Relator’s Counsel Sanctioned For Mishandling Privileged Documents and Barred from Acting as Counsel Against Company In Future


Posted by Amy Markopoulos and Kristin Koehler

A recent ruling in the District of Arizona serves as a reminder to defense counsel that they should be sensitive to the possibility that relators are relying on stolen privileged documents to support their claims. Should a company suspect that a relator’s case is founded on privileged documents, the company should act quickly to move for return of the privileged documents. The consequences for relator or his counsel for failing to appropriately handle privileged documents can be serious.

In Frazier v. IASIS Healthcare Corporation, No. 2:05-cv-00766 (D. Ariz. 2012), IASIS Healthcare and Relator’s counsel had engaged in a 4-year battle regarding the return of certain privileged documents that Relator had stolen when he left IASIS in 2004. The relator, Jerre Frazier, had sent these privileged documents to his lawyers, who kept most of the documents in a sealed box. Despite bearing the title “Legal Memo,” relator’s counsel did not seek the court’s opinion as to whether these documents were privileged, and “appeared to play dumb” and feigned ignorance about the documents’ location when IASIS asked for their return. As a result, IASIS moved for the return of the documents and for sanctions against Relator’s counsel.

Relator’s counsel will pay IASIS $1.4 million, representing the amount of legal fees incurred by litigating this specific issue. Counsel is also barred from representing the Relator or any other plaintiff adverse to IASIS.

Serious issues can arise for counsel when relators steal documents – defense counsel needs to be prepared to file a motion should this occur, and relator’s counsel must be careful to appropriately handle privileged documents if relator turns them over.

IASIS and Frazier settled the case in November, six years after Frazier had initially brought his complaint. The government had declined to intervene in this matter.

Recent DOJ Amicus Brief Demonstrates Government’s Aggressive Approach to Expanding FCA Liability

Posted by HL Rogers and Kristin Koehler

The Department of Justice recently filed an Amicus brief on behalf of the United States and in support of a Relator in an action originally brought in the District of Massachusetts and now on appeal to the First Circuit, United States ex rel. Rost v. Pfizer, Inc. Brief for United State of America as Amicus Curiae Supporting Plaintiff-Appellant, United States ex rel. Rost v. Pfizer, Inc., No. 10-2215 (1st Cir. January 17, 2012) (“United States Amicus Brief”). The Amicus brief is notable in demonstrating how far the First Circuit recently has moved from its previous interpretation of the False Claims Act and how far it has distanced itself from several other circuits. Additionally, the Amicus brief is notable in showing how aggressive the Department of Justice has been in expanding the reach of the False Claims Act.

The District Court ruled on Defendant’s summary judgment motion on September 14, 2010. At the time of the decision, the District Court Judge was accurate in stating that “the implied false certification theory of liability under the FCA is an evolving area of the law” – particularly in the First Circuit. United States ex rel. Rost v. Pfizer, Inc., 736 F.Supp.2d 367, 375 (D.Mass. 2010). Since that time, both United States ex rel. Hutcheson v. Blackstone Medical, Inc., 647 F.3d 377 (1st Cir. 2011) in June 2011 and New York v. Amgen, Inc., 652 F.3d 103 (1st Cir. 2011) in July 2011 were decided by the First Circuit.

Therefore, in Rost, the District Court Judge could reject two of the government’s arguments that attempted to greatly expand the FCA: (1) “[W]hen you bill Medicaid you are impliedly certifying that no kickbacks have been paid in any of the underlying transactions;” and (2) “the payment of a kickback renders subsequent claims factually false under the FCA, without regard to who submits the claim or whether there is a certification that no such kickback was accepted.” Rost, 736 F.Supp.2d at 377 (quotation marks omitted). But with the issuance of Blackstone and Amgen, the First Circuit now has embraced the government’s position and expanded the FCA in exactly the manner the government pushed in Rost and outside the bounds set by the FCA’s statutory language.

The government now argues on appeal in Rost, with the recent support of Blackstone and Amgen, that a defendant is liable under the FCA even when “the third party [submitting the claim] has no knowledge of the underlying kickbacks or makes no express certifications regarding compliance with the [Anti-Kickback Statute, 42 U.S.C. § 1320-7b].” United States Amicus Brief at 13; see Blackstone, 647 F.3d at 386-87; Amgen, 652 F.3d at 110. This argument, and the opinions in Blackstone and Amgen, read out one of the most important limitations of the FCA’s plain language—that in order to violate the FCA, a party must make a claim that is factually incorrect or certify compliance with a statute or regulation with which it failed to comply. In other words, for liability under the FCA, a party must file a claim that is false. Under the Government’s theory, a party is liable if it submitted a claim for which any underlying conduct, no matter how remote, included some form of illegality—whether or not the claim itself is false. Not only is this approach expansive, but as the Government itself admits, it is also one that has been rejected by the Second and Ninth Circuits and restrained by the Tenth and D.C. Circuits. United States Amicus Brief at 17. Stay tuned.

New Report Reinforces The Role Effective Internal Reporting Policies Play In Preventing Whistleblower Suits

A recent survey of employee attitudes toward whistleblowing reinforces the importance of an effective compliance program in mitigating FCA suits. The Ethics Resource Center recently published its bi-annual National Business Ethics Survey (NBES), a longitudinal study of employee attitudes that seeks to provide a “barometer of workplace ethics.” The survey, a copy of which can be downloaded here, finds that employees perceive “historically low levels of current misconduct in the American workplace.” Specifically,

* The percentage of employees who witnessed misconduct at work fell to a new low of 45 percent. That compares to 49 percent in 2009 and is well down from the record high of 55 percent in 2007.

* Those who reported the bad behavior they saw reached a record high of 65 percent, up from 63 percent two years earlier and 12 percentage points higher than the record low of 53 percent in 2005.

However, the NBES notes that this positive trend is accompanied by “ominous warning signs of a potentially significant ethics decline ahead”:

* Employees who reported misconduct and who reported experiencing some form of retaliation rose to 22 percent, up from 15 percent in 2009 and 12 percent in 2007.

* The percentage of employees who perceived pressure to compromise standards in order to do their jobs climbed five points to 13 percent, just shy of the all-time high of 14 percent in 2000.

* The share of companies perceived as having a weak ethics culture climbed to near record levels at 42 percent, up from 35 percent in 2009.

The NBES also examined the impact of the new Dodd-Frank whistleblower provisions on employee attitudes regarding reporting of employer misconduct. According to the survey, employees say they are far more motivated by the nature of the misconduct and its potential harm than by financial reward. Only three percent of employees who actually reported misconduct said they went outside the company as their first resort. About half (49 percent) said that they would consider reporting to federal authorities under certain circumstances, even if it might cost them their job. An additional five percent said they would report to the federal government, but “only if there was a chance for a substantial financial reward.”

As the study notes, despite the addition of new incentives under Dodd-Frank for whistleblowers to report wrongdoing to the federal government, employees say that they prefer to first report their concerns internally to their employers. The study recognizes that while “[a]s whistleblower protections become more widely known these behaviors may change,” for now, “financial rewards from government agencies do not seem to be enough of a motivator to cause employees to circumvent their employers.” However, the self-reported nature of the survey merits some caution in interpreting these results.

Litigating Fraud And Other Counterclaim Cases Before the U.S. Court of Federal Claims

“When you strike at a King, you must kill him.”

           — Ralph Waldo Emerson

FCA cases are not limited to qui tam actions and federal district courts. Some of the leading procurement fraud jurisprudence arises from cases decided by the United States Court of Federal Claims (COFC) and its appellate court, the Court of Appeals for the Federal Circuit. See, e.g., Daewoo Eng’g & Constr. Co. v. United States, 557 F.3d 1332 (Fed. Cir. 2009); Commercial Contractors, Inc. v. United States, 154 F.3d 1357 (Fed. Cir. 1998). The COFC possesses exclusive jurisdiction over claims in excess of $10,000 “founded . . . upon any express or implied contract with the United States.” 28 U.S.C. §§ 1346, 1491(a)(1). In such a case, however, the government may pursue monetary counterclaims against a plaintiff contractor based upon just about any cause of action, including fraud-related claims, such as the FCA, the Forfeiture of Fraudulent Claims Act (also known as the special plea in fraud), 28 U.S.C. § 2514, and the fraud provision of the Contract Dispute Act (CDA), 41 U.S.C. § 7103(c)(2). The COFC has jurisdiction over CDA cases pursuant to 28 U.S.C. § 1491(a)(2).

Together, the aforementioned fraud remedies are a powerful weapon in the arsenal of the Department of Justice in defending against contractor claims. In that regard – and consistent with Emerson’s aphorism and the old proverb that when dancing with a bear, you don’t decide when to stop – the government’s assertion of fraud counterclaims may radically alter the settlement position of both parties, if not entirely eliminate any motivation on the part of the government to settle a case. For that reason, contractors and their counsel seeking to sue the government in the COFC must be aware not only of the most salient substantive and procedural issues surrounding fraud counterclaims, but also of the government’s settlement calculus, generally, and in counterclaim cases.

A recently published Briefing Paper authored by Sidley Austin attorney Matthew Solomson – entitled When the Government’s Best Defense is A Good Offense: Litigating Fraud And Other Counterclaim Cases Before the U.S. Court of Federal Claims – addresses basic counterclaim issues with which plaintiffs in the COFC need to be familiar, including, but not limited to: counterclaim initiation and pleading requirements; discovery issues; significant substantive legal issues involving the FCA, the CDA’s fraud provision, and the special plea in fraud; scienter issues; parallel proceeding considerations; and settlement negotiations. The Briefing Paper may be accessed here.

Relator Attempting to Avoid The Scope of A Release Pleads Himself Out of Court

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Posted by Brad Robertson and Scott Stein

A recent decision explains how one relator, in an effort to plead around a release of FCA claims in favor of his former employer, managed to plead himself right out of court. U.S. ex rel. McNulty v. Reddy Ice Holdings, Inc., No. 08-cv-12728 (E.D. Mich.), December 7, 2011 Slip Op. The relator alleged that his former employer, Arctic Glacier, and two other manufacturers of packaged ice, overcharged the government. These same companies are also currently defending a series of antitrust lawsuits alleging that they conspired to allocate markets. The increased prices resulting from the alleged market allocation form the basis of the relator’s FCA claims in this action.

The plaintiff alleged that he discovered the market allocation conspiracy while employed with Arctic Glacier, and that he was terminated after refusing to participate in the conspiracy. As part of his severance package, he signed a broad release waiving any and all claims against the company for the time period prior to the release.

The defendants moved to dismiss on public disclosure/original source grounds and for failure to plead with sufficient particularity. The relator filed a cross-motion to dismiss Arctic Glacier’s counterclaim that he breached his release agreement. In an attempt to plead around the scope of release, the relator alleged that he learned that the alleged market allocation scheme resulted in overcharges to the United States government from a discussion with a former co-worker only after his termination from Arctic Glacier and after signing the release. Accordingly, he contended that his FCA claims were outside the scope of the release. Ruling on the defendants’ motion to dismiss, the court found the allegations of the discussion with his former co-worker particularly crucial to its 12(b)(6) analysis, as “the only allegations that relate in any way to the FCA claim itself” as opposed to the market allocation conspiracy. The court dismissed the complaint, finding that the allegations of market allocation had been publicly disclosed through the antitrust lawsuits, and that the relator was not an original source of the FCA allegations, as he “was no longer employed by Arctic Glacier at the time and could not possibly have ‘observed’ or ‘learned’ this information firsthand.”

Adding insult to the relator’s injury, the court then proceeded to declare the release that the relator had been attempting to plead around unenforceable, dismissing Arctic Glacier’s counterclaim. Without evidence that the government knew of the claims prior to the execution of the release, the court held, public policy concerns barred enforcement of the agreement as to the FCA claims.

District Court Dismisses False Certification Claim For Failure to Adequately Plead “Condition of Payment”


By Scott Stein and Erik Ives

In the first in-depth application of the Third Circuit’s decision in United States ex rel. Wilkins v. United Health Group, Inc., No. 10-2747, 2011 WL 2573390 (3d Cir. June 30, 2011)adopting the implied certification theory of liability, the United States District Court for the District of New Jersey dismissed at the pleading stage a relator’s claims under the federal False Claims Act (FCA) for failure adequately to plead that the defendant had violated a condition of payment. See Foglia v. Renal Ventures Management, LLC, No. 09-1552, Slip Op. (D.N.J. Nov. 23, 2011).

The Relator alleged that the Defendant (a dialysis care services company) failed to comply with New Jersey regulations concerning quality of patient care and facility staffing, and Center for Disease Control (CDC) standards concerning reuse of vials of the drug Zemplar. The Relator contended that these violations rendered each claim for payment of the drug legally false under a theory of express and/or implied false certification. The United States declined to intervene in the matter, and after the case was unsealed the defendant filed a motion for partial judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c).

The Court began its analysis by describing the false certification theory, as recently outlined by the Third Circuit in United States ex rel. Wilkins v. United Health Group, Inc., No. 10-2747, 2011 WL 2573390 (3d Cir. June 30, 2011). In doing so, the Court focused on the Third Circuit’s holding that:

‘[T]o plead a claim upon which relief could be granted under a false certification theory, either express or implied, a plaintiff must show that compliance with the regulation which the defendant allegedly violated was a condition of payment from the Government.”

<em&ggt;Foglia, Slip Op. at 24-25 (quoting Wilkins, 2011 WL 2573390 at *11). Applying this condition of payment requirement to Relator’s pleadings under Fed. R. Civ. P. 8(a)(2) (requiring a “short and plain statement” of the claim entitling pleader to relief) and Fed. R. Civ. P. 9(b) (establishing heightened pleading requirements for claims implicating fraud), the Court held that Relator’s “merely conclusory” assertion that compliance with the federal and state regulations in question was a precondition of payment was legally insufficient. The Court explained that Relator’s failure to “cite any rule, regulation, contract, or other facts to demonstrate” this contention required dismissal of Relator’s claim on the pleadings. Foglia, Slip Op. at 25-29.

Recent DOD Regulations Increase FCA Liability Risk


The Department of Defense (DoD) recently issued a final regulation, requiring prospective government contractors to represent, as part of their offers, that certain former DOD officials employed by the offeror are in compliance with the post-employment restrictions contained in 18 § U.S.C. 207, 41 U.S.C. §§ 2101–07, 5 CFR parts 2637 and 2641, as well as FAR § 3.104–2. See Defense Federal Acquisition Regulation Supplement: Representation Relating to Compensation of Former DoD Officials (DFARS Case 2010–D020), Final Rule, 76 Fed. Reg. 71,826 (Nov. 18, 2011). Those statutes and regulations are designed to combat the so-called “revolving door” problem of contractors hiring former government employees in order to do business with their former agencies.

Although the new requirement does not change the underlying post-employment restrictions, the new required “representation” opens contractors to greater penalties should they fail to comply. Of course, the point is that should a contractor’s representation prove to be false, the contractor is looking at a possible False Claims Act violation, assuming the requisite scienter is also present. U.S. ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 376 (4th Cir. 2008) (quoting Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 788 (4th Cir. 1999), for the proposition that “the term ‘false or fraudulent claim’ includes those instances ‘when the contract or extension of government benefit was obtained originally through false statements or fraudulent conduct'”); United States ex rel. Willard v. Humana Health Plan of Texas, Inc., 336 F.3d 375, 384 (5th Cir. 2003) (explaining that FCA liability may be imposed “when the contract under which payment is made was procured by fraud”).

DOD, on the other hand, specifically indicated that it “elected to employ a representation rather than a certification.” 76 Fed. Reg. 71826. In that regard, one comment that DOD received argued that the Clinger-Cohen Act prohibits the creation of contractor certifications that are not required by law. In response, DOD acknowledged that “[t]he Clinger/Cohen Act prohibited the creation of contractor certifications that are not required by law,” but asserted that “[t]he FAR and DFARS regularly employ the distinction between a representation and a certification, and representations have regularly been deemed not subject to the Clinger/Cohen Act ban.” Id. at 71828. Indeed, DOD went so far as to say that the new rule does not require the creation of new compliance systems and additional costs should not be incurred.

There are a number of problems with DOD’s explanations.

First, section 4301(b)(1) of the Clinger-Cohen Act of 1996, P.L. 104-106, amended 41 USC § 425 to restrict the inclusion of nonstatutory certification requirements in the FAR. Federal Acquisition Circular 97-11 explained that this statutory provision “apparently” responded to an industry perception that a “certification” requires a high level of attention within the company, may entail personal accountability of the signing official, and is more likely to be subject to criminal prosecution. 64 Fed. Reg. 10530, 10531 (Mar. 4, 1999). Indeed, prior to the enactment of Public Law 104-106, there were over 100 certifications required by law. See 40 No. 14 Gov’t Contractor ¶ 172. Some of the certifications that were specifically eliminated by the Act include the certification of procurement integrity (§ 4304) and the certification regarding a drug-free workplace (§ 4301(a)). Id.

Contractors, however, may well argue that the representation is, in effect, an invalid certification. There do not appear to be any cases addressing when a representation is really nothing more than a prohibited certification, although the GAO has held, in a bid protest decision, that “[a] certification is ‘the formal assertion in writing of some fact.'” Sea-Land Service, Inc., B- 278404 (February 09, 1998). In that regard, the new representation is made pursuant “to the best of its [i.e., the contractor’s] knowledge or belief.” 76 Fed. Feg. 71827. One comment complained about the vagueness of that phrase. In response, DOD asserted that the meaning of the phrase “is a recognized legal term of art,” but the example DOD cited for that assertion is, ironically, the certification required by the Truth in Negotiations Act. 10 U.S.C. § 2306a(a)(2). And, similar language is found in the Contract Disputes Act’s certification requirement. 41 U.S.C. § 7103(b).

Second, DOD does not even attempt to explain what the practical distinction is between a representation and a certification, which is particularly troubling given DOD’s assertion that “[b]y the terms of the representation, an offeror is prohibited from submitting an offer if it cannot make the representation.” 76 Fed. Feg. 71829 (emphasis added). That statement, of course, is an attempt to use the representation as a hook for False Claim Act liability.

In sum, the entire point of the new regulation is to require offerors to verify their employees’ compliance with existing laws and regulations in order to deter non-compliance. The DOD cannot have it both ways. Either the new the new rule is designed to force contractors to be extra careful regarding how they employ and monitor the employment of former DOD officials, or the rule imposes no particular additional duties or costs – but those possibilities are mutually exclusive.

The bottom line is that a representation employing standard certification language is a distinction without a difference for the purposes of the FCA and, notwithstanding any DOD disclaimers to the contrary, contractors should not be lulled into a false sense of security by the “representation” label.

DOJ Announces Record FCA Recoveries in 2011

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).





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