Welcome to Original Source: The Sidley Austin False Claims Act Blog

The False Claims Act (FCA) has long been a key enforcement tool for the federal government in matters involving government contracts or other expenditures of government funds. FCA enforcement has traditionally focused primarily on two industries receiving a substantial amount of government funds: healthcare and defense and other government contractors. Recently, however, FCA enforcement has expanded to other industries, including financial services. Through the False Claims Act Blog, lawyers in Sidley’s White Collar, Healthcare, FDA, Government Contracting, Financial Services, Appellate, and other practices will provide timely updates on new and interesting developments relating to FCA enforcement and litigation.

Lockheed Martin Corporation Settles False Claims Act Allegations Pertaining to Recklessness

On March 23, 2012, DOJ issued a press release, announcing that Lockheed Martin has agreed to pay $15,850,000 to settle allegations under the False Claims Act that the government was overcharged as a result of a seven-year pricing scheme by Tools & Metals Inc. (TMI), a subcontractor that sold perishable tools to Lockheed Martin for use on military aircraft. In the civil claims the government brought against Lockheed, the government alleged that “Lockheed Martin acted recklessly by failing to adequately oversee TMI’s charging practices and by mishandling information revealing these practices.” Because so many FCA claims are fact-driven, we reviewed the government’s complaint for details related to Lockheed Martin’s alleged recklessness.

In its complaint, the government alleged, in part, that Lockheed Martin violated three provisions of the federal False Claims Act, 31 U.S.C. §§3729(a)(1), (a)(2), and (a)(7). (The compliant, which was filed in November 2007, predates 2009 revisions to the statute that correspond to the current 31 U.S.C. §3729(a)(1)(A); 31 U.S.C. §3729(a)(1)(B); and 31 U.S.C. §3729(a)(1)(G), respectively.) All three provisions require that false claims be made “knowingly.” Under the FCA, the terms “knowing” and “knowingly” mean that “a person, with respect to information, (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information.” 31 U.S.C. §3729(b)(1)(A). For each of the FCA claims, the government alleged generally that “Lockheed acted knowingly in connection with the falsity of its claims for payment, [Forward Pricing Rate Agreement] (FPRA) cost proposals, FPRA’s and certifications of final, year-end manufacturing overhead costs, among other Lockheed omissions and submissions.”

By way of background, the government alleged that Tools & Metals, Inc. (TMI) and Lockheed executed a five year, sole source, integrated supply contract for TMI to supply perishable tools (the Master Agreement). Lockheed allegedly knew that the cost of tools to be purchased by Lockheed would be passed on, in whole or in part, to the United States under Lockheed’s contracts with government agencies. TMI inflated its reported costs, which Lockheed paid. In August 2005, TMI admitted to Lockheed that TMI had intentionally inflated its costs in the total amount of $17.735 million since January 1, 1998. Lockheed’s own subsequent calculations indicated that TMI had unlawfully inflated costs to the tune of $18.9 million.

The crux of the recklessness allegation is the government’s claim that Lockheed Martin could have and should have prevented TMI’s practice of unlawfully inflating its costs but failed to do so. The Master Agreement gave Lockheed’s buyer extensive audit rights to inspect TMI’s books and records. Nonetheless, while the Master Agreement was in effect, according to the government, Lockheed agreed to a severely restricted review of TMI costs. Although Lockheed’s buyer audited TMI twice a year, the audits were allegedly predictable and superficial , with TMI allegedly pre-selecting the small, predetermined number of hard copy vendor invoices that Lockheed’s buyer reviewed. The government also alleged that occasionally TMI provided altered invoices. The government claimed that Lockheed never inspected TMI’s actual books and records or its financial reports until late 2004 – and then only when TMI and Lockheed had learned that a federal prosecutor was investigating TMI’s costs. The government also claimed that Lockheed did not contact any of TMI’ s suppliers to verify the costs that TMI had reported to Lockheed even though Lockheed had purchased perishable tools from many of these suppliers before TMI and Lockheed’s Mater Agreement. Lockheed allegedly never requested audit assistance from DoD’s Defense Contract Audit Agency. Instead, Lockheed allegedly repeatedly used the same auditor, who had a long relationship with TMI. The government also alleged that several of Lockheed’s manufacturing managers had complained about price gouging by TMI.

In sum, the government’s case for recklessness was based on Lockheed’s alleged lack of oversight of TMI, such that Lockheed allegedly knowingly created false records and presented false claims to the United States for payment or approval.

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Railway Logistics How not to prepare and litigate a claim under the Contract Disputes Act

Earlier this year, we posted regarding government fraud counterclaims in Court of Federal Claims (COFC) cases (see link to that post, here, and a link to our West’s Briefing Paper on the subject, here). Soon thereafter, the COFC issued a decision once again addressing such counterclaims, see Railway Logistics International v. United States, — Fed. Cl. –, 2012 WL 171895 (Jan. 17, 2012). Railway Logistics offers contractors a powerful lesson in how not to prepare and litigate a claim submitted to the government pursuant to the Contract Disputes Act (CDA), 41 U.S.C. §§ 7101-7109.

In that case, the government awarded two contracts to Railway Logistics International (RLI) to provide materials for the rehabilitation of the Iraqi Republic Railway. After repeatedly missing contractual obligations and deadlines, the government terminated the contracts for convenience. In response to the termination, RLI submitted a certified claim for equitable adjustments and costs totaling nearly $6.5 million, approximately $2.4 million of which was based upon alleged subcontractor and vendor invoices, with the remainder due to the government’s alleged delays and changes. The sole support for RLI’s certified claim was a cost spreadsheet RLI had generated.

The government not only disclaimed responsibility for any of RLI’s damages, but also filed counterclaims against RLI, pursuant to the CDA’s fraud provision, 41 U.S.C. § 7103(c)(2), the False Claims Act, and the Special Plea in Fraud (also known as Forfeiture of Fraudulent Claims Act), 28 U.S.C.§ 2514. The government alleged that RLI knowingly submitted its CDA claim containing overstatements of costs. RLI, in response, contended that “at most, perhaps it could be charged with poor record keeping.”

The court flatly rejected RLI’s story, explaining that although RLI’s revised damages claim “totaled less than $1 million[,]” RLI presented a “certified claim to the contracting officer for over $6 million, and swore that the amount of the claim was what” the government owed RLI. In ruling for the government on all of its counterclaims, the court noted that RLI had “retreated” from the spreadsheet RLI allegedly prepared to support its claim, withdrawing, among other damages items, a claim for $3 million in lost business. Indeed, RLI seemingly was all but compelled to do so because “the spreadsheet was replete with exaggerated or fabricated figures” and costs for which “[p]laintiff provided no support.” In light of the certified claim, the court similarly rejected RLI’s proffered defense that the spreadsheet was intended to be simply “a ‘rough estimate'” of damages. Finally, the court observed that plaintiff “had no support” for many of the factual allegations and legal theories upon which plaintiff’s complaint was based.

Aside from actually possessing evidence to support a CDA claim, the lesson from this case is clear: contractors should scrub their CDA claims for factually (and legally) unsupportable items before submitting them to the contracting officer, and certainly prior to the filing of a complaint in the COFC to appeal a contracting officer’s final decision. Merely declining to pursue certain claim items in litigation may raise red flags, so ideally contractors should consult with counsel during the claim preparation process. The fact is that the government appears prepared to pursue fraud claims based upon abandoned CDA claim items, on the theory that such items likely are baseless, having been included solely for the purposes of negotiation – a particularly dangerous practice in light of Daewoo Eng’g & Constr. Co. v. United States, 557 F.3d 1332 (Fed. Cir. 2009).

Finally, despite the differences between the government’s burden of proof with respect to the Special Plea in Fraud (clear and convincing evidence), on the one hand, and the CDA’s fraud provision and the FCA (preponderance of evidence), on the other, we noted in the aforementioned Briefing Paper that “the Federal Circuit clearly has held that where the Government demonstrates a violation of the CDA’s fraud provision, the Government a fortiori, meets its burden under the FCA.” When the Government’s Best Defense Is a Good Offense: Litigating Fraud and Other Counterclaim Cases Before the U.S. Court of Federal Claims, Briefing Papers No. 11-12 (November 2011), at 9 (concluding that “the Federal Circuit implicitly has held that evidence sufficient to prove a CDA violation also is sufficient to sustain a forfeiture under the Special Plea in Fraud”). The COFC, in Railway Logistics, appears to have continued that trend. While explicitly distinguishing between the applicable burdens of proof, the court held that RLI’s “liability is clear by any standard” where the CDA “claim [was] based upon overestimations of costs” and where “[s]ubstantial parts of the claim cannot be supported.” In that regard, the court observed that the “[g]overnment limited its counterclaims to amounts that are directly contrary to invoices in evidence and costs that are obviously and grossly inflated.” The court thus ordered RLI’s claim forfeited – that is, “[a]ny amount of RLI’s claim that might have been valid” – based upon “[s]tatements contained in the spreadsheet alone[,]” which the court held to constitute clear and convincing evidence of fraud in violation of 28 U.S.C. § 2514.

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D. Minn. upholds qui tam complaint against ICD manufacturer Guidant

Posted by Sean Griffin and Kristin Graham Koehler

On March 14, 2012, Judge Donovan W. Frank of the United States District Court for the District of Minnesota upheld a relator’s complaint against Guidant Corporation (“Guidant”) based on its manufacture of certain implantable cardiac devices (“ICDs”), which had been sold to the Department of Veterans Affairs and/or reimbursed by Medicare. The relator, James Allen, alleged that Guidant had made false statements and failed to disclose known safety concerns in its post-approval reports to the Food and Drug Administration. Allen, a patient who had received one of Guidant’s ICDs, claimed that his allegations were based on his personal experience and certain adverse event reports he had reviewed. However, the safety and disclosure allegations in question had also been litigated both in prior, multi-district products liability litigation and in an earlier criminal adulteration proceeding.

After the government moved to intervene, Guidant moved to dismiss the relator’s complaint. The district court first rejected the argument that the government’s complaint in partial intervention was sufficient to supersede Allen’s complaint in its entirety. The district court also rejected the argument that the earlier litigation and related news coverage deprived the court of jurisdiction under the pre-FERA version of the FCA because it found the relator’s personal experience with Guidant’s products qualified him as an original source. Finally, the court found that Rule 9(b) had been satisfied because Relator had provided, inter alia, the names of Guidant employees allegedly involved in the purported false statements as well as the particulars of five allegedly defective devices.

While the court ultimately refused to dismiss this FCA case entirely, it did dismiss the relator’s claims for unjust enrichment and payment by mistake. Citing authority from courts in the First, Second, Eighth and D.C. Circuits, Judge Donovan ruled that qui tam relators lack standing to bring common law claims on behalf of the government.

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Fourth Circuit Panel Holds That SEC Filings May Trigger Public Disclosure Bar

On March 14, a three-judge panel of the Fourth Circuit held that a defendant’s SEC filings may trigger the FCA’s public disclosure bar. In U.S. ex rel Jones v. Collegiate Funding Services, Inc., No. 11-1103 (4th Cir. March 14, 2012), 2012 U.S. App. LEXIS 5574 (slip opinion attached), the relators alleged that CFS, a major student loan lender, violated the FCA by falsely certifying compliance with a variety of loan program requirements. The defendants successfully moved to dismiss the relators’ amended complaint on the ground that certain allegations had been publicly disclosed in various places, including the defendant’s SEC filings.

On appeal, the relators argued that SEC filings do not qualify as “administrative reports” for purposes of the FCA’s public disclosure bar. The Fourth Circuit panel affirmed the district court, holding that “the SEC filings by CFS were reasonably determined to be administrative reports because they were submitted under the SEC’s administrative regulatory requirements of the company. Forms 8-K and S-1 are mandatory filings for all publicly traded companies. While these documents were not authored by the SEC or created under their supervision, they were produced at the request of and were made public by the SEC in the course of carrying out its activities as a federal agency.”

While the opinion is unpublished, and therefore of no precedential value, its reasoning has persuasive value. As the Fourth Circuit panel explained, “the Supreme Court has noted that statutory construction of the FCA should be guided by the likelihood that a disclosure will ‘put the Government on notice of a potential fraud . . . . Congress passed the public disclosure bar to bar a subset of those suits that it deemed unmeritorious or downright harmful . . . . The statutory touchstone, once again, is whether the allegations of fraud have been [publicly disclosed].’ [citing Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, 130 S. Ct. 1396, 176 L. Ed. 2d 225 (2010)]. Here, the SEC forms in question were requested, received, made public, and presumably included in any corporate profiles compiled by the agency. While such a report does not necessarily alert federal agencies to wrongdoing, it certainly provides easily accessible notice of the transactions between CFS and its customers from which an investigation could have begun or developed.” Therefore, the panel concluded that “the SEC filings in question . . . were properly considered by the court below in the mix of publicly available information on the basis of which, in whole or in part, the Relators’ claims are based.”

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Oracle Investor Sues Over $200 Million Whistle-Blower Settlement

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.

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Noteworthy Commentary from the Relator’s Bar on DOJ’s “No Decision” Statements on Intervention

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.

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Dismissal and Sanctions Sought for Obtaining Protected Documents from Adversary’s Former Employees

Posted by Jaime L.M. Jones and Brad Robertson

Echoing a fact pattern often found in False Claims Act matters (see related post here), a recent motion filed in an unfair competition suit pending in the Southern District of Florida seeks sanctions for the inappropriate collection and use of confidential information from the opposing party’s former employees. In Millennium Laboratories, Inc. v. Aegis Sciences Corporation, consolidated cases No. 11-cv-20451 and 11-cv-22815, Millennium Laboratories claims that counsel for Aegis Sciences Corporation initiated numerous inappropriate ex parte communications with two of Millennium’s former employees and collected over 5,000 pages of Millennium’s documents—many of which were clearly marked as containing proprietary, confidential and/or attorney-client privileged information—and used the documents as the foundation of a counterclaim against Millennium. The motion further alleges that the former employees’ non-disclosure and confidentiality agreements with Millennium protected these materials and that documents in the production put counsel for Aegis on notice of the agreements. When faced with responding to discovery requests asking for the basis of its counterclaims, the motion asserts that counsel for Aegis allegedly attempted to cover up the circumstances of its receipt of these documents by returning them to the former employees and re-collecting them via a “friendly” third party subpoena before serving its responses.

Millennium seeks dismissal of the defendant’s counterclaims, monetary sanctions, and disqualification of counsel based on Federal Rule of Civil Procedure 37 and violation of the Florida Rules of Professional Conduct. While Aegis will almost certainly oppose the motion, it serves as another reminder that relators (and their counsel) may face significant legal risk when they rely on improperly obtained or retained internal company documents to bring an FCA claim.

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