the purposes of the attorney-client privileged in the context of an internal investigation.” Id. at 13.
The court emphasized that, for the results of an internal investigation to be privileged, “the company must clearly structure the investigation as one seeking legal advice and must ensure that attorneys themselves conduct or supervise the inquiries and, at the very least, the company must make clear to the communicating employees that the information they provide will be transmitted to attorneys for the purpose of obtaining legal advice.” Id. at 14.
The district court also rejected the respondent’s claim that the report was protected from disclosure by the work-product doctrine. In a detailed analysis of various tests for determining whether a document was prepared for purposes of litigation, the court concluded that the respondent had not met its burden under any potentially applicable test. After pointing out that the investigation was conducted and the report was prepared some two years before the government commenced its investigation of respondent, as well as evidence that the company had an alternative business purpose for conducting the investigation, the court returned again to the fact that counsel was not closely involved with the investigation. The court stated: “Minimal attorney involvement in an internal investigation represents a distinct difficulty for corporations claiming work-product privilege because it is the rare case in which a company genuinely anticipating litigation will leave its attorneys on the outside looking in.” Id. at 26.
A copy of the opinion is available here.
Posted by Kristin Graham Koehler and Lauren Roth
In the pharmaceutical industry, government investigations initiated by whistleblower qui tam complaints can—and often do—result in both civil and criminal charges against the company. In recent years, such investigations also have increasingly focused on individual corporate executives, either based on the executives’ participation in the misconduct or by virtue of their status as “responsible corporate officers” of the wrongdoing entity. Last week, three executives ensnared in one such investigation scored a key, albeit mixed, victory.
A decision by the D.C. Circuit Court in Friedman v. Sebelius overturned the exclusions of three Purdue Pharma executives from participation in federal healthcare programs, holding that the Department of Health and Human Services (HHS) acted arbitrarily in imposing extraordinarily lengthy exclusions. Notwithstanding this ruling, the court held that HHS has the authority to exclude individuals convicted of a misdemeanor if the conduct underlying the conviction is related to fraud, even if the individual is an executive that had no knowledge of the underlying fraudulent conduct.
Background on the Case
In 2007, Purdue Pharma L.P. and Purdue Frederick Company, Inc. paid $600 million to resolve charges that Purdue Frederick fraudulently misbranded OxyContin as less addictive and less subject to abuse and diversion than other pain medications. As part of the settlement, Purdue Frederick pleaded guilty to a felony misbranding charge. The settlement resolved potential civil liability for allegations that that, based on these misleading claims, Purdue knowingly caused the submission of false claims for OxyContin.
Prosecutors also charged three former senior executives of Purdue— the company’s President and Chief Operating Officer, Executive Vice President/Chief Legal Officer, and Vice President of Worldwide Medical Affairs—with misdemeanor violations of the Food, Drug and Cosmetic Act (FDCA) based on Purdue Frederick’s guilty plea for felony misbranding of OxyContin and the executives’ status as “responsible corporate officers.” HHS’s Office of Inspector General (OIG) subsequently excluded the three executives for 20 years on the ground that their convictions “related to” fraud in the delivery of a healthcare item — a ground for discretionary exclusion.
In an administrative appeal, the HHS Departmental Appeals Board (DAB) upheld the executives’ exclusion. Though the three executives did not admit personal knowledge of this fraud — rather, they admitted only that it had occurred and that they had been “responsible corporate officers” at the time — the DAB determined, nevertheless, that the there was evidence that the executives’ convictions had “related to” fraud. The DAB reduced the length of exclusion to 12 years, however, finding that the OIG had not demonstrated that the underlying conduct harmed any patients. The D.C. Federal District Court affirmed the DAB decision.
D.C. Circuit Opinion
On appeal, a sharply divided panel of the D.C. Circuit affirmed that the executives’ exclusion but remanded the case to the agency, holding that it failed to reconcile the lengthy 12-year term of exclusion with agency precedent.
The D.C. Circuit’s ruling is significant in at least two respects. First, a panel majority (Sentelle, CJ., Ginsburg, J.) held that misdemeanor misbranding, which requires no proof that a corporate officer know of, or have any involvement in, fraudulent misbranding, is nevertheless a conviction for a “misdemeanor relating to fraud” within the meaning of the exclusion statute. HHS may therefore exclude individuals convicted of such misdemeanors from participation in federal healthcare programs. Second, a different majority (Williams, Ginsburg, JJ.) held that the length of any exclusion is subject to review under the arbitrary and capricious standard. The government had argued that, unlike the Administrative Procedure Act, the statute providing for judicial review of DAB decisions (42 U.S.C. 405(g)) did not include the arbitrary-and-capricious standard. For that reason, the government contended, the court could not require the agency to compare the exclusion imposed here to exclusions imposed in other cases. The majority disagreed, holding that the agency had not explained how the 12-year exclusion here for a misdemeanor offense was justified by exclusions involving felonies and incarceration. As the majority noted, “Simply pointing to prior cases with the same bottom line but arising under a different law and involving materially different facts does not provide a reasoned explanation for the agency’s apparent departure from precedent.” The case will be remanded to OIG for further consideration. A copy of the opinion is available here. Sidley represented the former Purdue executives in the DC Circuit.
Posted by Kristin Graham Koehler and Amy Markopoulos
On July 28, 2012, McKesson Corporation entered into a national settlement with 29 states and the District of Columbia adding to the growing list of drug companies who have settled with the federal and state governments for allegations of reporting inflated prices to the databases used to set Medicaid and Medicare prices.
In April, the federal government settled the federal portion of this lawsuit for over $187 million. When announcing the federal settlement with McKesson, U.S. Attorney Paul Fishman said that over $2 billion has been recovered by state and federal governments from drug companies that have reported inflated prices to databases.
Under the July 28 settlement, McKesson agreed to pay more than $151 million to the states for violations of the false claims act. The settlements resolve a 2005 whistleblower case that charged McKesson with inflating the average wholesale prices that it reported to First Data Bank, a publisher of drug prices, by as much as 25% between Aug. 1, 2001, and Dec. 31, 2009. Medicaid relied upon First DataBank’s price lists to calculate the reimbursement amounts Medicaid paid pharmacies, physicians and clinics for prescription drugs it covered. As a result, it is alleged that State Medicaid programs had to overpay for a variety of drugs. The settlement covered more than 1,400 brand name prescription drugs, including commonly prescribed medications such as Adderall, Allegra, Ambien, Celexa, Lipitor, Neurontin, Prevacid, Prozac and Ritalin.
Posted by Meghan Delaney Berroya and Gordon D. Todd
The Obama Administration’s subprime lending task force, as well as U.S. Attorney’s Offices, are turning to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) (12 U.S.C. § 1833a) as a complement to the False Claims Act to prosecute claims arising out of the 2007-2009 financial crisis. Congress enacted FIRREA in 1989 in response to the Savings and Loan crisis, but until recently the statute has been used only sparingly. In the past year prosecutors have begun adding FIRREA allegations to FCA cases during settlement. In addition, the twenty five billion dollar settlement resolving FCA claims against a number of banks in connection with the servicing of mortgages and processing of foreclosures included FIRREA allegations.
FIRREA’s ten year statute of limitations period and the possibility of imposing civil penalties of up to one million dollars per violation and five million dollars for continuing violations make it an attractive tool for prosecutors. FIRREA may be able to reach a wide range of fraud offenses, including mail and wire fraud, bribery and embezzlement, and requires only that the government establish the right to recovery by a preponderance of the evidence. Facing challenges in bringing criminal charges associated with the subprime mortgage crisis, prosecutors view FIRREA as a potentially useful tool.
The Defense bar is pushing back. For instance, this past November, the Southern District of New York filed a civil mortgage fraud lawsuit against Allied Home Mortgage seeking penalties under the False Claims Act and FIRREA. At the end of March, Allquest Home Mortgage Corporation (formerly known as Allied Home Mortgage Corporation) and Americus Mortgage Corporation moved to dismiss the FIRREA claims on the basis that: (1) one of the provisions of the statute plead by the government, 18 U.S.C. §1006, applies only to individuals; (2) the government failed to allege an intent to defraud, and ; (3) the statute does not prohibit false or fraudulent statements to the FHA prior to July 30, 2008. View the motions to dismiss here and here. As additional defendants are forced to respond to FIRREA actions, the scrutiny it receives by the defense bar will undoubtedly increase.
At least one aspect of FIRREA has already had had a tour through the federal courts. In United States v. Winstar Corporation, 518 U.S. 839 (1996), the Supreme Court held that the United States breached contracts with defendant financial institutions when, pursuant to FIRREA, the government stripped thrifts of the ability to book “regulatory goodwill” as an asset.
Posted by Amy Markopoulos and Kristin Graham Koehler
Companies that enter into FCA settlements may face follow on shareholder liability for breach of fiduciary duty in the settlement process itself.
On March 22, 2012, Shareholder Jordan Weinrib sued Oracle Corporation directors, including Chief Executive Officer Larry Ellison, in Delaware Chancery Court for failing to mitigate damages when the company agreed to a $200 million whistle-blower settlement with the U.S. government.
The Complaint alleges that current and previous directors violated their fiduciary duties by forcing the government into extensive litigation even though the directors knew the government’s allegations were “grounded in fact.” According to the Complaint, “[r]ather than attempt to settle all claims at that time by the institution of appropriate corporate therapeutics and the paying of what would have been a small fine, the board insisted on digging in and litigating the matter extensively.” By litigating the case, the Complaint contends, Oracle drove up the ultimate settlement price, harming taxpayers and shareholders alike.
The underlying settlement, announced in October, resolved a lawsuit brought by a former Oracle employee, claiming Oracle induced the General Services Administration to buy $1.08 billion in software from 1998 to 2006 by falsely promising the same discounts offered to favored commercial customers. The payout was the largest ever obtained by the GSA under the False Claims Act.
Weinrib said in his Complaint that he initially asked the company to investigate his claims in September 2010. However, board members “surreptitiously” abandoned an investigation and instead focused on negotiating a settlement with shareholders who had filed similar complaints in federal court in San Francisco. According to Weinrib, Oracle is attempting to “derail any inquiry into the wrongful acts.” Weinrib is seeking unspecified damages on behalf of the company.
Posted by Brian P. Morrissey and Kristin Koehler
A. Brian Albritton at the False Claims Act and Qui Tam Law blog discusses an interesting interview recently published in the Corporate Crime Reporter with Joseph E.B. “Jeb” White of the firm Nolan & Auerbach, P.A., which focuses its practice exclusively on representing qui tam relators in healthcare fraud suits. The interview discusses White’s view on the types of cases in which the Department of Justice is most likely to intervene. In a particularly notable passage, White briefly mentions DOJ’s practice of “deferring” its decision on whether to intervene in a qui tam suit when the deadline for that decision comes due. That topic warrants a bit of exploration here because, as readers may have observed in their own practice, DOJ appears to be relying on this practice with increasing frequency.
The FCA provides that, once a relator files a complaint, the complaint “shall remain under seal for at least 60 days,” affording DOJ a window within which to investigate the relator’s claims. 31 U.S.C. § 3730(b)(2). At the end of that period (which is routinely extended for months or even years), DOJ is required to either intervene and take over the action, or decline and allow the relator to conduct the litigation instead. Id. § 3730(b)(4). Even if DOJ declines, the FCA grants the Department the right to join the case at a later time, provided it can show “good cause.” Id. § 3730(c)(3).
It is increasingly common for DOJ prosecutors to file a statement with the court indicating that the DOJ has made “no decision” on intervention, but reserving its right to intervene at a later time. In light of the FCA provisions discussed above, these “no decision” statements have the very same effect as a statement declining intervention. After DOJ files its “no decision” statement, the relator proceeds with the litigation alone, and DOJ preserves the same statutory right to intervene later, just as it would if it had formally declined to intervene.
Yet DOJ may achieve some benefits in labeling its choice on intervention as a “no decision” rather than a declination. White suggests one. He observes that, in some cases, a “no decision” statement allows the DOJ to signal to relator’s counsel that DOJ is, in fact, interested in the case, but simply cannot intervene at the moment because of resource constraints or because the relator has not yet fully fleshed out his or her allegations. By making “no decision,” DOJ sends a message to the relator saying “please keep this case alive, we are going to come back later.” But a second consideration may motivate “no decision” statements in other cases. Sometimes, DOJ may conclude that a relator’s allegations are unlikely to establish a violation of the FCA, but may also be aware that DOJ’s failure to intervene in the relator’s case could prompt a negative reaction from certain politicians or members of the media. The scores of recent qui tam complaints filed against participants in the mortgage securitization industry provide an example of this phenomenon. Some such complaints have merit, some do not, but the default presumption among certain sectors of the general public is that the DOJ should be actively pursuing all forms of fraud in that industry. By styling its choice on intervention as a “no decision” rather than a “declination,” the Department provides itself with some public relations cover, emphasizing to the public that while it is not formally joining the relator’s suit, it is retaining its right to do so later, which the FCA would have provided to the Department anyway, even if it had formally declined to intervene.
Whatever the reasons for DOJ’s “no decision” statement in a particular case, it is clear that DOJ’s practice of using such statements is on the rise and likely to continue in the future.
Posted by Jaime L.M. Jones and Nirav Shah
In a report released last month, the federal government announced that it had recovered nearly $4.1 billion last fiscal year as a result of its escalated fight against health care fraud. Spearheaded by the Department of Health and Human Services and the Department of Justice, the government recouped approximately $2.4 billion in civil health care fraud via the False Claims Act as well as $1.3 billion in criminal fines and forfeitures under the Federal Food, Drug and Cosmetic Act. The number of new cases also rose, with the DOJ opening more than 1,100 new criminal health care fraud cases in addition to the more than 1,800 already pending. The number of civil cases is growing, too, with nearly 1,000 new cases being filed on top of over 1,000 existing actions.
In a blog post announcing the report, HHS Secretary Kathleen Sebelius credits recent tools, including the Affordable Care Act’s $350 million funding of the Health Care Fraud and Abuse Control Program, to help in the fight against fraud. A government fact sheet released on the same day also highlights these efforts, with particular focus on Health Care Fraud Prevention and Enforcement Action Teams (“HEAT”). These teams, created in 2009, are designed to encourage coordination and intelligence sharing among HHS and DOJ. The report also praises the work of the Medicare Strike Force, an “interagency team of analysts, investigators, and prosecutors who can target emerging or migrating fraud schemes, including fraud by criminals masquerading as health care providers or suppliers.” Secretary Sebelius cites these specialized anti-fraud teams and notes that, before their creation, “a fraudster could swindle Medicare for millions of dollars in Florida, close up shop, move to Detroit, and attempt to reestablish the same scheme without ever being noticed. Now, CMS and Department of Justice officials are tracking fraud scams as they move across the country, so that criminals are spotted when they try to re-enroll into Medicare or Medicaid.”
Administration officials noted that the recovery figures are nearly double the $2.14 billion recouped in 2008. Likewise, the number of fraud prosecutions increased 75 percent during the same period. Secretary Sebelius and Attorney General Holder both credited the Obama Administration’s revamped efforts at fighting fraud for these statistics.
The U.S . Department of Health and Human Services has released its Fiscal Year 2013 “Budget in Brief,” an overview of how HHS proposes to spend the close to $1 billion in budget authority for HHS requested in President Obama’s 2013 budget request. Program integrity is a top priority, with HHS noting that over the last three years, Health Care Fraud and Abuse Control (which comprises $610 million of the budget request) has produced a “return on investment” of $7.20 for every dollar spent. Among the key initiatives these funds will support are a continued emphasis on improper fee-for-service payments by Medicare, expansion of the Health Care Fraud Prevention and Enforcement Action Team (HEAT) task forces, and “an increased focused on civil fraud, such as off-label marketing and pharmaceutical fraud.” (page 62).
On December 19, the Department of Justice announced that during the fiscal year ended September 30, 2011, it obtained over $3 billion in settlements and judgments under the False Claims Act. A few items of note:
- Over 90% of the amount recovered resulted from whistleblower suits. According to DOJ, a record 638 qui tam suits were filed in FY2011.
- 80% of the total recoveries involved alleged healthcare fraud, with the bulk ($2.2 billion) directed toward the pharmaceutical industry.
- DOJ obtained $358 million from “non-war related procurement and consumer-related financial fraud” cases, a category that includes grant, housing and mortgage fraud that emerged in the wake of the financial crisis.
- In addition to FCA recoveries, DOJ secured $1.3 billion in criminal fines, forfeitures, restitution, and disgorgement under the federal Food, Drug and Cosmetic Act (FDCA).
A December 3 article in the Daily News Journal (Murfreesboro, TN) reporting on the recent indictment of the owners of an ambulance company for Medicare fraud discusses the increasing focus on healthcare fraud cases by the U.S. Attorney’s Office in the Middle District of Tennessee. According to the article, Jerry Martin, the current U.S. Attorney, said in a recent speech that his office is “absolutely looking for [FCA} business,” and recently has doubled the number of prosecutors working on FCA cases. While the U.S. Attorney’s Office for the Middle District of Tennessee is not as well-known as its counterparts in other locales (such as Boston and Philadelphia) for its FCA work, it has announced a number of healthcare FCA verdicts or settlements in 2011 relating to medical devices, diagnostic testing, and nursing homes.