The Best Lawyers in America® 2020 has recognized 158 Gibson Dunn attorneys in 54 practice areas. Additionally, 48 lawyers were recognized in Best Lawyers International in Belgium, Brazil, France, Germany, Singapore, United Arab Emirates and United Kingdom.
Washington, D.C. partner Mark Perry and Los Angeles partner Perlette Jura are the contributing editors of “Appeals 2019,” a publication examining Appellate law and procedure between jurisdictions around the globe, published by Getting the Deal Through in June 2019. Perry and Jura are the authors of the “Global Overview” and the “United States” chapters of the book, and London partners Patrick Doris and Doug Watson and associate Daniel Barnett are the authors of the “United Kingdom” chapter.
Los Angeles partner James L. Zelenay Jr. and associate attorney Sean S. Twomey are the authors of “Mid-Year Review: False Claims Act Enforcement in 2019” [PDF] published by the Daily Journal on August 1, 2019.
Washington D.C. partner F. Joseph Warin and associate attorneys Jason Smith and Susanna Schuemann are the authors of “Navigating Cross-Border Investigations Involving Switzerland” [PDF] published by the Global Investigations Review on July 12, 2019.
Click for PDF As we progress through the Trump Administration’s third year, robust False Claims Act (“FCA”) enforcement continues. At the same time, the Administration has continued to signal a greater openness to tempering overly aggressive FCA theories. In the past six months, the Department of Justice (“DOJ”) issued long-awaited guidance about cooperation credit in FCA cases and also continued to seek dismissal of some declined cases pursued by whistleblowers (albeit with mixed success). Aside from these efforts, however, DOJ has not evidently relaxed its approach to enforcement: the first half of the year saw DOJ announce recoveries of nearly three-quarters of a billion dollars in settlements, largely from entities in the health care and life sciences industries. The next year should provide insight as to whether the Administration’s policy refinements are the vanguard of a more meaningful shift by DOJ away from its historical enforcement efforts. But even if that were the case, enterprising relators and aggressive state enforcers may end up filling any gaps. In just the past half year, several states took steps to enact or strengthen existing FCA statutes. Regardless of what direction DOJ and the Trump Administration head, federal courts’ FCA decisions from the last six months serve as a reminder that FCA litigation remains hard-fought, given the enormous stakes. At the highest level, the U.S. Supreme Court weighed in on the FCA again this year, resolving a circuit split about the FCA’s statute of limitation in favor of whistleblowers. This marked the third time in four years the land’s highest court interpreted the FCA. Meanwhile, lower courts also remained active in FCA jurisprudence, issuing a number of notable opinions that we have summarized herein. Below, we begin by addressing enforcement activity at the federal and state levels, turn to legislative developments, and then analyze significant court decisions from the past six months. As always, Gibson Dunn’s recent publications regarding the FCA may be found on our website, including in-depth discussions of the FCA’s framework and operation, industry-specific presentations, and practical guidance to help companies avoid or limit liability under the FCA. And, of course, we would be happy to discuss these developments—and their implications for your business—with you. I. NOTEWORTHY DOJ ENFORCEMENT ACTIVITY DURING THE FIRST HALF OF 2019 DOJ has announced more than $750 million in settlements this year, a slight uptick from this point in 2018, but somewhat down from half-year highs set in recent years. The dollar totals tell only part of the story, however, as neither DOJ nor qui tam relators have scaled back FCA investigations or whistleblower complaints considerably. As in recent years, DOJ secured the lion’s share of its FCA recoveries from enforcement actions involving health care and life sciences entities. Although DOJ’s recoveries came from cases reflecting a wide variety of theories of FCA liability, cases involving alleged violations of the Anti-Kickback Statute (“AKS”) and the Stark Law, which generally prohibit various types of remunerative arrangements with referring health care providers, continued to predominate. This year, DOJ’s AKS enforcement activity includes several large recoveries, totaling nearly $250 million, from pharmaceutical companies accused of unlawfully covering Medicare copays for their own products through charitable foundations. Further, DOJ backed up its statements regarding its plans to combat the opioid epidemic as it recovered more than $200 million from an opioid manufacturer accused of paying kickbacks. Below, we summarize these and some of the other most notable settlements thus far in 2019. A. Health Care and Life Science Industries On January 28, a hospital and six of its owners agreed to pay the federal government $8.1 million to settle claims that it violated the FCA by submitting false claims to Medicare and Medicaid programs in violation of the AKS and Stark Law. DOJ alleged that the hospital, its subsidiary, and at least two affiliates recruited a medical director in order to secure his referrals of patients by offering the physician compensation that exceeded fair market value for his services. The whistleblower will receive $1.6 million from the federal government.[1] On January 30, a pathology laboratory agreed to pay $63.5 million to settle allegations that it violated the FCA by engaging in improper financial relationships with referring physicians. The settlement resolves allegations that the company violated the AKS and the Stark Law by providing subsidies to referring physicians for electronic health records (“EHR”) systems and free or discounted technology consulting services. The allegations stem from three whistleblower lawsuits, and the whistleblowers’ share of the settlement had not been determined at the time the settlement was announced.[2] On February 6, a Florida-based developer of EHR software agreed to pay $57.25 million to resolve allegations that it caused its users to submit false claims to the government by (1) misrepresenting the capabilities of its EHR product (thereby enabling them to seek meaningful use incentive payments) and (2) violating the AKS (by financially incentivizing its client health care providers to recommend its product to prospective customers).[3] On February 6, a Georgia-based hospital agreed to pay $5 million to resolve allegations that it violated the FCA by engaging in improper financial relationships with referring physicians between 2012 and 2016. DOJ alleged that the hospital compensated the physicians in amounts that were above fair market value or in a manner that took into account the volume or value of the physicians’ referrals.[4] On February 27, a Tennessee-based health care company and its related companies agreed to pay more than $18 million to resolve a lawsuit brought by DOJ and Tennessee alleging they billed the Medicare and Medicaid programs for substandard nursing home services. The settlement also resolves claims brought by DOJ against the company’s majority owners and CEO, as well as the LLC’s former director of operations, who agreed to pay $250,000 toward the settlement.[5] On March 11, a medical technology company agreed to pay more than $17.4 million to resolve allegations that it violated the FCA by providing free or discounted practice development and market development support, allegedly amounting to “in-kind” payments to induce physicians in California and Florida to purchase the company’s ablation products. Under the settlement, the company also will pay approximately $1.4 million to California and approximately $1.0 million to Florida for claims paid for by the states’ Medicaid programs. The two whistleblowers, former company employees, will receive approximately $3.1 million as their share of the federal recovery.[6] On March 21, a Maryland-based health care company and its affiliates agreed to pay $35 million to settle allegations under the FCA that it paid kickbacks to a Maryland cardiology group in exchange for referrals, through a series of contracts with two Maryland hospitals. The settlement resolved two whistleblower lawsuits brought by cardiac surgeons and former patients, who alleged that the company and its affiliates performed medically unnecessary cardiac procedures for which they submitted false claims to Medicare. The whistleblowers’ share had not been disclosed yet.[7] In April, several pharmaceutical companies reached settlements with DOJ over allegations involving charitable funds. For example: As part of a string of investigations by the U.S. Attorney’s Office for the District of Massachusetts, three pharmaceutical companies agreed to pay a total of $122.6 million to resolve allegations that they violated the FCA by illegally paying the Medicare or Civilian Health and Medical Program copays for their own products through purportedly independent foundations that were allegedly used as mere conduits. The government contended that the companies’ payments of the copays were kickbacks aimed at inducing patients to use the companies’ drugs. In all three matters, the government alleged that the foundations were used to generate revenues from prescriptions for patients who would have otherwise been eligible for the companies’ free drug programs. One company agreed to pay $57 million; the second company agreed to pay $52.6 million, and the third company agreed to pay $13 million.[8] On April 30, a Kentucky-based pharmaceutical company agreed to pay $17.5 million to resolve allegations that it violated the FCA and AKS by paying kickbacks to patients and physicians to induce prescriptions of two of its drugs. DOJ alleged that the company increased the drugs’ prices in January 2012, which increased Medicare patients’ copays. Then, DOJ asserted, the company paid these patients’ copays through a third-party Parkinson’s Disease fund, thereby providing illegal inducements to patients to purchase the drugs. The allegations underlying the settlement were originally raised by whistleblowers, who will receive $3.15 million as their share of the recovery.[9] On April 12, a California-based health care services provider and several affiliated entities agreed to pay $30 million to resolve allegations that the affiliated entities submitted false information about the health status of beneficiaries enrolled in Medicare Advantage plans, which purportedly resulted in overpayments to the provider.[10] On May 6, a West Virginia-based health care company agreed to pay $17 million to resolve allegations of a billing scheme that allegedly defrauded Medicaid of $8.5 million. This represented the largest health care fraud settlement in the history of West Virginia, and the state will collect $2.2 million from the settlement. DOJ alleged that the company, acting through a subsidiary and several of its drug treatment centers, sent blood and urine samples to outside laboratories for testing, and then submitted reimbursement claims to West Virginia Medicaid as if the treatment centers had performed the tests themselves. According to the government, since the company paid the outside laboratories a lower rate than its requested reimbursement to Medicaid, the company wrongfully collected $8.5 million.[11] On May 30, a Kansas-based cardiologist agreed to pay $5.8 million to resolve allegations that he and his medical group violated the FCA by improperly billing federal health care programs for medically unnecessary cardiac stent procedures. This marked the DOJ’s third False Claims settlement with the cardiologist and his medical group, who concurrently agreed with U.S. Department of Health and Human Services (“HHS”) to be excluded from participation in federal health programs for three years. The settlement announcement resolves allegations in a whistleblower lawsuit filed by another cardiologist, who will receive approximately $1.16 million from the settlement.[12] On May 31, a New Jersey-based pharmaceutical company was charged under the Sherman Act for conspiring with competitors to fix prices, rig bids, and allocate customers. In a separate civil resolution, the company agreed to pay $7.1 million to resolve allegations under the FCA related to the alleged price fixing conspiracy. DOJ asserted that between 2012 and 2015, the company paid and received remuneration through arrangements on price, supply, and allocation of customers with other pharmaceutical manufacturers for certain generic drugs, in violation of the AKS, and that its sale of such drugs resulted in claims submitted to or purchases by federal health care programs.[13] On June 5, an opioid manufacturing company agreed to a $225 million global resolution to settle the government’s criminal and civil investigations. DOJ alleged that the company paid kickbacks and engaged in other unlawful marketing practices to induce physicians and nurse practitioners to prescribe its opioid to patients. As part of the criminal resolution, the company entered into a deferred prosecution agreement with the government, and its subsidiary pleaded guilty to five counts of mail fraud. The company also agreed to pay a $2 million criminal fine and a $28 million forfeiture. As part of the civil resolution, the company agreed to pay $195 million. The allegations stem from five whistleblower lawsuits, and the whistleblowers’ share of the settlement has yet to be determined.[14] On June 30, the nation’s largest operator of inpatient rehabilitation centers agreed to pay $48 million to resolve allegations that its centers provided medically unnecessary treatment, and also submitted false information to Medicare to achieve higher levels of reimbursement. The settlement involved allegations across multiple facilities and was part of DOJ’s broader efforts to target inpatient treatment facilities nationally. B. Government Contracting On January 28, a corporation that provides information and technology services agreed to pay $5.2 million to resolve allegations that it violated the FCA by falsely billing labor under its contract with the United States Postal Service (“USPS”). Under the contract, the company would bill the USPS for personnel performing services at rates established by certain billing categories. DOJ alleged that the corporation knowingly billed the USPS for certain personnel services at higher category rates, even though the personnel did not have the education and/or experience to be in these categories.[15] On March 25, a private university in North Carolina agreed to pay the government $112.5 million to resolve allegations that it violated the FCA by submitting applications and progress reports that contained purportedly falsified research on federal grants to the National Institutes of Health (“NIH”) and to the Environmental Protection Agency. Among other allegations, DOJ asserted that the university fabricated research results related to mice to claim millions of grant dollars from the NIH. The allegations stem from a whistleblower lawsuit brought by a former university employee, who will receive $33.75 million from the settlement.[16] On May 13, a California-based software development company agreed to pay $21.57 million to resolve allegations that it caused the government to be overcharged by providing misleading information about its commercial sales practices, which was then used in General Services Administration (“GSA”) contract negotiations. DOJ alleged that the company knowingly provided false information concerning its commercial discounting practices for its products and services to resellers. These resellers then allegedly used that information in negotiations with GSA for government-wide contracts. DOJ alleged this caused GSA to agree to less favorable pricing, which led the government purchasers to be overcharged. The allegations stemmed from a whistleblower lawsuit filed by a former company employee, who will receive over $4.3 million from the resolution.[17] II. LEGISLATIVE AND POLICY DEVELOPMENTS A. Federal Developments 1. Guidance Regarding Cooperation Credit The first half of 2019 did not witness major legislative developments at the federal level pertaining to the FCA. But DOJ has advanced its recent efforts to more publicly and transparently articulate its approach to FCA cases, as evidenced by the May 2019 release of long-awaited guidance regarding cooperation credit in FCA investigations.[18] We covered this development in detail in our May 14, 2019 alert entitled “Cooperation Credit in False Claims Act Cases: Opportunities and Limitations in DOJ’s New Guidance.” Several key points regarding the guidance bear mention here. The guidance is the latest chapter in a broader effort by DOJ to scale back the “all or nothing” approach to cooperation credit set forth in the 2015 Yates Memorandum. This initiative stems from a belief that that approach, in the words of former Deputy Attorney General Rod J. Rosenstein, had been “counterproductive in civil cases” because it deprived DOJ attorneys of the “flexibility” they needed “to accept settlements that remedy the harm and deter future violations.”[19] In keeping with Mr. Rosenstein’s statements, the new DOJ guidance—codified at Section 4-4.112 of the Justice Manual[20]—provides that defendants may receive varying levels of cooperation credit depending on their efforts across ten non-exhaustive categories of cooperation.[21] These include: “[i]dentifying individuals substantially involved in or responsible for the misconduct”; making individuals available who have “relevant information”; “[a]dmitting liability or accepting responsibility for the relevant conduct”; and “[a]ssisting in the determination or recovery” of losses.[22] The guidance also notes that cooperation must have value for DOJ, as measured by the “timeliness and voluntariness” of the cooperation, the “truthfulness, completeness, and reliability” of the information provided, the “nature and extent” of the cooperation, and the “significance and usefulness of the cooperation” to DOJ. Under the guidance, DOJ’s determination of cooperation credit will consider remediation undertaken by the defendant, including remediation focused on root causes and discipline of relevant individuals.[23] The guidance states that to receive full credit, entities should “undertake a timely self-disclosure that includes identifying all individuals substantially involved in or responsible for the misconduct, provide full cooperation with the government’s investigation, and take remedial steps designed to prevent and detect similar wrongdoing in the future.”[24] Unlike DOJ’s guidance regarding cooperation in criminal cases, the new FCA guidance does not provide for percentage reductions in penalties (or damages) for various levels of cooperation. Instead, the guidance focuses on DOJ’s “discretion . . . [to] reduc[e] the penalties or damages multiple sought by the Department,” and provides that no defendant may receive cooperation credit so great as to result in the payment of an amount less than single damages (including relator’s share, plus lost interest and costs of investigation).[25] The new guidance provides a measure of clarity regarding DOJ’s overall approach to cooperation credit, and the flexible standards the guidance sets forth provide opportunities for defendants to formulate creative negotiation and litigation strategies. On the other hand, the guidance lacks specificity regarding several critical issues (e.g., what constitutes cooperation and how to assess the value that cooperation provides to DOJ). 2. Application of the Granston Memorandum As we have previously discussed, DOJ signaled last year that it will increasingly consider moving to dismiss some FCA qui tam actions. Specifically, in January 2018, Michael Granston, the Director of the Fraud Section of DOJ’s Civil Division, issued a memorandum (the “Granston Memo”) stating that “when evaluating a recommendation to decline intervention in a qui tam action, attorneys should also consider whether the government’s interests are served, in addition, by seeking dismissal pursuant to section 3730(c)(2)(A).”[26] The Granston Memo established a list of non-exhaustive factors for DOJ to evaluate when considering whether to dismiss a case under section 3730(c)(2)(A), which states that the government may dismiss an FCA “action notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.”[27] The Granston Memo’s release prompted cautious optimism among FCA observers that DOJ would step in to dismiss unmeritorious cases, but the Memo also left many open questions regarding exactly how DOJ would exercise its discretion. Since the Memo’s release, FCA defendants routinely have pushed DOJ to dismiss cases, and in some cases, DOJ has done just that. But a little more than a year after the Memo’s release, there are signs that DOJ is continuing to calibrate its approach, in response both to defendants’ insistent entreaties and scrutiny by the courts (which must approve any dismissal). First, the memorandum’s namesake, DOJ Civil Fraud Section Director Michael Granston, recently elaborated on how DOJ will apply the Granston Memo’s principles. In remarks at the Federal Bar Association’s FCA Conference in March, Mr. Granston explained that DOJ will not be persuaded to dismiss qui tam actions “[j]ust because a case may impose substantial discovery obligations on the government.”[28] The decision to seek dismissal, he said, will instead be evaluated on a case-by-case basis, with the cost-benefit analysis focusing on the likelihood that the relator can prove the allegations brought on behalf of the government.[29] Mr. Granston cautioned that defendants “should be on notice that pursuing undue or excessive discovery will not constitute a successful strategy for getting the government to exercise its dismissal authority,” and that “[t]he government has, and will use, other mechanisms for responding to such discovery tactics.”[30] Overall, Mr. Granston stated, “dismissal will remain the exception rather than the rule.”[31] Second, Deputy Associate Attorney General Stephen Cox delivered remarks at the 2019 American Conference Institute’s Advanced Forum on False Claims and Qui Tam Enforcement that explained DOJ’s approach to dismissals.[32] Regarding the Granston Memo, Mr. Cox characterized the relationship between qui tam relators and the government as a “partnership,” formed on the belief that relators “are often uniquely situated to bring fraudulent practices to light.”[33] He emphasized, however, that DOJ plays a “gatekeeping role” in ensuring that when a relator prosecutes a non-intervened FCA case, it does not do so in a way that harms the government’s financial interests or creates bad law for the government.[34] Mr. Cox stated that the Granston Memo “is not really a change in the Department’s historical position,” but he acknowledged that DOJ’s use of its dismissal authority has increased since 2017.[35] Mr. Cox told listeners that while DOJ “will remain judicious,” it “will use this tool more consistently to preserve our resources for cases that are in the United States’ interests.”[36] In more recent remarks, Mr. Cox has added that DOJ’s “more consistent[]” use of its dismissal authority will aim at “reign[ing] in overreach in whistleblower litigation.”[37] With DOJ’s increased use of its statutory dismissal authority has come greater judicial scrutiny of the scope of that authority and the standards to be applied in determining whether dismissal is appropriate. In the wake of the Granston Memo, lower courts have been forced to analyze the standard that courts should apply when the government moves to dismiss qui tam cases. These cases have pitted two competing standards against each other, with mixed results. Previously, in United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139 (9th Cir. 1998), the Ninth Circuit held that the government’s dismissal is first examined for: (1) an identification of a valid government purpose by the government; and (2) a rational relation between the dismissal and accomplishment of the government’s purpose. Id. at 1145. If the government’s dismissal meets the two-step test, the burden shifts to the relator to show that the “dismissal is fraudulent, arbitrary and capricious, or illegal.” Id. (quoting United States ex rel. Sequoia Orange Co. v. Sunland Packing House Co., 912 F. Supp. 1325, 1353 (E.D. Cal. 1995)). The Tenth Circuit adopted the Sequoia standard and also applies the above test. Ridenour v. Kaiser-Hill Co., 397 F.3d 925, 936, 940 (10th Cir. 2005). In contrast, in Swift v. United States, 318 F.3d 250, 253 (D.C. Cir. 2003), the D.C. Circuit rejected the Ninth Circuit’s Sequoia standard, holding that nothing in section 3730(c)(2)(A) “purports to deprive the Executive Branch of its historical prerogative to decide which cases should go forward in the name of the United States.” The court observed that the purpose of the hearing provided for in section 3730(c)(2)(A) “is simply to give the relator a formal opportunity to convince the government not to end the case.” Id. Therefore, the D.C. Circuit held that the government has “an unfettered right to dismiss” FCA actions, and so government dismissals are basically “unreviewable” (with a possible exception for dismissals constituting “fraud on the court”). Id. at 252-53. However, the remainder of the federal circuit courts have not weighed in on the standard for government dismissals of qui tam actions thus far. In the meantime, several district courts have confronted this issue, with some following Sequoia, while others followed Swift. Among the courts following Sequoia were the following: In United States v. EMD Serono, Inc., 370 F. Supp. 3d 483 (E.D. Pa. 2019), the U.S. District Court for the Eastern District of Pennsylvania adopted the Ninth Circuit’s Sequoia standard after critiquing the D.C. Circuit’s approach in Swift. The court then held that the government’s dismissal had met the Sequoia standard because the government had “articulated a legitimate interest” when it argued that the “allegations lack merit, and continuing to monitor, investigate, and prosecute the case will be too costly and contrary to the public interest.” at 489. Id. at 489. In United States ex rel. CIMZNHCA, LLC v. UCB, Inc., No. 17-CV-765-SMY-MAB, 2019 WL 1598109 (S.D. Ill. Apr. 15, 2019), the U.S. District Court for the Southern District of Illinois adopted the Ninth Circuit’s Sequoia standard and rejected the D.C. Circuit’s approach in Swift. Applying the Sequoia standard, the court found that the government’s “decision to dismiss this action is arbitrary and capricious, and as such, not rationally related to a valid governmental purpose.” Id. at *4. Although the government had identified a valid interest of avoiding litigation costs, the court found the government had failed to conduct the requisite “minimally adequate investigation” because it collectively investigated the eleven claims that the relator’s group filed without specifically investigating the relator’s claim against the defendants in this case. Id. at *3. Other district courts have been persuaded by Swift’s “unfettered” dismissal standard. In United States ex rel. Davis v. Hennepin County, No. 18-CV-01551 (ECT/HB), 2019 WL 608848 (D. Minn. Feb. 13, 2019), the U.S. District Court for the District of Minnesota stated that the Swift standard was more consistent with section 3730(c)(2)(A)’s text and with the Constitution, but did not decide the issue because the government was entitled to dismissal under both the Swift and Sequoia standards. According to the court, the government could dismiss because “the Relators were notified of the motion and received the opportunity for a hearing.” Id. at *7. However, the court then observed that the government would still be entitled to dismissal even under Sequoia. Id. The court credited the government’s rationale of avoiding the cost and burden of a case that would likely result in no recovery, and also noted that the relators had put forth no factual evidence that the government was acting capriciously by ignoring evidence. Id. In United States ex rel. Sibley v. Delta Reg’l Med. Ctr., No. 17-CV-000053-GHDRP, 2019 WL 1305069 (N.D. Miss. Mar. 21, 2019), the U.S. District Court for the Northern District of Mississippi indicated its agreement with the Swift standard, but then observed that the government was entitled to dismissal under either standard. There, the government declined to intervene, then moved to dismiss her action, arguing that the action would interfere with the government’s efforts to enforce the Emergency Medical Treatment Act, would use scarce government resources, and that the complaint did not allege any viable claims. Id. at *2-*3. Aligning with Swift, the court explained that the government “possesses the unfettered discretion to dismiss a qui tam [FCA] action” and therefore that the court must grant the government’s motion. Id. at *7. Regardless, the government was entitled to dismissal even under Sequoia, as the government had stated a “valid reason for dismissal” that the relator could not refute. Id. at *8. In United States ex rel. De Sessa v. Dallas Cty. Hosp. Dist., No. 3:17-CV-1782-K, 2019 WL 2225072 (N.D. Tex. May 23, 2019), the U.S. District Court for the Northern District of Texas also echoed Swift’s reasoning, while concluding that the government was entitled to dismissal under either standard. In a short decision, the court cited to Swift and granted the government’s motion to dismiss the relator’s FCA fraud claim. Id. at *2. The court then explicitly noted that its holding did not dismiss the relator’s FCA retaliation claim, as that claim was not brought on behalf of the U.S. government. Id. B. State Developments As detailed in our 2018 Mid-Year and Year-End False Claims Act Updates, Congress created financial incentives in 2005 for states to enact their own false claims statutes that are as effective as the federal FCA in facilitating qui tam lawsuits, and that impose penalties at least as high as those imposed by the federal FCA.[38] States passing review by HHS’s Office of Inspector General (“OIG”) may be eligible to “receive a 10-percentage-point increase in [their] share of any amounts recovered under such laws” in actions filed under state FCAs.[39] As of June 2019, HHS OIG has approved laws in twenty states (California, Colorado, Connecticut, Delaware, Georgia, Illinois, Indiana, Iowa, Massachusetts, Montana, Nevada, New York, North Carolina, Oklahoma, Rhode Island, Tennessee, Texas, Vermont, Virginia and Washington), while nine states are still working towards FCA statutes that meet the federal standards (Florida, Hawaii, Louisiana, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, and Wisconsin).[40] Five approvals have occurred in 2019 to date (California, Delaware, Georgia, New York, and Rhode Island).[41] While HHS OIG did not publicly state the reasons for these approvals, they likely stemmed at least in part from the fact that all five states recently amended their false claims statutes to peg their civil penalties to those imposed by the federal FCA, including as adjusted for inflation under the Federal Civil Penalties Inflation Adjustment Act of 1990.[42] Some states have continued to consider (or implement) revisions to their false claims acts after federal approval. Most notably, in May 2019, the California Assembly passed Assembly Bill No. 1270, which would amend the California False Claims Act’s definition of materiality, for purposes of the “false record or statement” prong of the statute, to consider only “the potential effect of the false record or statement when it is made, not . . . the actual effect of the false record or statement when it is discovered.”[43] This change could mark a significant pro-plaintiff limiting of the concept of materiality in the wake of Escobar, which held that materiality is a matter of the “effect on the likely or actual behavior of the recipient of an alleged misrepresentation.”[44] The California bill also would expand the state false claims act to apply to certain claims, records, or statements made under the California Revenue and Taxation Code. Specifically, the bill extends the California false claims act to tax-related cases where the damages pleaded exceed $200,000, and where the state-taxable income or sales of any person or corporation against whom the action is brought exceeds $500,000.[45] The new law would require the state Attorney General or prosecuting authority, prior to filing or intervening in any false claims act case related to taxes, to consult with the relevant tax authority.[46] Under the bill, the state Attorney General or prosecuting authority, but not a qui tam relator, would be authorized to obtain from state government agencies otherwise confidential records relating to taxes, fees, or other obligations under California’s Revenue and Taxation Code.[47] The amendment would prohibit the state government authorities from disclosing federal taxation information to the state Attorney General or prosecuting authority without IRS authorization. The amendment would also prohibit disclosure by the state Attorney General or prosecuting authority of any taxation information it does receive, “except as necessary to investigate and prosecute suspected violations” of the California false claims act.[48] The bill is currently being considered by committees in the California Senate.[49] Other states lack false claims statutes and have moved in fits and starts towards enacting them. For example, as of June 2019, a bill to enact the South Carolina False Claims Act remained pending in the state’s legislature after being referred to the state senate’s judiciary committee in January.[50] The bill is nearly identical to the last false claims act bill introduced in South Carolina’s Senate, which died in that body’s judiciary committee after being referred in January 2015.[51] Other states that lack broad false claims acts have nonetheless moved incrementally towards endowing themselves with robust enforcement powers. West Virginia, for example, lacks a false claims statute broadly defined, but does prohibit Medicaid fraud through a statute that in some ways resembles the FCA.[52] Until early 2019, the state’s Medicaid Fraud Control Unit (“MFCU”), which holds the power to investigate possible violations of the statute, sat within the state department of health and human services. However, a bill was passed on March 7, 2019, which will relocate the MFCU to the Office of the Attorney General.[53] Once effective on October 1, 2019, the new law will give primary prosecution authority to the Office of the Attorney General; only if that office declines prosecution will attorneys employed or contracted by the state department of health and human services have authority to take the case forward.[54] This consolidation of power in the Office of the Attorney General could be the first step in a push for enactment of broader false claims enforcement powers. III. NOTABLE CASE LAW DEVELOPMENTS With a U.S. Supreme Court decision, more than a dozen notable circuit court decisions, and a handful of important district court decisions too, the first half of 2019 was an active period on the case law front (as detailed below). A. U.S. Supreme Court Extends the Statute of Limitations in Cases Where the Government Does Not Intervene The FCA provides two different limitations periods for “civil action[s] under section 3730”—(1) six years after the statutory violation occurs, or (2) three years “after the United States official charged with the responsibility to act knew or should have known the relevant facts, but not more than [ten] years after the violation.” 31 U.S.C. § 3731(b). Whichever period is longer applies. In Cochise Consultancy, Inc. v. United States ex rel. Hunt, 139 S. Ct. 1507 (2019), the Supreme Court resolved a circuit split regarding the FCA’s statute of limitations for qui tam actions pursued only by a whistleblower, without government participation. Specifically, the question that had split the circuit courts is whether a relator—pursuing a case where the government has declined to intervene—can take advantage of the longer statute of limitations period of up to ten years. In Cochise, the relator conceded that more than six years had elapsed before he filed his suit from when the alleged FCA violations occurred. Id. at 1511. However, the relator argued that fewer than three years had elapsed between when the relator had revealed the alleged FCA violations to federal agents and when the relator filed his suit. Id. Thus, the relator argued that he should be able to take advantage of the longer statute of limitations period, triggered from when he had disclosed his allegations to the government. Id. The district court initially dismissed the suit, holding that section 3731(b)(2)’s three-year period does not apply to relator-initiated suits in which the government declines to intervene. Id. But the Eleventh Circuit reversed, and held that the longer period could apply to relator-initiated suits in which the government declines to intervene. Id. The Supreme Court, looking to resolve a circuit split, unanimously affirmed the Eleventh Circuit’s ruling. Id. at 1510. The Court reasoned that, because section 3731(b)’s two statute of limitations periods apply to “civil action[s] under section 3730” and because both government and relator-initiated FCA suits constitute “civil action[s] under section 3730,” the statute’s plain text made both of the limitations periods applicable to both types of suits. Id. at 1511-12 (quoting section 3731(b)). The Court also held that private relators in non-intervened suits do not constitute “the official of the United States charged with responsibility to act in the circumstances” under section 3731(b)(2). Id. at 1514. In other words, section 3731(b)(2)’s three-year period does not begin when a private relator who initiates the suit knows or should have known about the fraud. Id. Thus, because section 3731(b)(2)’s three-year period is available in relator-initiated non-intervened suits and because the private relator’s learning of the facts does not begin this three-year period, dismissal of the relator’s suit was not warranted on statute-of-limitations grounds. Id. B. Courts Continue to Interpret the FCA’s Materiality Requirement Post-Escobar As we have previously discussed, courts continue to wrestle with the implications of the Supreme Court’s decision in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the landmark decision that addressed the implied certification theory of liability, and in the process gave renewed emphasis to the concepts of materiality and government knowledge under the FCA. 1. The Fifth Circuit Applies Escobar in Analyzing Materiality In United States ex rel. Lemon v. Nurses To Go, Inc., 924 F.3d 155 (5th Cir. 2019), the Fifth Circuit, reviewing a district court’s dismissal of claims, engaged in a thorough application of Escobar, articulating three non-exhaustive “factors” for determining materiality. First, the court asked whether the government expressly conditioned payment on meeting the statutory or regulatory requirements at issue. Second, the court considered whether the government would have denied payment if it had known of the violations, a factor which the court referred to as “government enforcement.” And third, the court asked whether the defendant’s noncompliance was substantial or minor. In Lemon, the relators alleged that a hospice provider submitted claims affirming it had complied with various Medicare statutory and regulatory requirements, despite allegedly violating several requirements related to certifications, face-to-face physician patient encounters, and writing plans of care. Id. at 157. They also alleged that the hospital billed for ineligible services and patients, such as billing for already deceased patients. Id. at 157-58. Applying each of its articulated Escobar factors in turn, the Fifth Circuit began by addressing conditions of payment. The court acknowledged that Escobar held that violating a requirement which is labeled a condition of payment does not alone “conclusively establish materiality.” Id. at 161. Nevertheless, conditioning payment on a requirement is “certainly probative evidence of materiality.” Id. (quoting United States ex rel. Rose v. Stephens Institute, 909 F.3d 1012, 1020 (9th Cir. 2018)). Because the Medicare statute expressly noted that payment can only be made if the certification, face-to-face encounter, and plan-of-care requirements that the defendants allegedly violated were met, the court held that the defendants’ allegedly fraudulent certifications that they had complied with the statutory and regulatory requirements violated the government’s express conditions of payment. Id. Second, the court turned to government enforcement. Id. at 161-62. Here, the relators alleged in their complaint that HHS OIG had previously pursued enforcement actions against other hospice providers that had committed violations similar to the defendants’ alleged violations—namely submitting bills for ineligible services and patients and failing to conduct the required certifications. Id. at 162. Because of these past enforcement actions, the Court held that the relators here had created a reasonable inference that the government would have denied payment had it known of the defendants’ violations. Id. The Court found additional support for this conclusion in the Sixth Circuit’s holding in United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 892 F.3d 822 (6th Cir. 2018) (previously discussed here and here). There, the Sixth Circuit concluded that Escobar does not require relators to allege specific previous government prosecutions for claims similar to the relator’s. Id. Third, the Fifth Circuit analyzed whether the noncompliance was substantial or minor. Id. at 163. Citing Escobar, the court noted that a violation is material either when a reasonable person would “attach importance” to the noncompliance or when the defendant knew or had reason to know that the false representation’s recipient would attach importance to it, even though a reasonable person would not. Id. Because the court had determined in its government enforcement analysis that the government would have denied payment had it known of the defendants’ violations, the court therefore held that government would have attached importance to the violations. Id. Thus, the relators had also satisfied the third factor, showing that the noncompliance was substantial. Id. Given that all three factors were satisfied, the court held that the relators had sufficiently alleged material violations to survive the motion to dismiss. Id. 2. The Third Circuit Analyzes Post-Escobar Materiality Standards on Summary Judgment In United States ex rel. Doe v. Heart Solutions, PC, 923 F.3d 308 (3d Cir. 2019), the Third Circuit explored materiality and causation in light of Escobar. There, the government filed an FCA claim alleging that the defendants, an individual and her health care company, had violated Medicare regulations requiring all diagnostic testing to be performed under the proper level of physician supervision. Id. at 311. Specifically, the government alleged that the defendants had falsely represented that a licensed neurologist performed all their company’s neurological testing as required by regulation, when their testing allegedly was not supervised by a neurologist in reality. Id. Applying Escobar to the government’s motion for summary judgment, the Third Circuit found that the government met its initial summary judgment burden to show materiality by submitting evidence that Medicare would not have paid the testing claims without a supervising neurologist’s certification, per regulation. Id. 318. When the defendants failed to introduce any evidence to rebut this, the court held that the government had met its materiality burden. Id. Notably, the court also held that by establishing materiality, the government also had adequately demonstrated causation. Id. According to the court, “because these misrepresentations were material, they caused damage to Medicare,” and therefore “but for the misrepresentations, Medicare would never have paid the claims.” Id. This ruling, which appears to conflate the separate elements of causation and materiality by hinging causation entirely on materiality, will be one to watch in future decisions. C. Courts Continue to Analyze Rule 9(b)’s Particularity Requirement in FCA Claims In last year’s year-end update, we noted that the circuit courts continue to struggle with how to apply Rule 9(b)’s particularity requirement in FCA cases. Rule 9(b) heightens the pleading standard required in fraud claims, stating that a party alleging fraud “must state with particularity the circumstances constituting fraud or mistake.” This year, several circuits further analyzed Rule 9(b)’s application to FCA cases. 1. The Ninth Circuit Discusses the Relationship between Rule 9(b)’s Particularity Standard and the FCA’s Materiality Requirement In United States ex rel. Mateski v. Raytheon Co., 745 F. App’x 49 (9th Cir. 2018), cert. denied sub nom. Mateski v. Raytheon Co., No. 18-1312, 2019 WL 1643040 (U.S. May 13, 2019), the Ninth Circuit elaborated on Rule 9(b)’s particularity standard and, in particular, the effect of a lack of particularity on meeting the materiality requirement. In Mateski, the relator filed a qui tam action against his employer, a defense contractor, alleging that it falsely claimed compliance with contract requirements for a satellite system sensor. Id. at *50. The case had been to the Ninth Circuit once before, under the public disclosure bar, at which point the Ninth Circuit reversed the district court’s dismissal of the complaint. Id. This time, however, the Ninth Circuit affirmed dismissal of the case. Id. First, the court held that the complaint failed to meet Rule 9(b)’s particularity requirement with regard “to the ‘what,’ ‘when,’ and ‘how’ of the allegedly false claims.” Id. For example, the relator alleged the defendant failed to comply with its contractual requirements to complete tests and retests on component parts, but never specified which parts, which tests, whether the tests were never done or whether they were instead done incompletely, as well as failing to name approximate dates of these tests. Id. Without these details, the court held that the defendant did not have enough information to defend against the claims, and so the complaint failed to meet Rule 9(b)’s particularity requirement. Id. The Ninth Circuit also concluded that because of this lack of particularity regarding the false claims, the complaint also inadequately pleaded the materiality requirement. Id. Noting that the materiality requirement is a “demanding” standard pursuant to Escobar, the court found itself unable to assess whether the noncompliance was material or minor because of the lack of particularity regarding the false claims. Id. 2. The Eighth Circuit Provides Further Guidance on Rule 9(b)’s Particularity Requirement In United States ex rel. Strubbe v. Crawford County Memorial Hospital, 915 F.3d 1158 (8th Cir. 2019), the Eighth Circuit elaborated on its prior holding in United States ex rel. Thayer v. Planned Parenthood of the Heartland, 765 F.3d 914, 918 (8th Cir. 2014), in which the court concluded that relators in FCA cases can meet Rule 9(b)’s particularity requirement either by: (1) pleading representative examples of false claims; or (2) pleading the “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” Strubbe, 915 F.3d at 1163 (quoting Thayer, 765 F.3d at 918). In Strubbe, the relators, emergency medical technicians and paramedics, filed an FCA qui tam action against a hospital, alleging that it submitted false claims for Medicare reimbursement, made false statements to get false claims paid, and conspired to violate the AKS. Id. at 1162. The district court dismissed the claims for failure to plead with the required particularity, finding that the complaint did not allege facts showing any false claims were submitted or show how the relators acquired their information. Id. Over a dissent, the Eighth Circuit affirmed, holding that the complaint did not plead the fraud with the particularity required by Rule 9(b). Id. at 1166. First addressing the relator’s allegation that the hospital submitted false claims, the court found that the relators had not met Thayer’s first prong of submitting representative examples of false claims. Id. at 1164. For example, while they had alleged that the hospital made a false claim for an unnecessary treatment, they failed to include the requisite particularity because they did not identify the date of this incident, the provider, any specific information about the patient, what money was obtained, and crucially, whether the hospital actually submitted a claim for this specific patient. Id. Nor had relators met Thayer’s second prong, according to the court. Id. The court held that the complaint lacked sufficient indicia of reliability to create a strong inference that claims were actually submitted, because the complaint did not provide any details about the hospital’s billing practices. Id. at 1164-65. Moreover, the relators did not identify the basis for their allegations regarding billing; this was especially problematic given the relators lack of personal knowledge about the hospital’s billing due to their lack of access to the hospital’s billing department as EMTs and paramedics. Id. at 1165-66. The relators’ second claim that the hospital made false statements failed to meet Rule 9(b)’s particularity requirement for similar reasons as their first—namely, the complaint did not connect the false statements to claims submitted to the government and did not provide the basis on which the relators’ assertions were founded. Id. at 1166. Finally, their third claim, that the hospital conspired to violate the AKS, failed because they did not provide any details about the conspiracy, and so failed to plead with particularity. Id. Therefore, the court affirmed the complaint’s dismissal. Id. at 1170. 3. Under Rule 9(b), the Fourth Circuit Requires Allegations Regarding a Sub-Contractor’s Billing and Payment Structure In United States ex rel. Grant v. United Airlines Inc., 912 F.3d 190 (4th Cir. 2018), the Fourth Circuit held that a relator failed to meet Rule 9(b)’s particularity requirement where his complaint alleged a fraudulent scheme without detailing the billing and payment structure. Because of this omission, the court found that relator’s allegations did not foreclose the possibility that the government was never billed or that the alleged fraud was remedied before billing or payment. The case involved allegations by a relator against his former employer, an airline, alleging that the airline violated the FCA by certifying airplane repairs that did not comply with various aviation regulations and contract requirements in the airline’s work as a sub-sub-contractor for the U.S. Air Force. Id. at 194. Specifically, the relator alleged that the defendant: (1) certified uncompleted work as completed; (2) certified repairs performed by uncalibrated and uncertified tools, in violation of the subcontract’s requirements; and (3) allowed inspectors to continue certifying repairs after their training and eye exams had expired. Id. at 194-95. Affirming dismissal of the claims, the Fourth Circuit held that Rule 9(b)’s “stringent” pleading standard requires the complaint to “provide ‘some indicia of reliability’ to support the allegation that an actual false claim was presented to the government.” Id. (quoting United States ex rel. Nathan v. Takeda Pharm. N. Am., Inc., 707 F.3d 451, 457 (4th Cir. 2013)). Relators can meet this standard either by: (1) alleging with particularity that specific false claims were actually submitted to the government or (2) alleging “a pattern of conduct that would ‘necessarily have led[ ] to submission of false claims’ to the government for payment.” Id. (quoting Nathan, 707 F.3d at 457). Over a dissent, the court concluded that the relator had not pleaded specific claims, and also failed to allege a pattern of conduct that would necessarily have led to the submission of false claims, because he had only particularly alleged that the defendant engaged in fraudulent conduct without connecting the fraudulent conduct to the necessary presentment of false claims to the government. Id. The court reasoned that the complaint failed “to allege how, or even whether, the bills for these fraudulent services were presented to the government and how or even whether the government paid [the defendant] for the services.” Id. at 198. Because the complaint alleged only an umbrella payment without describing the billing or payment structure, the court held that the complaint left open the possibility that no payments were ever made. The court held that alleging a link between the false claims and government payment is especially necessary to meet Rule 9(b)’s requirements where, as here, the defendant is several levels removed from the government because it is a sub-sub-contractor. Id. at 199. D. Estoppel and the FCA As DOJ increasingly pursues parallel criminal and civil investigations in cases involving fraud on the government, the interplay between criminal and FCA charges becomes increasingly important. Several decisions during the first half of the year discussed issues relevant to this interplay. 1. The Third Circuit Finds That a Company Is Not Estopped by an Individual Employee’s Criminal Conviction In United States ex rel. Doe v. Heart Solution, PC, 923 F.3d 308 (3d Cir. 2019) (discussed previously in relation to materiality), the Third Circuit held that, although an individual defendant was collaterally estopped from denying the falsity and knowledge elements of a civil FCA claim by her criminal conviction and plea colloquy regarding the same conduct, her employer was not. Id. at 316-17. The case involved an individual defendant who was convicted criminally of defrauding Medicare after having admitted at her plea colloquy that Medicare paid her company for diagnostic neurological testing that she falsely represented was supervised by a licensed neurologist. Id. at 312. After her conviction, the government intervened in a civil qui tam FCA case against her and her health care company regarding the same fraudulent neurologist certifications. Id. In granting summary judgment against the defendant company, the district court had relied on the individual defendant’s criminal conviction and plea colloquy. Id. at 313. But the Third Circuit held that the district court erred in finding that the health care company had conceded all of the essential elements of the FCA claim through the individual defendant’s plea. Id. at 316-17. In so holding, the court relied on the fact that collateral estoppel does not apply unless the party against whom the earlier decision is asserted previously had a “full and fair opportunity to litigate that issue.” Id. at 316 (internal quotation marks omitted) (quoting Allen v. McCurry, 449 U.S. 90, 95 (1980)). Here, the defendant company did not have any opportunity, let alone a “full and fair opportunity,” to contest the fraud claim at the individual’s separate criminal proceedings. Heart Sol., 923 F.3d at 317. Additionally, some of the elements of the FCA claim against the company, as opposed to the individual, were neither actually litigated nor determined by a final judgment in the individual’s criminal case, both of which are required for collateral estoppel to apply. Id. at 317. 2. The Fourth Circuit Holds That Non-Intervened Qui Tam Actions Decided in Favor of the Defendant Do Not Collaterally Estop the Government from Pursuing Criminal Proceedings In United States v. Whyte, 918 F.3d 339 (4th Cir. 2019), the Fourth Circuit considered whether the government is collaterally estopped from pursuing its own criminal case by a prior qui tam FCA action in which it did not intervene. See id. at 344. There, the defendant, the owner of a company that supplied armored vehicles to multinational forces in Iraq, was indicted for criminal fraud in July 2012. Id. at 342-43. Then, in October 2012, a relator filed a civil FCA suit, in which the government declined to intervene, against the defendant. Id. at 343. The defendant ultimately prevailed at trial in his FCA civil suit, but then, over two years later, a jury convicted the defendant in the criminal case. Id. at 344. The defendant argued that the government was collaterally estopped in its criminal case by the defendant’s victory in the prior qui tam civil case, but the courts were not convinced. The Fourth Circuit affirmed the district court, holding as a matter of first impression that “the Government is not a party to an FCA action in which it has declined to intervene,” and so is not collaterally estopped by a prior FCA action in which it did not intervene. Id. at 345, 350. In so holding, the court first reasoned that collateral estoppel cannot bar a criminal prosecution when the government did not “have a full and fair opportunity to litigate the issue in the prior proceeding.” Id. at 345 (citation and internal quotation marks removed). Whether the government had that opportunity in turn depends on whether the government was a party to that prior proceeding. Id. Citing precedent, the FCA’s language and structure, and the government’s different interests in intervened versus non-intervened cases, the court held that the government is not a party to an FCA action in which it has not intervened. Id. at 345-49. Therefore, the court concluded that “the Government cannot be considered to have been a party with a full and fair opportunity to litigate” in a prior FCA action in which it declined to intervene, and so the government’s criminal prosecution was not collaterally estopped by a prior, nonintervened FCA qui tam action. Id. at 349-50. E. The First Circuit Holds That Unsealing an FCA Complaint Begins the Statute of Limitations for Related Claims As we previously discussed, RICO suits mirroring FCA suits that challenge off-label drug marketing continue to appear. A recent First Circuit case held that the unsealing of an FCA complaint regarding off-label drug marketing begins the running of RICO’s four-year statute of limitations in these kinds of cases. In In re Celexa & Lexapro Marketing & Sales Practices Litigation, 915 F.3d 1 (1st Cir. 2019), the First Circuit addressed the relationship between FCA claims and the statute of limitations for RICO claims (as well as state consumer fraud claims). There, the government intervened in a qui tam FCA claim alleging that the defendant pharmaceutical companies engaged in illegal off-label drug marketing schemes intended to fraudulently induce doctors to prescribe their drugs for off-label uses. Id. at 5-6. The unsealing of the complaint led to more than a dozen consumers and entities that had paid for these drugs filing suit, including the suits in this case, alleging RICO and state consumer fraud violations related to the defendant’s alleged illegal off-label marketing schemes. Id. at 7. The First Circuit held that, as a matter of law, the unsealing of the government’s FCA complaint put the plaintiffs on notice that the defendants allegedly had been promoting off-label uses of their products. Id. at 15. Therefore, the unsealing of the government’s FCA complaint began the running of the four-year statute of limitations on the plaintiffs’ RICO claims related to the off-label marketing schemes alleged in the FCA complaint. Id. at 15-16. F. The Ninth Circuit Upholds an FCA Settlement Agreement’s Confidentiality Provisions For companies involved in negotiations with DOJ about the terms of settlement agreements under the FCA, there was a bit of good news from the Ninth Circuit. In Brunson v. Lambert Firm PLC, 757 F. App’x 563 (9th Cir. 2018), the Ninth Circuit upheld the confidentiality provisions of an FCA settlement agreement, over objection from the relator. See id. at 566. In that case, the relator entered into an FCA settlement agreement with the defendants and the government, but later filed several post-settlement motions that put at issue the settlement agreement’s confidentiality provisions. See id. at 565. The Ninth Circuit held that the settlement agreement’s confidentiality provisions were not void on public policy grounds, because the settlement did not impede any whistleblower’s ability to bring information to the government, and so did not violate the public interest underlying the FCA’s provisions encouraging disclosures of fraud. Id. at 566. Additionally, the court held that the confidentiality provisions did not interfere with the public’s right to information, given that the entire qui tam complaint was still publicly available. Id. Finally, the Ninth Circuit held that the district court had not abused its discretion in maintaining the seal over the settlement agreement, because the settlement agreement was a “private agreement reached without court assistance” and was only in the judicial record through the relator’s efforts to void its confidentiality provisions. Id. G. The Public Disclosure Bar and Its Original Source Exception The public disclosure bar, as amended in 2010 by the Affordable Care Act, requires courts to dismiss a relator’s FCA claims “if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed,” unless that relator “is an original source of the information.” § 3730(e)(4)(A). One of the statute’s definitions of an original source is an individual “who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions.” § 3730(e)(4)(B) (emphasis added). Although the “materially adds” language has been in effect for nearly a decade, the new language did not apply retroactively, and due to the long timeframe for many FCA cases, it is therefore just in recent years getting serious attention from the appellate courts. In April of this year, the Tenth Circuit became the latest court to opine on the meaning of the original source exception’s “materially adds” language. In United States ex rel. Reed v. KeyPoint Government Solutions, 923 F.3d 729 (10th Cir. 2019), the Tenth Circuit explored what a relator must allege to meet the original source exception by materially adding to publicly disclosed information. In defining the “materially adds” language in the original source exception, the Tenth Circuit cited United States ex rel. Winkelman v. CVS Caremark Corp., 827 F.3d 201 (1st Cir. 2016), and held that a relator satisfies the materially-adds requirement when she “discloses new information that is sufficiently significant or important that it would be capable of” influencing the government’s behavior, as contrasted with a relator who provides only background information or details about a previously disclosed fraud. Reed, 923 F.3d at 757. Under this standard, the court noted that a relator who merely identifies a new specific actor engaged in fraud usually would not materially add to public disclosures of alleged widespread fraud in an industry with only a few companies. Id. at 758. Ultimately, however, the court concluded that the relator here had materially added to the public disclosures about a specific program at her company. Id. at 760-63. Thus, the court held she met the original source exception’s materially-adds requirement, but remanded on whether her knowledge was “independent” and whether her claims should otherwise survive scrutiny under Rule 12(b)(6) and Rule 9(b). Id. at 763. H. The First Circuit Holds That the First-to-File Bar Is Not Jurisdictional The First Circuit joined the D.C. and Second Circuits in holding that the FCA’s first-to-file bar is not jurisdictional, such that arguments under the first-to-file bar do not implicate the court’s subject matter jurisdiction, even if they are a cause for dismissal. This distinction can affect how, and when, arguments under the first-to-file bar may be made, and also the standard of review a court applies. In United States v. Millennium Laboratories, Inc., 923 F.3d 240 (1st Cir. 2019), Relator A, who filed first, alleged that the defendant used inexpensive point-of-care tests to induce physicians into excessive testing, including confirmatory testing, which was then billed to the government. Id. at 245-46. Another relator, Relator B, later filed a complaint against the same defendant related to confirmatory testing, not point-of-care testing, allegedly induced through improper custom profiles and standing orders. Id. at 246-47. The government intervened in Relator B’s action (but not Relator A’s) and pursued an FCA case focused on excessive confirmatory testing induced through improper custom profiles and standing orders. Id. at 247-48. The government and the defendant eventually settled for $227 million plus interest, without resolving which relator was entitled to the relator’s share. Id. at 247. The district court dismissed Relator B’s crossclaim for the relator’s share of the settlement, holding that Relator A was the first to file. Id. at 248. As Relator A was the first to file, the district court therefore held that it did not have subject matter jurisdiction over Relator B’s crossclaim, because the first-to-file bar was jurisdictional. Id. On appeal, the First Circuit reversed, and held that the first-to-file bar is not jurisdictional, overturning its prior precedent, for three reasons. Id. at 248-49. First, the First Circuit pointed to Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, 135 S. Ct. 1970 (2015), in which the Supreme Court addressed a first-to-file issue in an FCA qui tam action on “decidedly non-jurisdictional terms,” implying that the Supreme Court did not consider the first-to-file rule a jurisdictional one. Millennium Labs., 923 F.3d at 249 (internal quotation marks removed) (quoting United States ex rel. Heath v. AT&T, Inc., 791 F.3d 112, 121 n.4 (D.C. Cir. 2015)). Second, the First Circuit noted that its prior cases all predated Carter and also did not substantively analyze whether the first-to-file rule was jurisdictional, but rather assumed it was. Millennium Labs., 923 F.3d at 250. Third, applying the Supreme Court’s “bright line rule” in Arbaugh v. Y & H Corp., 546 U.S. 500 (2006), which held that provisions are only jurisdictional when Congress clearly states that they are, the First Circuit held that the first-to-file bar’s statutory text, context, and legislative history did not describe the bar in jurisdictional terms. Millennium Labs., 923 F.3d at 250-51. For these reasons, the First Circuit held that the first-to-file bar is not jurisdictional. Id. at 251. Therefore, the court held that it had jurisdiction over Relator B’s crossclaim. Id. Next, the First Circuit turned to the issue of whether Relator A or B was the first to file for purposes of the relator’s share of the government’s settlement. Id. at 252-53. To determine whether Relator A was the first to file in the action in which the government intervened, the court analyzed whether Relator A’s complaint contained “all the essential facts” of the fraud that Relator B alleged, on a claim-by-claim basis, looking at the specific mechanisms of fraud alleged. Id. at 252-53. Because Relator A’s complaint never alleged the specific mechanisms of fraud that Relator B alleged—custom profiles and standing orders in the confirmatory, not point-of-care, stage—Relator A’s complaint did not cover the essential facts of the fraud that Relator B and the government alleged. Id. at 254. Thus, as Relator A alleged a different fraud than the fraud that the government pursued, he was not the first to file in this case; Relator B was. Id. I. The Second Circuit Holds That a Relator Who Previously Voluntarily Dismissed His FCA Action Is Not Entitled to the Relator’s Share of the Government’s Subsequent Action In United States v. L-3 Communications EOTech, Inc., 921 F.3d 11 (2d Cir. 2019), the Second Circuit joined several other circuits in holding that a relator who previously voluntarily dismissed his qui tam action and had no other qui tam actions pending at the time the government pursued its own FCA claim is not entitled to the relator’s share of a later government settlement. Specifically, the court examined the FCA’s provision in section 3730(c)(5), which states that, notwithstanding the section of the FCA allowing qui tam actions, the government may pursue an “alternative remedy,” but if the government pursues an alternative remedy, then “the person initiating the action shall have the same rights in such proceeding as such person would have had if the action had continued under this section.” Id. at 24 (quoting § 3730(c)(5)). The court held that section 3730(c)(5) only applied if that relator had a pending qui tam action in which the government could intervene when the government initiated its own FCA action. Id. at 26. Thus, where, as here, the relator had no FCA action pending because the relator had voluntarily dismissed his FCA suit fourteen months before the government commenced its own FCA suit, the relator is not entitled to the relator’s share of the government’s action. Id. J. FCA Retaliation Claims There were also a number of decisions from the courts of appeal that addressed issues under the FCA’s anti-retaliation provision, which protects would-be whistleblowers from retaliation based on certain protected activity undertaken in furtherance of a potential FCA claim. We very briefly summarize these decisions below. In United States ex rel. Reed v. KeyPoint Government Solutions, 923 F.3d 729 (10th Cir. 2019) (previously discussed regarding the public disclosure bar), the Tenth Circuit affirmed the district court’s dismissal of the relator’s retaliation claim, holding that the facts she pleaded were inadequate to show that the defendant was on notice that she was engaged in FCA-protected activity. Id. at 741, 764. Because the relator was a compliance officer, the court explained that she must plead facts to overcome the presumption that she was just doing her job in reporting fraud internally to her employer. That is, she must plead that the actions she took to report the alleged fraud internally went beyond what was required to fulfill her compliance job duties. Id. at 768-69. In that case, the relator did not adequately allege that her employer was on notice she was trying to stop FCA violations, and so the court affirmed the dismissal of her retaliation claim. Id. at 772. In United States ex rel. Strubbe v. Crawford County Memorial Hospital, 915 F.3d 1158 (8th Cir. 2019) (previously discussed regarding Rule 9(b)), the Eighth Circuit limited liability for FCA retaliation claims by affirming the district court’s ruling that relators’ retaliation claim was barred because the complaint did not allege that relators ever told their employer (a hospital) that its practices were fraudulent or potentially violated the FCA. Id. The court found that complaining about the hospital’s finances and changes the hospital made to certain treatments does not provide the hospital notice that the relators are taking action to stop an FCA violation or in furtherance of a qui tam action. Id. In addition, as a matter of first impression for FCA retaliation claims before the Eighth Circuit (but not whistleblower claims more generally), the court held that when there is no direct evidence of retaliation, the McDonnell Douglas framework—from McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973)—applies to FCA retaliation claims. Id. at 1168. Thus, for FCA retaliation claims, the plaintiff must show that: “(1) she engaged in protected conduct, (2) [her employer] knew she engaged in protected conduct, (3) [her employer] retaliated against her, and (4) ‘the retaliation was motivated solely by [the plaintiff’s] protected activity.’” Id. at 1167-68 (quoting Schuhardt v. Washington University, 390 F.3d 563, 566 (8th Cir. 2004)). If the plaintiff establishes a prima facie retaliation claim, then the burden shifts to the employer to “articulate a legitimate reason for the adverse action.” Id. at 1168 (quoting Elkharwily v. Mayo Holding Co., 823 F.3d 462, 470 (8th Cir. 2016)). Then, the burden again shifts back to the plaintiff to show that the employer’s reason was “merely a pretext and that retaliatory animus motivated the adverse action.” Id. (quoting Elkharwily, 823 F.3d at 470). In Guilfoile v. Shields, 913 F.3d 178 (1st Cir. 2019), the First Circuit explored the link between FCA retaliation claims and the AKS. The relator alleged that he was fired in retaliation for internally reporting that his employer, which provides specialty pharmacy services to chronically ill patients, was violating the AKS and making false representations in its contracts with hospitals. Id. at 182-83. The First Circuit affirmed dismissal with respect to his contract violation-based retaliation claim, but vacated the district court’s holding dismissing the plaintiff’s AKS-based retaliation claim, over a dissent. Id. at 195. In so doing, the First Circuit held that for FCA retaliation claims, plaintiffs do not need to meet Rule 9(b)’s particularity requirement, plead the submission of false claims, or plead that compliance with the AKS was material. Id. at 190. Instead, FCA retaliation plaintiffs “need only plead that their actions in reporting or raising concerns about their employer’s conduct ‘reasonably could lead to an FCA action.’” Id. at 189 (quoting United States ex rel. Booker v. Pfizer, Inc., 847 F.3d 52, 59 (1st Cir. 2017)). Under this standard, the court held that the plaintiff had plausibly pleaded that he was engaged in FCA-protected conduct, because by reporting his concerns about paying a consultant to secure contracts at hospitals at which the consultant worked, he was engaging in conduct that could reasonably lead to an FCA action based on the submission of claims resulting from an AKS violation. Id. at 193. Finally, in United States ex rel. Grant v. United Airlines Inc., 912 F.3d 190 (4th Cir. 2018) (discussed previously regarding Rule 9(b)), the Fourth Circuit held that an objective reasonableness standard applies to FCA retaliation claims’ new protected activity category, added in 2010, of “other efforts to stop 1 or more” FCA violations. Prior Fourth Circuit precedent applied a “distinct possibility” standard to evaluate protected activity under § 3730(h), which related to retaliation for actions taken “in furtherance” of an FCA action, meaning employees engage “in protected activity when ‘litigation is a distinct possibility, when the conduct reasonably could lead to a viable FCA action, or when . . . litigation is a reasonable possibility.’” Id. at 200 (quoting Mann v. Heckler & Koch Def., Inc., 630 F.3d 338, 344 (4th Cir. 2010)) (emphasis added). However, the court rejected the “distinct possibility” standard for “other efforts to stop 1 or more” FCA violations, and instead adopted an “objective reasonableness” standard. Id. at 201. Under the second category’s “objective reasonableness” standard, “an act constitutes protected activity where it is motivated by an objectively reasonable belief that the employer is violating, or soon will violate, the FCA.” Id. (emphasis added). IV. CONCLUSION We will monitor these developments, along with other FCA legislative activity, settlements, and jurisprudence throughout the year and report back in our 2019 False Claims Act Year-End Update, which we will publish in January 2020. _________________________ [1] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Avanti Hospitals LLC, and Its Owners Agree to Pay $8.1 Million to Settle Allegations of Making Illegal Payments in Exchange for Referrals (Jan. 28, 2019), https://www.justice.gov/opa/pr/avanti-hospitals-llc-and-its-owners-agree-pay-81-million-settle-allegations-making-illegal. [2] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pathology Laboratory Agrees to Pay $63.5 Million for Providing Illegal Inducements to Referring Physicians (Jan. 30, 2019), https://www.justice.gov/opa/pr/pathology-laboratory-agrees-pay-635-million-providing-illegal-inducements-referring. [3] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Electronic Health Records Vendor to Pay $57.25 Million to Settle False Claims Act Allegations Charges (Feb. 6, 2019), https://www.justice.gov/opa/pr/electronic-health-records-vendor-pay-5725-million-settle-false-claims-act-allegations. [4] See Press Release, U.S. Atty’s Office for the N. Dist. of GA., Union General Hospital to Pay $5 Million to Resolve Alleged False Claims Act Violations (Feb. 6, 2019), https://www.justice.gov/usao-ndga/pr/union-general-hospital-pay-5-million-resolve-alleged-false-claims-act-violations. [5] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Vanguard Healthcare Agrees to Resolve Federal and State False Claims Act Liability (Feb. 27, 2019), https://www.justice.gov/opa/pr/vanguard-healthcare-agrees-resolve-federal-and-state-false-claims-act-liability. [6] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Covidien to Pay Over $17 Million to The United States for Allegedly Providing Illegal Remuneration in the Form of Practice and Market Development Support to Physicians (Mar. 11, 2019), https://www.justice.gov/opa/pr/covidien-pay-over-17-million-united-states-allegedly-providing-illegal-remuneration-form. [7] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, MedStar Health to Pay U.S. $35 Million to Resolve Allegations that it Paid Kickbacks to a Cardiology Group in Exchange for Referrals (Mar. 21, 2019), https://www.justice.gov/opa/pr/medstar-health-pay-us-35-million-resolve-allegations-it-paid-kickbacks-cardiology-group. [8] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Three Pharmaceutical Companies Agree to Pay a Total of Over $122 Million to Resolve Allegations That They Paid Kickbacks Through Co-Pay Assistance Foundations (Apr. 4, 2019), https://www.justice.gov/opa/pr/three-pharmaceutical-companies-agree-pay-total-over-122-million-resolve-allegations-they-paid. [9] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pharmaceutical Company Agrees to Pay $17.5 Million to Resolve Allegations of Kickbacks to Medicare Patients and Physicians (Apr. 30, 2019), https://www.justice.gov/opa/pr/pharmaceutical-company-agrees-pay-175-million-resolve-allegations-kickbacks-medicare-patients. [10] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Medicare Advantage Provider to Pay $30 Million to Settle Alleged Overpayment of Medicare Advantage Funds (Apr. 12, 2019), https://www.justice.gov/opa/pr/medicare-advantage-provider-pay-30-million-settle-alleged-overpayment-medicare-advantage. [11] See Press Release, U.S. Atty’s Office for the S. Dist. of W.V., United States Attorney Announces $17 Million Healthcare Fraud Settlement (May 6, 2019), https://www.justice.gov/usao-sdwv/pr/united-states-attorney-announces-17-million-healthcare-fraud-settlement. [12] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Kansas Cardiologist and His Practice Pay $5.8 Million to Resolve Alleged False Billings for Unnecessary Cardiac Procedures (May 30, 2019), https://www.justice.gov/opa/pr/kansas-cardiologist-and-his-practice-pay-58-million-resolve-alleged-false-billings. [13] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pharmaceutical Company Admits to Price Fixing in Violation of Antitrust Law, Resolves Related False Claims Act Violations (May 31, 2019), https://www.justice.gov/opa/pr/pharmaceutical-company-admits-price-fixing-violation-antitrust-law-resolves-related-false. [14] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Opioid Manufacturer Insys Therapeutics Agrees to Enter $225 Million Global Resolution of Criminal and Civil Investigations (Jun. 5, 2019), https://www.justice.gov/opa/pr/opioid-manufacturer-insys-therapeutics-agrees-enter-225-million-global-resolution-criminal. [15] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Northrop Grumman Systems Corporation Agrees to Pay $5.2 Million to Settle Allegations of False Labor Charges (Jan. 28, 2019), https://www.justice.gov/opa/pr/northrop-grumman-systems-corporation-agrees-pay-52-million-settle-allegations-false-labor. [16] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Duke University Agrees to Pay U.S. $112.5 Million to Settle False Claims Act Allegations Related to Scientific Research Misconduct (Mar. 25, 2019), https://www.justice.gov/opa/pr/duke-university-agrees-pay-us-1125-million-settle-false-claims-act-allegations-related. [17] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Informatica Agrees to Pay $21.57 Million for Alleged False Claims Caused by Its Commercial Pricing Disclosures (May 13, 2019), https://www.justice.gov/opa/pr/informatica-agrees-pay-2157-million-alleged-false-claims-caused-its-commercial-pricing. [18] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Department of Justice Issues Guidance on False Claims Act Matters and Updates Justice Manual (May 7, 2019), https://www.justice.gov/opa/pr/department-justice-issues-guidance-false-claims-act-matters-and-updates-justice-manual. [19] Deputy Attorney General Rod J. Rosenstein Delivers Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0. [20] See U.S. Dep’t of Justice, Justice Manual, Section 4-4.112. [21] Id. [22] Id. [23] Id. [24] Id. [25] Id. [26] See Memorandum, U.S. Dep’t of Justice, Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A) (Jan. 10, 2018), https://assets.documentcloud.org/documents/4358602/Memo-for- Evaluating-Dismissal-Pursuant-to-31-U-S.pdf. [27] Id. at 2–3. [28] See Jeff Overly, DOJ Warns FCA Targets On Discovery Tactics, Law360 (Mar. 2, 2019), https://www.law360.com/articles/1134479/doj-atty-warns-fca-targets-on-discovery-tactics. [29] Id. [30] Id. [31] Id. [32] Press Release, U.S. Dep’t of Justice, Deputy Associate Attorney General Stephen Cox Delivers Remarks at the 2019 Advanced Forum on False Claims and Qui Tam Enforcement (Jan. 28, 2019), https://www.justice.gov/opa/speech/deputy-associate-attorney-general-stephen-cox-delivers-remarks-2019-advanced-forum-false. [33] Id. [34] Id. [35] Id. [36] Id. [37] Press Release, U.S. Dep’t of Justice, Deputy Associate Attorney General Stephen Cox Gives Remarks to the Cleveland, Tennessee, Rotary Club (Mar. 12, 2019), https://www.justice.gov/opa/speech/deputy-associate-attorney-general-stephen-cox-gives-remarks-cleveland-tennessee-rotary. [38] State False Claims Act Reviews, Dep’t of Health & Human Servs.—Office of Inspector Gen., https://oig.hhs.gov/fraud/state-false-claims-act-reviews/index.asp. [39] Id. [40] Id. Wisconsin repealed its false claims act in 2015. Assembly Bill 1021 would have reinstated the statute, but failed to pass in March 2018. See Wisconsin State Legislature, Assembly Bill 1021, http://docs.legis.wisconsin.gov/2017/proposals/reg/asm/bill/ab1021. [41] Id. [42] See Cal. Gov’t Code § 12651 (West 2018); Ga. Code Ann. § 49-4-168.1 (2018); Del. Code Ann. tit. 6, § 1201 (2018); N.Y. State Fin. Law §§ 189-190-b; 2018 R.I. Gen. Laws § 9-1.1-3 (2018). [43] Cal. AB-1270, 2019 Leg. Reg. Sess. (Cal. 2019). [44] Escobar, 136 S. Ct. at 2002 (emphasis added) (citation and internal quotation marks removed). [45] Cal. AB-1270, 2019 Leg. Reg. Sess. (Cal. 2019). [46] Id. [47] Id. [48] Id. [49] AB-1270 False Claims Act, California Legislative Information (July 9, 2019), http://leginfo.legislature.ca.gov/faces/billStatusClient.xhtml?bill_id=201920200AB1270. [50] See S. 40, A Bill to Amend Title 15 of the 1976 Code, by Adding Chapter 85, to Enact the “South Carolina False Claims Act” (123d Session), https://www.scstatehouse.gov/sess123_2019-2020/bills/40.htm. [51] See S. 223, A Bill to Amend the South Carolina Code of Laws, 1976, by Adding Chapter 85 to Title 15, so as to Enact the “South Carolina False Claims Act” (121st Session), https://www.scstatehouse.gov/sess121_2015-2016/bills/223.htm. [52] Notably, though, the statute covers claims a defendant “reasonably should have known” were false, thereby creating potential liability for mere negligence (unlike the federal FCA, which requires at least reckless disregard). The West Virginia law also lacks a qui tam provision. See W.Va. Code § 9-7-6 (2018). [53] See 2019 W.Va. Laws S.B. 318 (2019 Regular Session). [54] See id. at § 9-7-6. The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Charles Stevens, Stuart Delery, Benjamin Wagner, Timothy Hatch, Joseph West, Robert Walters, Robert Blume, Andrew Tulumello, Karen Manos, Monica Loseman, Geoffrey Sigler, Alexander Southwell, Reed Brodsky, Winston Chan, John Partridge, James Zelenay, Jonathan Phillips, Ryan Bergsieker, Sean Twomey, Reid Rector, Allison Chapin, Michael Dziuban, Jillian N. Katterhagen Mills, and summer associate Marie Zoglo. Gibson Dunn’s lawyers have handled hundreds of FCA investigations and have a long track record of litigation success. From U.S. Supreme Court victories, to appellate court wins, to complete success in district courts around the United States, Gibson Dunn believes it is the premier firm in FCA defense. Among other notable recent victories, Gibson Dunn successfully overturned one of the largest FCA judgments in history in United States ex rel. Harman v. Trinity Indus. Inc., 872 F.3d 645 (5th Cir. 2017), and the Daily Journal recognized Gibson Dunn’s work in U.S. ex rel. Winter v. Gardens Regional Hospital and Medical Center Inc. as a Top Defense Verdict in its annual feature on the top verdicts for 2017. Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases. The firm has dozens of attorneys with substantive FCA experience, including nearly 30 Assistant U.S. Attorneys and DOJ attorneys. For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the following attorneys. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Geoffrey M. Sigler (+1 202-887-3752, gsigler@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. 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Click for PDF On July 4, 2019, the UK Serious Fraud Office (“SFO”) secured approval for its fifth Deferred Prosecution Agreement (“DPA”) before the Crown Court sitting at Southwark. The DPA is with Serco Geografix Limited (“SGL”), a security company that contracts with the UK Ministry of Justice (“MOJ”) to electronically monitor suspects and offenders. The DPA relates to three charges of fraud and two of false accounting. The facts of the case are summarised by the SFO in its official press release, which is accompanied by a copy of the judgment of the Court. In order for the SFO to obtain approval for a DPA it is required to satisfy the Court that a DPA is in the “interests of justice” and that the proposed terms of the DPA are “fair, reasonable and proportionate”. Certain features of the SFO’s arguments and the Court’s approval in this case are novel and worthy of appreciation. Interests of Justice Seriousness The conduct at issue was serious: the victim was a central government department (the MOJ) and the Judge considered the nature of the conduct to be “ingrained”. There were nonetheless countervailing factors which meant that the Court agreed with the SFO that a DPA was in the interests of justice. These included prompt self-reporting, cooperation with the SFO, absence of past misconduct, the historic nature of the conduct, the voluntary provision by SGL of compensation and SGL’s implementation of remedial compliance measures. Cooperation With respect to cooperation, as in the Tesco Stores Limited case, at the request of the SFO, SGL’s parent company Serco Group PLC (“Serco”) conducted no employee interviews as part of its internal investigation, limiting its investigation to document production. This permitted the SFO to secure “first accounts” from interviewees and avoided the creation of privileged interview records. One cannot say that such a request reflects a settled trend, as there are more recently-commenced investigations in which companies have not received a request not to conduct interviews. It is worth noting, however, that in two DPAs concluded to date, the acquiescence by the company to such a request has weighed positively in favour of a DPA being concluded. Such requests will no doubt be made in future cases, albeit likely not in all. They are most likely to be made in cases of a purely domestic nature with a small number of persons of interest. Collateral Consequences In support of the DPA being in the interests of justice, the SFO also argued that a conviction would have a disproportionate impact on the company, due to its reliance upon public sector contracts and the consequent public sector contracts debarment risk. The DPA Code of Practice (“Code”) permits the taking into account of disproportionate harm on a company of a conviction, but in a qualified fashion, in that it recognises that there is a public interest in the operation of a debarment regime. The Code additionally permits the taking into account of the collateral harm of a conviction to blameless third parties. The judgment suggests that the SFO focussed on the former argument rather than the latter, submitting that debarment would be unfair in this case in light of the remediation steps the company had taken. The judge expressed concern that, in this respect, he was effectively being asked to make a decision as to whether the company should be debarred, and that “quasi-political” decision was not one for him to make. In order to address this issue (which appears to have arisen on the Judge’s preliminary review of the papers) the SFO adduced evidence that the MOJ and Cabinet Office, as public sector procurers, saw no reason to debar in this case, primarily on account of the remedial actions taken by Serco. As the approval of a DPA would not be determinative of the question of debarment, the judge concluded he could approve the DPA. Had the SFO focussed instead on collateral third party harm this issue may have been avoided altogether. Such an approach was approved in the DPA with Rolls-Royce PLC in 2017. It is also of interest that the Court concluded that a DPA could amount to a finding of grave professional misconduct under debarment rules and that the facts of the DPA, as admitted by SGL, must amount to such misconduct. Debarment for grave professional misconduct is, however, discretionary under the Public Procurement Rules 2015. Strength of the Evidence The Code requires the SFO to state which of two permitted evidential thresholds have been reached when applying for the DPA. In this case the lower of the two thresholds is identified. This means that, at the time of the DPA, the SFO was not of the view that there was sufficient evidence to charge SGL, but was of the view that in reasonable time that evidential standard would be reached. This may explain why individuals have not yet been charged, and why the SFO committed to making individual charging decisions within six months. Despite the evidential standard for charging having not been reached, the Judge commented in the judgment that the evidence demonstrates involvement of unspecified senior individuals in the fraudulent scheme and that there was a clear case against the company. With that weight of judicial assessment the SFO may proceed to charging decisions against the individuals sooner rather than later. Despite the company’s cooperative conduct, a striking feature of this case is the almost six years it took to resolve. No explanation is offered for why it took so long to get to this point, as the conduct was self-reported in 2013. This lack of explanation risks speculation occurring as to the cause, such as whether the company put the SFO to strict evidential proof, and if so, that begs the question whether that is an acceptable method of engagement. Alternatively, it raises the question whether a six-year time frame is to be reasonably expected for the resolution of a self-report with subsequent cooperation. It would have been helpful for the SFO to provide some explanation, so that those considering engagement in the future might have a greater understanding as to what to expect from the self-reporting process. Terms Penalty The question of the applicable penalty was addressed in a wholly conventional way. Consistent with the Judge’s opening observations regarding the seriousness of the conduct, culpability was assessed as “high level”. The harm was readily identifiable as the loss in the form of the revenue abatement not given to the MOJ. The penalty was discounted by 50% to reflect Serco’s cooperation, resulting in a saving in time as compared with a prosecution, and to encourage future self-reporting. Although, given that that DPA took almost six years to conclude it is not immediately clear what saving of time occurred. Compliance Remediation The terms of the DPA contained conditions not seen before in English DPAs. The first is that the compliance remediation obligations are assumed by Serco, the parent company of SGL, and for all of Serco’s other subsidiaries, not just SGL. The breadth of the remediation is also wide in that it covers all forms of compliance programmes. Historically the remediation terms of UK DPAs have focussed solely on the failings exposed by the misconduct the subject of the DPA. The Court notes that this assumption of group-wide remediation responsibility by a parent is a first and describes it as “an important development in the use of DPAs.” This signals the prospect of broad remediation requirements in the future. The parent company is not however required to engage an independent compliance monitor to sign off on the suitability and implementation of the remediation. Instead, the parent company is obliged to report annually to the SFO in respect of progress. There is no requirement for SFO approval of progress and similarly no formal mechanism for addressing any SFO dissatisfaction with what is reported. This could present a significant gap in the effectiveness of this term. Reporting of Future Misconduct The second novel condition is a duty by Serco to report to the SFO any allegation or evidence of misconduct in respect of serious and complex fraud. As with the remediation provision this term is extremely broad, as it requires reporting in respect of the entire Serco group. The breadth of the compliance remediation and reporting terms are said in the judgment to be due to the subsidiary SGL now being dormant, such that such terms in respect of it alone would be meaningless. Statement of Facts A DPA requires the publication of a Statement of Facts, either at the same time as the DPA or later in prescribed circumstances. The publication of the Statement of Facts has in this case been postponed pending charging decisions in respect of individuals before year-end. The decision to postpone publishing raises the prospect of a repeat of the scenario in a prior DPA where the statement of facts naming individuals was published after their acquittal, or alternatively publication when a decision is taken not to charge. A preferable approach may have been to publish an anonymised Statement of Facts now, as a trial of individuals will not be for at least one and a half to two years, and the court responsible for such a trial would be empowered to make appropriate directions to a jury when necessary regarding information in the public domain. Conclusion A two-year hiatus in corporate crime resolutions by the SFO has now come to an end. There is much about this DPA in common with its predecessors. Those companies considering whether to self-report and cooperate going forward will, however, want to weigh in the balance the length of time that a resolution may take, the breadth of compliance remediation and reporting terms that may be imposed upon them and the risk made plain in this judgment that DPAs do not absolve a company of debarment risk – far from it; indeed, it appears they may well heighten that risk. These final observations may make this fifth DPA less of a High Five for the SFO for encouraging more self-reporting and cooperation and more of a Down Low, Too Slow, for increasing the corporate risks, costs and burdens. This client alert was prepared by Sacha Harber-Kelly, Patrick Doris, and Steve Melrose. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you would like to discuss this alert in greater detail, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s disputes practice: Sacha Harber-Kelly (+44 20 7071 4205, sharber-kelly@gibsondunn.com) Patrick Doris (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Philip Rocher (+44 (0)20 7071 4202, procher@gibsondunn.com) Charles Falconer (+44 (0)20 7071 4270, cfalconer@gibsondunn.com) Allan Neil (+44 (0)20 7071 4296, aneil@gibsondunn.com) Steve Melrose (+44 (0)20 7071 4219, smelrose@gibsondunn.com) Sunita Patel (+44 (0)20 7071 4289, spatel2@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs) are favored enforcement tools for resolving white collar investigations that have figured prominently in some of the largest and most complex multi-agency and cross-border resolutions of the past two decades. Because they are highly customizable, require a cooperative posture, and can be tailored to specific alleged crimes to achieve targeted remediation outcomes, NPAs and DPAs can be attractive alternatives to guilty pleas or trial for companies and enforcement agencies alike. This presentation addresses how the use of these agreements has evolved over time and what to expect in negotiating one, including discussion of recent Department of Justice guidance regarding evaluation of corporate compliance programs. We also will look at other countries and agencies employing similar resolution vehicles to NPAs and DPAs. Furthermore, this presentation examines new guidance from the Department of Justice regarding monitor selection, and how to successfully navigate a monitorship. Topics: Varieties of resolution structures Trends and statistics regarding the use of NPAs and DPAs from the past two decades Key negotiating terms Advocacy to avoid corporate monitors and management of monitors Due to technical difficulties, the audio was dropped during the last 15 minutes of the discussion. The below video presentation is 75 minutes long. We apologize for this inconvenience and invite you to please contact the presenters with any questions. The complete slide deck is available below. View Slides (PDF) PANELISTS: Stephanie L. Brooker is co-chair of Gibson Dunn’s Financial Institutions Practice Group. She is the former Director of the Enforcement Division at FinCEN, and previously served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia and as a DOJ trial attorney for several years. Ms. Brooker represents financial institutions, multi-national companies, and individuals in connection with BSA/AML, sanctions, anti-corruption, securities, tax, wire fraud, whistleblower, and “me-too” internal corporate investigations and enforcement actions. Her practice also includes BSA/AML compliance counseling and due diligence and significant criminal and civil asset forfeiture matters. Ms. Brooker was named a 2018 National Law Journal “White Collar Trailblazer” and a Global Investigations Review “Top 100 Women in Investigations.” Richard W. Grime is co-chair of Gibson Dunn’s Securities Enforcement Practice Group. Mr. Grime’s practice focuses on representing companies and individuals in corruption, accounting fraud, and securities enforcement matters before the SEC and the DOJ. Prior to joining the firm, Mr. Grime was Assistant Director in the Division of Enforcement at the SEC, where he supervised the filing of over 70 enforcement actions covering a wide range of the Commission’s activities, including the first FCPA case involving SEC penalties for violations of a prior Commission order, numerous financial fraud cases, and multiple insider trading and Ponzi-scheme enforcement actions. Patrick F. Stokes is a partner in Gibson Dunn’s Washington, D.C. office, where his practice focuses on internal corporate investigations and enforcement actions regarding corruption, securities fraud, and financial institutions fraud. Prior to joining the firm, Mr. Stokes headed the DOJ’s FCPA Unit, managing the FCPA enforcement program and all criminal FCPA matters throughout the United States covering every significant business sector. Previously, he served as Co-Chief of the DOJ’s Securities and Financial Fraud Unit. F. Joseph Warin is co-chair of Gibson Dunn’s global White Collar Defense and Investigations Practice Group, and chair of the Washington, D.C. office’s nearly 200-person Litigation Department. Mr. Warin’s group was recognized by Global Investigations Review in 2018 as the leading global investigations law firm in the world, the third time in four years to be so named. Mr. Warin is a former Assistant United States Attorney in Washington, D.C. He is ranked annually in the top-tier by Chambers USA, Chambers Global, and Chambers Latin America for his FCPA, fraud and corporate investigations expertise. Among numerous accolades, he has been recognized by Benchmark Litigation as a U.S. White Collar Crime Litigator “Star” for nine consecutive years (2011–2019). MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.25 credit hours, of which 1.25 credit hours may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.25 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.
Who’s Who Legal named Gibson Dunn as its Investigations Firm of the Year and Washington, D.C. partner F. Joseph Warin as Investigations Lawyer of the Year at its 6th annual Who’s Who Legal Awards. The Who’s Who Legal Awards celebrate the world’s leading lawyers, championing the firms and individuals that have performed exceptionally well across its global research. The awards were announced on May 16, 2019. Gibson Dunn’s White Collar Defense and Investigations Practice Group defends businesses, senior executives, public officials and other individuals in a wide range of investigations and prosecutions. The group is composed of over 100 lawyers practicing across our U.S. and international offices and draws on the expertise of more than 75 of its members with extensive government experience. The White Collar Defense and Investigations group includes numerous former U.S. federal and state prosecutors and officials, many of whom served at high levels within the U.S. Department of Justice, the Securities and Exchange Commission and other key investigative and prosecutorial arms of the government. Our lawyers use firsthand knowledge of how government agencies conduct investigations and prosecutions to assist our clients in navigating those processes successfully. F. Joseph Warin is chair of the nearly 200-person Litigation Department of Gibson Dunn’s Washington, D.C. office, and he is co-chair of the firm’s global White Collar Defense and Investigations Practice Group. Warin’s practice includes representation of corporations in complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation. Warin has handled cases and investigations in more than 40 states and dozens of countries. His clients include corporations, officers, directors and professionals in regulatory, investigative and trials involving federal regulatory inquiries, criminal investigations and cross-border inquiries by dozens of international enforcers, including UK’s SFO and FCA, and government regulators in Germany, Switzerland, Hong Kong, and the Middle East. His credibility at DOJ and the SEC is unsurpassed among private practitioners – a reputation based in large part on his experience as the only person ever to serve as a compliance monitor or counsel to the compliance monitor in three separate FCPA monitorships, pursuant to settlements with the SEC and DOJ. He has been hired by audit committees or special committees of public companies to conduct investigations into allegations of wrongdoing in a wide variety of industries including energy, oil services, financial services, healthcare and telecommunications.
Click for PDF On May 7, 2019, the U.S. Department of Justice (“DOJ”) released long-awaited guidance on when DOJ will award cooperation credit to targets of False Claims Act (“FCA”) enforcement. But those familiar with FCA enforcement are unlikely to find any big surprises in the guidance. Instead, the guidance echoes longstanding DOJ expectations with respect to cooperation and remediation and reaffirms recent DOJ pronouncements regarding how companies may secure credit by identifying individual wrongdoers. Further, DOJ emphasizes, yet again, that entities seeking maximum cooperation credit should voluntarily self-disclose misconduct. As to the value of cooperation to defendants, DOJ’s new guidance caps the credit a defendant may receive: under the guidance, the credit may not result in a defendant paying less than single damages. But DOJ offers little detail on the quantum of cooperation necessary to secure single damages, and the award of cooperation credit remains discretionary. This discretion creates uncertainty, but may also present FCA defendants with the opportunity to argue for lower settlement payments during settlement negotiations with DOJ. It remains to be seen which way this discretion cuts in practice. Background DOJ’s guidance results from a long-running effort, started after the issuance of the 2015 Yates Memorandum, to describe in more detail the bases for cooperation credit in a variety of civil and criminal enforcement contexts. As discussed in a previous Gibson Dunn alert, DOJ announced in June 2018 that it was working to promote more fair and consistent enforcement activities under the FCA, and it pledged to promulgate new and potentially expanded policies on cooperation credit. In November 2018, Deputy Attorney General Rod Rosenstein likewise signaled a retreat from the “all or nothing” approach to cooperation set forth in the Yates Memorandum, announcing, for example, that partial cooperation credit might be available in civil fraud cases, and that companies need not identify all individuals involved in the misconduct at issue, just those “substantially involved.” Forms of Cooperation The FCA guidance released on Tuesday, which is codified in Section 4-4.112 of DOJ’s Justice Manual, follows those announcements by allowing more flexibility in terms of what defendants can provide to the government in exchange for cooperation credit. Self-Disclosure. In a press release issued along with the new guidance, Assistant Attorney General Jody Hunt made clear that voluntary self-disclosure—i.e., proactively approaching the government to report potential violations—is still “the most valuable form of cooperation.” Under the new guidance, such disclosure should be both “proactive” and “timely”—characteristics the guidance leaves open to interpretation. Disclosure of misconduct going beyond the scope of concerns known to DOJ will further qualify a defendant for credit. Other Forms of Cooperation. The new DOJ guidance also includes an illustrative, non-exhaustive list of ten forms of cooperation that may earn a defendant “some cooperation credit.” In addition to voluntary disclosure, defendants may also earn credit for taking other actions that “meaningfully assist[]” DOJ in its FCA investigation. Such actions include: identifying individuals “substantially involved in or responsible for” misconduct; disclosing facts or evidence relevant to potential misconduct by third parties (or facts or evidence not already known to the government); preserving and disclosing relevant information beyond existing business practices or legal requirements; identifying and making available individuals with relevant information; attributing facts to specific sources and providing updates on any internal investigation; admitting liability or accepting responsibility for the relevant conduct; and assisting in the determination or recovery of losses. The guidance emphasizes that defendants are not required to waive attorney-client privilege or work product protection to be eligible for credit. Not surprisingly, actions that do not qualify for cooperation credit under the guidance include disclosure of information that is required by law or is under “imminent threat” of discovery or investigation, as well as “merely” responding to a subpoena or demand for information. The guidance does not define terms such as “imminent threat,” potentially opening the door to significant DOJ discretion. The Value of Cooperation Under the new guidance, the “value” of any cooperation also will impact DOJ’s calculus regarding cooperation credit. To assess value, DOJ will consider four factors relating to the assistance or information provided by a defendant: (1) timeliness and voluntariness; (2) truthfulness, completeness, and reliability; (3) nature and extent; and (4) significance and usefulness to the government. In the new guidance, DOJ also emphasizes the importance of remedial measures, such as implementing or improving a compliance program and acknowledging and accepting responsibility. Benefits of Cooperation As noted, one aspect of the new guidance that may be met with disappointment is the general lack of clarification or concrete details regarding the benefits of cooperation. The guidance sets a ceiling for the credit a defendant may receive. Specifically, cooperation credit may not result in the government receiving less than “full compensation for the losses caused by the defendant’s misconduct,” including damages, interest, the costs of investigation, and any relator’s share. Further, the guidance lists some non-monetary ways in which DOJ might recognize cooperation, such as notifying another agency of, or publicly acknowledging, the cooperation, or assisting the defendant in qui tam litigation. As members of the FCA defense bar know, double damages are the frequent result when negotiating resolutions of FCA investigations—so the promise of single damages in return for full cooperation has some value. But the guidance provides no specific information about how much of a benefit defendants might expect for cooperation, nor does it offer a means by which a defendant might quantify, calculate, or estimate the benefit. This lack of specific information, while contributing to ongoing uncertainty, may also create an opportunity for defendants to advocate for cooperation credit and lower settlement amounts without any fixed set of limitations on what DOJ may agree to provide, aside from the floor of single damages. Yet, even in the case of single damages, the guidance is silent as to how those single damages must be calculated and whether litigation risk may factor into the calculation. All of these factors combined create the possibility of robust negotiations over cooperation credit, even under this new framework. DOJ’s silence on the precise benefits of cooperation in the FCA context stands in contrast to cooperation frameworks in other contexts. For example, under the FCPA Corporate Enforcement Policy (“FCPA Policy”), it is clear that companies that (1) voluntarily disclose, (2) fully cooperate, and (3) timely and appropriately remediate misconduct “will receive a declination” absent aggravating circumstances. The FCPA Policy defines each of the three elements of cooperation—which are similar in substance to those set out in the new guidance—providing a clearer, albeit not ambiguity-free, roadmap to receiving credit. Notably, the FCPA Policy also quantifies the value of cooperation, stating, for example, that a defendant that did not initially disclose misconduct but later does can expect to receive “up to a 25% reduction” off the low end of the sentencing guidelines. DOJ’s guidance in the FCA context is not so explicit. Cooperation Versus “Outsourced” Investigations Although DOJ’s new guidance is unabashed in its solicitation of “meaningful[]” investigative assistance, just how prescriptive DOJ may be without risking exclusion of some evidence it gathers remains an open question. Just over a week ago, Chief Judge McMahon of the U.S. District Court for the Southern District of New York issued an opinion (in a criminal, non-FCA case) stating that she was “deeply troubled” by the government in effect “outsourcing” its investigation to its target, which was seeking to cooperate. See Mem. Decision and Order Den. Def. Gavin Black’s Mot. for Kastigar Relief, United States v. Connolly, No. 16 Cr. 0370 (CM) (S.D.N.Y. May 2, 2019). Judge McMahon concluded that the target’s lawyers appeared to have done “everything that the Government could, should, and would have done had the Government been doing its own work,” id. at 24, and that the internal investigation was therefore fairly attributable to the government, id. at 29. As a result, Judge McMahon held that the individual defendant’s statements to a law firm conducting an investigation on behalf the individual’s corporate employer were effectively compelled statements to the government (under the line of cases beginning with Garrity v. New Jersey, 385 U.S. 493 (1967)). See Connolly, No. 16 Cr. 0370 (CM), at 21, 28–29. As a criminal case, Connolly involves different considerations (and constitutional protections). Nevertheless, it suggests that courts may play—and potentially embrace—a role in distinguishing “cooperation” from compulsion in future cases (particularly FCA matters with parallel civil and criminal components). * * * * * Time will tell whether DOJ’s lack of specificity with respect to the benefits of cooperation will limit the impact of the new guidance on cooperation credit in FCA enforcement. But, at the very least, defendants will have factors to consider—and single damages to hope for—based on DOJ’s latest addition to the Justice Manual. The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Stuart Delery, John Partridge, Jonathan Phillips, Julie Hamilton and Reid Rector. Gibson Dunn’s lawyers have handled hundreds of FCA investigations and have a long track record of litigation success. Our lawyers are available to assist in addressing any questions you may have regarding the above developments. For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the any of the following. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Stephen C. Payne (+1 202-887-3693, spayne@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) James L. Zelenay Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Click for PDF On April 30, 2019, the U.S. Department of Justice (“DOJ”), Criminal Division, released updated guidance to DOJ prosecutors on how to assess corporate compliance programs when conducting an investigation, in making charging decisions, and in negotiating resolutions. The pronouncement, “Evaluation of Corporate Compliance Programs,” updates earlier guidance that DOJ’s Fraud Section issued in February 2017 (covered in our 2017 Mid-Year FCPA Update). This guidance emphasizes DOJ’s laser focus on compliance programs, requiring companies under investigation to carefully evaluate, test, and likely upgrade their programs well before the investigation is over. The updated Evaluation document has been restructured around the three “fundamental questions” from the Justice Manual that DOJ prosecutors should assess: Is the corporation’s compliance program well designed? Is the program being applied earnestly and in good faith? In other words, is the program being implemented effectively? Does the corporation’s compliance program work in practice? Under these three categories, the updated Evaluation groups 12 topics and sample questions that DOJ considers relevant in evaluating a corporate compliance program. Much like the earlier Evaluation articulation, these topics relate to common elements of effective compliance programs, including policies and procedures, training, reporting mechanisms and investigations, third-party due diligence, tone at the top, compliance independence and resources, incentives and disciplinary measures, and periodic testing and review. Several of these core standards can be found in other compliance program guidance materials, such as the Resource Guide to the U.S. Foreign Corrupt Practices Act and, very recently, the “Framework for OFAC Compliance Commitments” issued by OFAC on May 2, 2019, pursuant to the Agency’s promise to provide more guidance on its expectations for sanctions compliance programs. The following chart captures how the 12 compliance topics in the updated Evaluation are grouped under DOJ’s three core questions. Core Questions Compliance Topic (Core Focus) Is the Program Well Designed? Risk Assessment DOJ will assess whether the program is appropriately tailored to the company’s business model and the particularized risks that accompany it, considering factors like the company’s locations, industry sectors, and interactions with government officials. Policies and Procedures DOJ will assess whether the company has established appropriate policies and procedures, the processes for doing so and disseminating them to the workforce, and the guidance and training provided to “key gatekeepers in the control processes.” Training and Communications DOJ will assess the compliance training provided to directors, officers, employees, and third parties, as well as efforts to communicate to the workforce about the company’s response to misconduct, and the availability of resources to provide compliance guidance to employees. Confidential Reporting Structure and Investigation Process DOJ will assess the company’s reporting channels and investigative mechanism. Third-Party Management DOJ will examine whether the company’s third-party due diligence process is risk-based and includes controls and monitoring related to the qualifications and work of its third parties. Mergers and Acquisitions DOJ will examine the company’s M&A pre-acquisition due diligence and post-acquisition integration processes. Is the Program Implemented Effectively? Commitment by Senior and Middle Management DOJ will evaluate the commitment by company leadership to a culture of compliance, including management’s messaging and promotion of compliance and the board’s role in overseeing compliance. The OFAC Compliance Framework similarly emphasizes the importance of management’s commitment to, and support of, a company’s compliance program. Compliance Autonomy and Resources DOJ will assess whether the compliance function has sufficient seniority, resources, and autonomy commensurate with the company’s size and risk profile. Notably, DOJ will ask whether the company outsourced all or parts of its compliance function to an external firm or consultant. If so, DOJ will probe the level of access that the external firm or consultant has to company information. Incentives and Disciplinary Measures DOJ will assess whether the company has clear disciplinary procedures that are enforced consistently, as well as whether and how the company incentivizes ethical behavior. Does the Program Work in Practice? Continuous Improvement, Periodic Testing, and Review DOJ will consider how the company has reviewed and evaluated its compliance program to ensure it is current, including changes made to the program in light of lessons learned. DOJ also will assess the internal audit function and how the company measures its culture of compliance. Effective training also is called out specifically in the OFAC Compliance Framework. Investigation of Misconduct DOJ will assess the effectiveness and resources of the company’s investigative function. Notably, this is the second instance in the updated Evaluation calling for DOJ to assess a company’s investigative function. Analysis and Remediation of Any Underlying Misconduct DOJ will consider whether the company conducts root-cause analyses of misconduct and takes timely and appropriate remedial action against violators. Under the heading “Accountability,” the updated Evaluation includes a question about whether disciplinary actions for failures in supervision have been considered by the company. KEY TAKEAWAYS The updated Evaluation covers many of the same topics as the prior version, yet the addition of certain questions signals added emphasis or expectations compared to the prior guidance. Although non-exhaustive, the following list outlines key takeaways from the updated Evaluation that companies should consider in building, maintaining, and enhancing their compliance programs. Starting with a Risk Assessment and Building on “Lessons Learned”: The updated Evaluation calls for tailoring a company’s compliance program based on its risk assessment, and ensuring that the criteria for the risk assessment are “periodically updated.” Commentators suggest risk assessments annually or every two years. DOJ does not prescribe the timing of risk assessments. Going forward, “‘revisions to corporate compliance programs [should be made] in light of lessons learned.’” This means that a company’s risk assessment should be an ongoing and iterative process, and that a company should reexamine and revise its compliance program from time to time based on the risk assessment results. Reexamining and revising the compliance program is necessary to address DOJ’s particular emphasis on making enhancements in response to specific instances of misconduct. When companies conduct internal investigations, especially where there is a prospect of a government-facing inquiry, they should give serious consideration to taking prompt remedial steps to address the components highlighted by the updated Evaluation document. This will better position companies to advocate that they have effectively and timely remediated root-cause issues and should receive remediation credit. Importance of Compliance Personnel: In evaluating whether a company has sufficient staffing for compliance personnel, the updated Evaluation presents a number of related queries, such as where within the company the compliance function is housed (but without dictating a particular reporting structure) and how the compliance function compares with other functions within the company in terms of stature, compensation, rank/title, reporting lines, resources, and access to key decision-makers. Responsibility for Third Parties: The updated Evaluation indicates an increased focus on a company’s oversight of third parties, which historically have factored into the vast majority of Foreign Corrupt Practices Act enforcement actions. Among other things, DOJ will consider whether a company has “appropriate business rationale[s]” for the use of third parties and whether it has considered “the compensation and incentive structures” for third parties against the compliance risks posed. In addition, in assessing a company’s remediation of misconduct involving suppliers, DOJ will consider the company’s process for supplier selection. Termination of a supplier or business partner upon a company’s finding of misconduct, and steps to ensure that such third parties cannot be re-engaged without appropriate authorization, is a sign of a mature compliance program expected by DOJ. Cascading Tone from the Top: The updated Evaluation emphasizes “culture of compliance.” Crucially, messaging at the “top” alone will not equate to an adequate tone of compliance. Rather, DOJ will focus on how the compliance tone cascades downward in the organization and to counterparties. DOJ will examine not only the standards set by the board of directors and senior executives, but also the tone and actions of middle management to reinforce those standards. The focus on the cultural leadership by mid-level management has been a constant theme from DOJ for more than a decade. In addition, in assessing a company’s remediation, DOJ will consider whether managers were held accountable for misconduct that occurred under their supervision and whether the company considered disciplinary actions for failures in supervision. Like its predecessor, the updated Evaluation guidance is an important resource for companies both for reactively defending their compliance programs in the context of a DOJ investigation and for proactively benchmarking or enhancing their programs. Clearly, this refined prism will provide the template for DOJ Filip Factor presentations. The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Richard Grime, Patrick Stokes, Christopher Sullivan, Oleh Vretsona, Abbey Bush, and Alexander Moss. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 110 attorneys with FCPA experience, including a number of former federal prosecutors and SEC officials, spread throughout the firm’s domestic and international offices. Please contact the Gibson Dunn attorney with whom you work, or any of the following: Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Richard W. 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The 2019 edition of Benchmark Litigation Asia-Pacific has recognized partner Kelly Austin as a Hong Kong Star in the area of White Collar Crime and ranked the Firm in Tier 2 in its Hong Kong White Collar Crime – International Firms category. Benchmark Litigation Asia-Pacific conducts extensive interviews with litigators and their clients to identify the leading dispute resolution firms and lawyers in the region. The rankings were published on May 2, 2019. Kelly Austin’s practice focuses on government investigations, regulatory compliance and international disputes. She has extensive expertise in government and corporate internal investigations, including those involving the Foreign Corrupt Practices Act and other anti-corruption laws, and anti-money laundering, securities, and trade control laws. She also regularly guides companies on creating and implementing effective compliance programs.
In its 2019 edition, Chambers USA: America’s Leading Lawyers for Business awarded Gibson Dunn 79 first-tier rankings, of which 27 were firm practice group rankings and 52 were individual lawyer rankings. Overall, the firm earned 276 rankings – 80 firm practice group rankings and 196 individual lawyer rankings. Gibson Dunn earned top-tier rankings in the following practice group categories: National – Antitrust National – Antitrust: Cartel National – Appellate Law National – Corporate Crime & Investigations National – FCPA National – Outsourcing National – Real Estate National – Retail National – Securities: Regulation CA – Antitrust CA – Environment CA – IT & Outsourcing CA – Litigation: Appellate CA – Litigation: General Commercial CA – Litigation: Securities CA – Litigation: White-Collar Crime & Government Investigations CA – Real Estate: Southern California CO – Litigation: White-Collar Crime & Government Investigations CO – Natural Resources & Energy DC – Corporate/M&A & Private Equity DC – Labor & Employment DC – Litigation: General Commercial DC – Litigation: White-Collar Crime & Government Investigations NY – Litigation: General Commercial: The Elite NY – Media & Entertainment: Litigation NY – Technology & Outsourcing TX – Antitrust This year, 155 Gibson Dunn attorneys were identified as leading lawyers in their respective practice areas, with some ranked in more than one category. The following lawyers achieved top-tier rankings: D. Jarrett Arp, Theodore Boutrous, Jessica Brown, Jeffrey Chapman, Linda Curtis, Michael Darden, William Dawson, Patrick Dennis, Mark Director, Scott Edelman, Miguel Estrada, Stephen Fackler, Sean Feller, Eric Feuerstein, Amy Forbes, Stephen Glover, Richard Grime, Daniel Kolkey, Brian Lane, Jonathan Layne, Karen Manos, Randy Mastro, Cromwell Montgomery, Daniel Mummery, Stephen Nordahl, Theodore Olson, Richard Parker, William Peters, Tomer Pinkusiewicz, Sean Royall, Eugene Scalia, Jesse Sharf, Orin Snyder, George Stamas, Beau Stark, Charles Stevens, Daniel Swanson, Steven Talley, Helgi Walker, Robert Walters, F. Joseph Warin and Debra Wong Yang.
German publication WirtschaftsWoche has recognized Gibson Dunn as a Top Law Firm and Munich partner Benno Schwarz as a Top Lawyer in Compliance among its list of the most renowned law firms and lawyers. The list was published on April 8, 2019. Gibson Dunn’s White Collar Defense and Investigations Practice Group defends businesses, senior executives, public officials and other individuals in a wide range of investigations and prosecutions. The group is composed of over 100 lawyers practicing across our U.S. and international offices and draws on the expertise of more than 75 of its members with extensive government experience. Benno Schwarz focuses on corporate transactions as well as on white collar defense and compliance investigations. Schwarz has many years of experience in the area of corporate anti-bribery compliance, especially issues surrounding the enforcement of German anti-corruption laws, the U.S. Foreign Corrupt Practices Act, the UK Bribery Act, as well as applicable Russian law.
Twelve Gibson Dunn partners were recognized by Who’s Who Legal Investigations 2019. The guide covers investigations, white-collar crime, corporate compliance and regulatory enforcement. Hong Kong partner Kelly Austin; Los Angeles partner Debra Wong Yang; New York partners Reed Brodsky and Alexander Southwell; San Francisco partners Winston Chan and Charles Stevens; Washington, D.C. partners John Chesley, Daniel Chung, Michael Diamant, Richard Grime, Patrick Stokes and F. Joseph Warin were recognized. The list was published in March 2019.
Gibson Dunn received 30 rankings in Chambers Europe 2019: 22 individual rankings and eight firm rankings. The firm was recommended in the following categories: Competition/European Law – Belgium; Corporate Investigations – Europe-wide; Corporate/M&A: High-End Capability – France; Restructuring/Insolvency – France; TMT: Information Technology – France; Compliance – Germany; Corporate/M&A: High-End Capability – Germany; Dispute Resolution: White-Collar Crime: Corporate Advisory – Germany. The following Gibson Dunn partners were recognized as leaders in their fields: Peter Alexiadis, Ahmed Baladi, Sandy Bhogal, Jérôme Delaurière, Jean-Pierre Farges, Benoît Fleury, Charlie Geffen, Ariel Harroch, Chris Haynes, Ali Nikpay, Dirk Oberbracht, Wilhelm Reinhardt, Sebastian Schoon, Benno Schwarz, Steve Thierbach, David Wood, and Finn Zeidler.
Click for PDF Decided February 20, 2019 Timbs v. Indiana, No. 17-1091 The Supreme Court held 9-0 that the Eighth Amendment’s prohibition of excessive fines applies to the States. Background: After Tyson Timbs pled guilty to dealing in a controlled substance and conspiracy to commit theft, an Indiana state trial court considered Indiana’s request for civil forfeiture of his Land Rover, which he used to transport heroin. The trial court denied the request, reasoning that forfeiture of the vehicle would be grossly disproportionate to Timbs’s offense, and thus impermissible under the Eighth Amendment’s Excessive Fines Clause, because Timbs had recently purchased the vehicle for $42,000—far more than the maximum $10,000 fine assessable against him for the drug conviction. The Indiana Supreme Court reversed, concluding that the Excessive Fines Clause applies to only the federal government, not the States. Issue: Does the Eighth Amendment’s Excessive Fines Clause apply to the States? Court’s Holding: Yes. The Excessive Fines Clause is “fundamental to our scheme of ordered liberty” or “deeply rooted in this Nation’s history and tradition,” McDonald v. Chicago, 561 U.S. 742, 767 (2010), and therefore applies to the States under the Fourteenth Amendment’s Due Process Clause. “[T]he historical and logical case for concluding that the Fourteenth Amendment incorporates the Excessive Fines Clause is overwhelming.” Justice Ginsburg, writing for the unanimous Court What It Means: The Court ruled that the Constitution’s prohibition of excessive fines applies to state and local governments, limiting their abilities to impose fines and seize property for forfeiture. The opinion imposes a new constitutional constraint on more than thirty States that have not already incorporated the Excessive Fines Clause (e.g., Michigan, New York, and Virginia), limiting their ability to levy fines and forfeitures, which are often key sources of revenue for state and local governments. The Court did not address when a fine is impermissibly “excessive” under the Eighth Amendment. It noted, however, that the lineage of the Excessive Fines Clause traces back to the Magna Carta, which generally required economic sanctions to be proportionate to the underlying wrong. The opinion gives defendants in suits brought by state and local governments a potential new defense to excessive fines and penalties. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Related Practices: Anti-Money Laundering, Forfeiture, White Collar Defense, and Investigations Joel M. Cohen +1 212.351.2664 jcohen@gibsondunn.com Charles J. Stevens +1 415.393.8391 cstevens@gibsondunn.com F. Joseph Warin +1 202.887.3609 fwarin@gibsondunn.com Stephanie Brooker +1 202.887.3502 sbrooker@gibsondunn.com M. Kendall Day +1 202.955.8220 kday@gibsondunn.com
Los Angeles partners Debra Wong Yang, Michael Farhang and James Zelenay, and associate Sean Twomey are the authors of “Looking back and ahead at the False Claims Act” [PDF] published by The Daily Journal on February 14, 2019.
Every year brings new compliance challenges, and 2018 has been no exception. Join our panelists as they discuss key changes in the 2018 regulatory landscape and look forward to 2019 with insight on how to effectively navigate risks in the new year. Topics discussed include: Global Enforcement and Regulatory Developments Board Oversight of Cyber Threats and Governance Allocation How to Effectively Identify and Address Key Compliance Risks Practical Tips for Improving Corporate Compliance DOJ and SEC Priorities, Policies, and Penalties Update on Core Governance Issues and Regulatory Requirements Legislative Developments Impacting Board Governance View Slides (PDF) PANELISTS: Kendall Day, a partner in Washington, D.C., was an Acting Deputy Assistant Attorney General, the highest level of career official in the Criminal Division at DOJ. He represents financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions involving anti-money laundering (AML)/Bank Secrecy Act (BSA), sanctions, FCPA and other anti-corruption, securities, tax, wire and mail fraud, unlicensed money transmitter, and sensitive employee matters. Mr. Day’s practice also includes BSA/AML compliance counseling and due diligence, and the defense of forfeiture matters. Sacha Harber-Kelly, a partner in London, focuses his practice in global white-collar investigations. He was a Prosecutor and Case Controller at the United Kingdom’s Serious Fraud Office (SFO) where he was involved in the investigation and prosecution of international corporate corruption cases since 2007. He has worked extensively with a range of other enforcement authorities in the U.K., U.S. and beyond, including the DOJ, SEC, OFAC, the U.K. National Crime Agency, HM Revenue Commissioners, and the Financial Conduct Authority. He was awarded a Member of the Order of the British Empire (MBE) for services to the SFO. In private practice, he represents clients in criminal and regulatory investigations as well as cross-border enforcement inquiries. Stuart Delery, a partner in Washington, D.C., was the Acting Associate Attorney General, the No. 3 position in the Justice Department, where he oversaw the civil and criminal work of five litigating divisions — Antitrust, Civil, Tax, Civil Rights, and Environment and Natural Resources — as well as other components. His practice focuses on representing corporations and individuals in high-stakes litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement. Adam M. Smith, a partner in Washington, D.C., was the Senior Advisor to the Director of the U.S. Treasury Department’s OFAC and the Director for Multilateral Affairs on the National Security Council. His practice focuses on international trade compliance and white collar investigations, including with respect to federal and state economic sanctions enforcement, the FCPA, embargoes, and export controls. He routinely advises multi-national corporations regarding regulatory aspects of international business. Lori Zyskowski, a partner in New York, is Co-Chair of the firm’s Securities Regulation and Corporate Governance practice. She was previously Executive Counsel, Corporate, Securities & Finance at GE. She advises clients, including public companies and their boards of directors, on a wide variety of corporate governance and securities disclosure issues, and provides a unique perspective gained from over 12 years working in-house at S&P 500 corporations. F. Joseph Warin, a partner in Washington, D.C., is Co-Chair of the firm’s White Collar Defense and Investigations practice and former Assistant U.S. Attorney in Washington, D.C. Mr. Warin is consistently recognized annually in the top-tier by Chambers USA, Chambers Global, and Chambers Latin America for his FCPA, fraud and corporate investigations acumen. In 2018 Mr. Warin was selected by Chambers USAas a “Star” in FCPA, and “a “Leading Lawyer” in the nation in Securities Regulation: Enforcement. Global Investigations Review reported that Mr. Warin has now advised on more FCPA resolutions than any other lawyer since 2008. Who’s Who Legal and Global Investigations Review named Mr. Warin to their 2016 list of World’s Ten-Most Highly Regarded Investigations Lawyers based on a survey of clients and peers, noting that he was one of the “most highly nominated practitioners,” and a “’favourite’ of audit and special committees of public companies.” Mr. Warin has handled cases and investigations in more than 40 states and dozens of countries. His credibility at DOJ and the SEC is unsurpassed among private practitioners — a reputation based in large part on his experience as the only person ever to serve as a compliance monitor or counsel to the compliance monitor in three separate FCPA monitorships, pursuant to settlements with the SEC and DOJ: Statoil ASA (2007-2009); Siemens AG (2009-2012); and Alliance One International (2011-2013). MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 3.0 credit hours, of which 3.0 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 2.50 credit hours, of which 2.50 credit hours may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 2.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.
Washington, D.C. partners F. Joseph Warin and M. Kendall Day and associate Melissa Farrar are the authors of “Trends In DOJ Nonprosecution, Deferred Prosecution Deals” [PDF] published by Law360 on January 29, 2019.
Click for PDF With Democrats regaining the majority in the House of Representatives for the first time in nearly a decade, the investigative priorities of the lower chamber will shift—and corporations should expect (and prepare) to find themselves more frequently the subjects of investigations. Moreover, the investigative powers of several committees have expanded in significant ways since House Democrats last held committee gavels in 2010. And, while Republicans remain in charge of the Senate, new and returning chairs of a number of key investigative committees are likely to focus on issues that implicate several industries and private sector entities. Unlike receiving a civil complaint or compulsory process in an Executive Branch investigation, when a congressional letter or subpoena arrives, targeted organizations may only have a matter of days to consider their response and devise a strategy, and often must do so amid significant media scrutiny and public attention. Congressional investigations often involve public attacks on a company’s reputation, which can imperil the goodwill upon which the company has built its business and maintains its competitive advantages. It is therefore crucial that potential targets evaluate their exposure to likely investigations in the 116th Congress, familiarize themselves with how such inquiries unfold—including the rules and procedures that govern them—and consider potential responses. To assist possible targets and interested parties in assessing their readiness for responding to a potential congressional investigation, Gibson Dunn presents this brief overview of how such investigations are often conducted, Congress’ underlying legal authorities to investigate, various defenses that can be raised in response, and the changing political and investigative landscape of the 116th Congress. We also note missteps that subjects of investigations sometimes make when receiving an inquiry and best practices for how to respond. I. What is a Congressional Investigation? Congressional investigations present a number of unique challenges not found in the familiar arenas of civil litigation and Executive Branch investigations. Unlike the relatively controlled environment of a courtroom, congressional investigations often unfold in a hearing room in front of television cameras and on the front pages of major newspapers and social media feeds. The first thing to know about congressional investigations is that Congress’ power to investigate is broad—as broad as its legislative authority. The “power of inquiry” is inherent in Congress’ authority to “enact and appropriate under the Constitution.”[1] And while Congress’ investigatory power is not a general power to probe any private affair or to conduct law enforcement investigations, but rather must further a valid legislative purpose,[2] the term “legislative purpose” is understood broadly to include not only gathering information for the purpose of legislating, but also for overseeing governmental matters and informing the public about the workings of government.[3] As a practical matter, numerous motivations (not always legitimate) often drive a congressional inquiry, including: advancing a chair’s political agenda or public profile, exposing criminal wrongdoing, pressuring a company to take certain actions, and responding to public outcry. Recognizing the presence of these underlying objectives and evaluating the political context surrounding an inquiry can therefore be a key component of developing an effective response strategy. II. Investigatory Tools of Congressional Committees Congress has many investigatory tools at its disposal, including: (1) requests for information; (2) interviews; (3) depositions; (4) hearings; (5) referrals to the Executive Branch for prosecution; and (6) subpoenas. If these methods fail, Congress can use its contempt power in an effort to punish individuals or entities who refuse to comply with subpoenas. It is imperative that targets are familiar with the powers (and limits) of each of the following tools to best chart an effective response: Requests for Information: Any member of Congress may issue a request for information to an individual or entity, which may seek documents or other information.[4] Absent the issuance of a subpoena, responding to such requests is entirely voluntary. As such, recipients of such requests should carefully consider the pros and cons of different degrees of responding. Interviews: Interviews also are voluntary, led by committee staff, and occur in private (in person or over the phone). They tend to be less formal than depositions and are sometimes transcribed. Committee staff may take copious notes and rely on interview testimony in subsequent hearings or public reports. Depositions: Depositions can be compulsory, are transcribed, and are taken under oath. As such, depositions are more formal than interviews and are similar to those in traditional litigation. The number of committees with authority to conduct staff depositions has increased significantly over the last few years. In the last Congress, the House required (with limited exceptions) that one or more Members of Congress be present during a deposition. Importantly, the House rules for the 116th Congress have eliminated this requirement (see infra, Section IV), which will likely result in an increase in the use—or at least threatened use—of depositions as an investigative tool.[5] It is expected that the House Rules Committee soon will issue guidance on how staff depositions are to be conducted. In the Senate, only the Judiciary Committee requires a member present, unless waived by agreement of the Chair and Ranking Member.[6] On January 25, 2019, the House Rules Committee issued new regulations governing depositions by committee counsel. Significantly, the regulations now allow for immediate overruling of objections raised by a witness’s counsel and immediate instructions to answer, on pain of contempt, and appear to eliminate the witness’s right to appeal rulings on objections to the full committee (although committee members may still appeal). This will likely speed up the deposition process, as previously the staff deposition regulations required a recess before the chair could rule on an objection. Additionally, the regulations now expressly allow for depositions to continue from day to day and permit, with notice from the chair, questioning by members and staff of more than one committee. Finally, the regulations have removed a prior requirement that allowed objections only by the witness or the witness’s lawyer. This change appears to allow objections from staff or Members who object to a particular line of questioning.[7] Hearings: While both depositions and interviews allow committees to acquire information quickly and (at least in many circumstances) confidentially,[8] testimony at hearings, unless on a sensitive topic, is conducted in a public session led by the Members themselves (or, on occasion, committee counsel).[9] Hearings can either occur at the end of a lengthy staff investigation or more rapidly, often in response to an event that has garnered public and congressional concern. Most akin to a trial in litigation (though without many procedural or evidentiary rules), hearings are often high profile and require significant preparation to navigate successfully. Executive Branch Referral: Congress also has the power to refer its investigatory findings to the Executive Branch for criminal prosecution. After a referral from Congress, the Department of Justice may charge an individual or entity with making false statements to Congress, obstruction of justice, or destruction of evidence. Importantly, while Congress may make a referral, the Executive Branch retains the discretion to prosecute, or not. Subpoena Power As noted above, Congress will usually seek voluntary compliance with its requests for information or testimony. However, it may compel disclosure of information or testimony through the issuance of a congressional subpoena.[10] Like Congress’ power of inquiry, there is no explicit constitutional provision granting Congress the right to issue subpoenas.[11] But the Supreme Court has recognized that the issuance of subpoenas is “a legitimate use by Congress of its power to investigate” and its use is protected from judicial interference by the Speech or Debate Clause.[12] Congressional subpoenas are also subject to few legal challenges.[12] And “there is virtually no pre-enforcement review of a congressional subpoena.”[13] The authority to issue subpoenas is initially governed by the rules of the House and Senate, which delegate further rulemaking to each committee.[15] While nearly every standing committee in the House and Senate has the authority to issue subpoenas, the specific requirements for issuing a subpoena vary by committee. These rules are still being developed by the committees of the 116th Congress, and can take many forms.[16] For example, several House committees authorize the committee chair to issue a subpoena unilaterally and only require that notice be provided to the ranking member. Others, however, require approval of the chair and ranking member, or upon the ranking member’s objection, require approval by a majority of the committee. Contempt of Congress Failure to comply with a subpoena can result in contempt of Congress. Although Congress does not frequently resort to its contempt power to enforce its subpoenas, it has three potential avenues for seeking to implement its contempt authority. Inherent Contempt Power: The first, and least relied upon, is Congress’ inherent contempt power. Much like the subpoena power itself, the inherent contempt power is not specifically authorized in the Constitution, but the Supreme Court has recognized its existence and legitimacy.[17] To exercise this power, the House or Senate must pass a resolution and then a full trial or evidentiary proceeding must occur, followed by debate and (if contempt is found to have been committed) imposition of punishment.[18] As is apparent in this description, the inherent contempt authority is cumbersome and inefficient, and potentially fraught with political peril for legislators. It is therefore unsurprising that Congress has not used it since 1934.[19] Statutory Criminal Contempt Power: Congress also possesses a statutory criminal contempt power. In 1857, Congress enacted this criminal contempt statute as a supplement to its inherent authority.[20] Under the statute, a person who refuses to comply with a subpoena is guilty of a misdemeanor and subject to a fine and imprisonment.[21] “Importantly, while Congress initiates an action under the criminal contempt statute, the Executive Branch prosecutes it.”[22] This relieves Congress of the burdens associated with its inherent contempt authority. The statute simply requires the House or Senate to approve a contempt citation. Thereafter, the statute provides that it is the “duty” of the “appropriate United States attorney” to prosecute the matter, although the Department of Justice maintains that it always retains discretion not to prosecute.[23] Although utilized as recently as the 1980s, the criminal contempt power has largely fallen into disuse.[24] Civil Contempt Power: Finally, Congress may exercise its civil contempt power. The Senate’s civil contempt power is expressly codified.[25] This statute expressly authorizes the Senate to seek enforcement of legislative subpoenas in a U.S. District Court. In contrast, the House does not have a civil contempt statute, but it may pursue a civil contempt action “by passing a resolution creating a special investigatory panel with the power to seek judicial orders or by granting the power to seek such orders to a standing committee.”[26] In the past, the full House has “adopt[ed] a resolution finding the individual in contempt and authorizing a committee or the House General Counsel to file suit against a noncompliant witness in federal court.”[27] It remains to be seen whether that process will be followed in the 116th Congress; the incoming Chairman of the House Rules Committee has taken the position that the current House rules empower the Bipartisan Legal Advisory Group (consisting of the Speaker, the Majority and Minority Leaders, and the Majority and Minority Whips) to authorize a civil enforcement action without the need for a House vote.[28] III. Defenses to Congressional Inquiries While potential defenses to congressional investigations are limited, they are important to understand—likely more so now with Democrats taking control of the House. The principal defenses are as follows: Jurisdiction As discussed above, a congressional investigation is required generally to relate to a legislative purpose, and must also fall within the scope of legislative matters assigned to the particular committee at issue. In a challenge to a committee’s jurisdiction, the party subject to the investigation must argue that the inquiry does not have a proper legislative purpose, that the investigation has not been properly authorized, or that a specific line of inquiry is not pertinent to an otherwise proper purpose within the committee’s jurisdiction. Because courts generally interpret “legislative purpose” broadly, these challenges can be an uphill battle. Nevertheless, this defense should be considered when a committee is pushing the boundaries of its jurisdiction. Constitutional Defenses Constitutional defenses under the First and Fifth Amendments may be available in certain circumstances. While few of these challenges are ever litigated, these defenses should be carefully evaluated by the subject of a congressional investigation. When a First Amendment challenge is invoked, a court must engage in a “balancing” of “competing private and public interests at stake in the particular circumstances shown.”[29] The “critical element” in the balancing test is the “existence of, and the weight to be ascribed to, the interest of the Congress in demanding disclosures from an unwilling witness.”[30] Though the Supreme Court has never relied on the First Amendment to reverse a criminal conviction for contempt of Congress, it has recognized that the Amendment may restrict Congress in conducting investigations.[31] Courts have also recognized that the First Amendment constrains judicially compelled production of information in certain circumstances.[32] Accordingly, it would be reasonable to contend that the First Amendment limits congressional subpoenas at least to the same extent. The Fifth Amendment’s privilege against self-incrimination is available to witnesses—but not entities—who appear before Congress.[33] The right generally applies only to testimony, and not to the production of documents,[34] unless those documents satisfy a limited exception for “testimonial communications.”[35] Congress can circumvent this defense by granting transactional immunity to an individual invoking the Fifth Amendment privilege.[36] This allows a witness to testify without the threat of a subsequent criminal prosecution based on the testimony provided. Attorney-Client Privilege & Work Product Defenses Although committees in the House and Senate have taken the position that they are not required to recognize the attorney-client privilege, in practice, the committees generally acknowledge the privilege as a valid protection. Moreover, no court has ruled that the attorney-client privilege does not apply to congressional investigations. Committees often require that claims of privilege be logged as they would in a civil litigation setting. In assessing a claim of privilege, committees balance the harm to the witness of disclosure against legislative need, public policy, and congressional duty. The work product doctrine protects documents prepared in anticipation of litigation. Accordingly, it is not clear whether or in what circumstances the doctrine applies to congressional investigations, as committees may argue that their investigations are not necessarily the type of “adversarial proceeding” required to satisfy the “anticipation of litigation” requirement.[37] IV. Lay of the Land in the 116th Congress House of Representatives With Democrats taking charge of the House for the first time since 2010, the chamber’s investigative priorities are likely to shift significantly to a number of issues Democrats have previously attempted to probe while they were in the minority. The investigative tools available to committee chairs also have significantly strengthened since Democrats were last in the majority. For example, nearly all House committees now have authority that permits staff counsel to conduct depositions. And, as noted above, Democrats recently have removed the requirement that a Member must be present during the taking of a deposition[38] and have adopted new regulations that will permit staff investigators to adopt a more aggressive posture.[39] Such broad authority could make it more difficult for minority members to affect, influence, or otherwise hinder investigations to which they are opposed. The Democrats’ investigative arsenal is further bolstered by the fact that approximately a dozen committee chairs are empowered to issue subpoenas without consent of the ranking member. Democrats have thus gained command of a considerably more powerful investigative apparatus than existed in previous Congresses. Many committees are likely to focus on oversight of the Trump administration; however, several members have signaled their intention to examine numerous topics affecting the private sector as well. Industries and entities expected to face considerable scrutiny include: The pharmaceutical industry; Drug manufacturers, distributors, and pharmacy benefit managers; Health insurers and health care providers; Consumer-facing financial institutions; Student loan lenders; Credit agencies; E-cigarette manufacturers; Technology and social media companies; Entities responsible for safeguarding data privacy; Industries disproportionally serving elderly populations; and Private entities connected to the Trump Organization or high-level administration figures. We have also catalogued the publicly stated priorities of certain incoming chairs and other key Democratic members. House Oversight and Reform: Chairman Elijah Cummings (D-MD) has said on several occasions that investigating prescription drug pricing and health insurance practices with respect to pre-existing conditions will be a primary focus of his committee. On January 14, 2019, Chairman Cummings launched his first major investigation of the 116th Congress—into prescription drug pricing. House Energy and Commerce: Chairman Frank Pallone (D-NJ) has already announced a hearing related to the Affordable Care Act, an indication that that the health care industry is likely to be a top issue. Pallone has also announced a hearing on issues related to climate change, a topic of inquiry that could envelop numerous industries. Meanwhile, in the prior Congress, Democratic members of the committee called for investigations related to prescription drug pricing, pharmaceutical tax breaks, and issues related to nursing home management, topics they are likely to press forward with now that they hold the gavel. In the prior Congress, Chairman Pallone also issued information requests to social media companies related to election interference, to online retailers related to counterfeit merchandise, and to media companies related to industry consolidation. House Financial Services: Chairwoman Maxine Waters (D-CA) has made clear that numerous financial institutions, particularly the country’s largest banks, will face scrutiny on a variety of issues affecting consumers and small businesses, as well as financial institutions’ ongoing compliance with safeguards designed to prevent another financial crisis. She has also indicated her intention to focus on minority hiring practices in senior corporate positions. In the prior Congress, Congresswoman Waters also sought to target payday lending practices. It also has been reported that she will hold a hearing in February focused on credit reporting companies. House Ways and Means: Chairman Richard Neal (D-MA) has stated he will take aim at issues related to the health care insurance industry and rising health care costs. House Science, Space, and Technology: Chairwoman Eddie Bernice Johnson (D-TX) has indicated an intention of focus on climate change. Additionally, in the prior Congress, Chairwoman Johnson sought to investigate certain private institutions and universities in relation to sexual harassment allegations. She also targeted the automotive and oil and gas industries in relation to relaxed EPA regulations. In their recently passed rules package, Democrats also re-established the House Select Committee on the Climate Crisis,[40] which is mandated with examining issues related to climate change and will be chaired by Congresswoman Kathy Castor (D-FL).[41] While the committee lacks subpoena power, a broad range of industry actors may find themselves on the receiving end of inquiries, particularly in light of the fact that several new House Democrats made climate change a top issue in their election campaigns. And the Select Committee can recommend that other committees issue subpoenas, which provides an added incentive to cooperate with its inquiries. Senate On the Senate side, while Republicans remain in control of the chamber, committee chairs have signaled that they are likely to investigate business sectors such as technology, health care, and pharmaceuticals. And unlike their Democratic counterparts in the House, Republican chairs are unlikely to divert significant committee resources to oversight of the Trump administration. Below, we have catalogued areas in which certain committees may focus in the 116th Congress: Permanent Subcommittee on Investigations: Majority and Minority staffs recently completed a two-year investigation regarding the price of drug treatments to combat Opioid overdosing and are expected to continue to pursue the subject of drug pricing generally. Senate Finance: Chairman Chuck Grassley (R-IA), who moved to Finance from Judiciary, has stated that he plans to use his new post to investigate rising health care costs. Chairman Grassley has also said he will investigate the effect of trade and tax policies. Health, Education, Labor, and Pensions: Chairman Lamar Alexander (R-TN), who plans to retire in 2020, has long made issues related to health care a primary focus and held hearings during the previous Congress related to drug pricing. We expect Chairman Alexander to continue to pursue these subject matters. Commerce, Science, and Transportation: Chairman John Thune (R-SD) has previously made drug pricing issues a committee priority and we expect that focus to continue. Issues related to technology and data privacy are also expected to be on Chairman Thune’s agenda. Special Committee on Aging: We expect Chairwoman Susan Collins (R-ME) will continue her prior inquiries into rising health care costs for seniors, and particularly rising prices of prescription drugs that disproportionately serve senior populations. Senate Judiciary: Incoming Chairman Lindsay Graham (R-SC) previously spearheaded a Judiciary subcommittee inquiry into various social media companies on the issue of election interference. He is likely to pursue that topic, as well as larger issues of data privacy, on a broader scale now that he is chair of the full committee. The committee has also previously investigated social media companies for alleged bias against the dissemination of conservative opinions, work that may continue this Congress. Additionally, Senate Democrats are expected to pursue numerous inquiries that they initiated in the previous Congress, some of which overlap with GOP priorities, including on issues related to data privacy concerns, social media company practices, e-cigarettes, banking regulations, and health care costs. And of course, Senate Democrats will remain focused on issues related to the Mueller investigation and, inevitably, private sector entities that may be tangentially related. V. Top Mistakes and How to Prepare Successfully navigating a congressional investigation requires a multifaceted mastery of the facts at issue, careful consideration of collateral political events, and crisis communications. Here are some of the more common mistakes we have observed: Facts: Failure to identify and verify the key facts at issue; Message: Failure to communicate a clear and compelling narrative; Context: Failure to understand and adapt to underlying dynamics driving the investigation; Concern: Failure to timely recognize the attention and resources required to respond; Legal: Failure to preserve privilege and assess collateral consequences; Rules: Failure to understand the rules of each committee, which can vary significantly; and Big Picture: Failure to consider how an adverse outcome can negatively impact numerous other legal and business objectives. The consequences of inadequate preparation can be disastrous on numerous fronts. A keen understanding of how congressional investigations differ from traditional litigation and even Executive Branch or state agency investigations is therefore vital to effective preparation. The most successful subjects of investigations are those that both seek advice from experienced counsel and employ multidisciplinary teams with expertise in government affairs, media relations, e-discovery, and the key legal and procedural issues. Gibson Dunn lawyers have extensive experience in both running congressional investigations and defending targets of and witnesses in such investigations. If you or your company become the subject of a congressional inquiry, or if you are concerned that such an inquiry may be imminent, please feel free to contact us for assistance. [1] Barenblatt v. United States, 360 U.S. 178, 187 (1957). [2] See Wilkinson v. United States, 365 U.S. 399, 408-409 (1961); Watkins v. United States, 354 U.S. 178, 199‑201 (1957). [3] Michael D. Bopp, Gustav W. Eyler, & Scott M. Richardson, Trouble Ahead, Trouble Behind: Executive Branch Enforcement of Congressional Investigations, 25 Corn. J. of Law & Pub. Policy 453, 456 (2015). [4] Id. at 456. [5] See H.R. Res. 6, 116th Cong. § 103(a)(1) (2019). [6] Consistent with past practice, Gibson Dunn will release a client alert outlining the specific subpoena rules for each committee as soon as they become available. See, e.g., Michael D. Bopp, F. Joseph Warin, Trent J. Benishek, & Alexander W. Mooney, The Power to Investigate: Table of Authorities of House and Senate Committees for the 115th Congress, https://www.gibsondunn.com/the-power-to-investigate-table-of-authorities-of-house-and-senate-committees-for-the-115th-congress/. [7] See 165 Cong. Rec. H1216 (Jan. 25, 2019) (statement of Rep. McGovern). [8] Bopp, supra note 3, at 457. [9] Id. at 456-57. [10] Id. at 457. [11] Id. [12] Eastland v. U.S. Servicemen’s Fund, 421 U.S. 491, 504-05 (1975). [13] Bopp, supra note 3, at 458. [14] Id. at 459. [15] Id. at 458. [16] Gibson Dunn will detail these rules when they are finalized in an upcoming publication. See supra note 6. [17] Bopp, supra note 3, at 460 (citing Anderson v. Dunn, 19 U.S. 204, 228 (1821)). [18] Id. [18] Id. at 466. [20] Id. at 461. [21] See 2 U.S.C. §§ 192 and 194. [22] Bopp, supra note 3, at 462. [23] See 2 U.S.C. § 194. [24] Bopp, supra note 3, at 467. [25] See 2 U.S.C. §§ 288b(b) and 288d. [26] Bopp, supra note 3, at 465. [27] Id. [28] See 165 Cong. Rec. H30 (Jan. 3, 2019) (“If a Committee determines that one or more of its duly issued subpoenas has not been complied with and that civil enforcement is necessary, the BLAG, pursuant to House Rule II(8)(b), may authorize the House Office of General Counsel to initiate civil litigation on behalf of this Committee to enforce the Committee’s subpoena(s) in federal district court.”) (statement of Rep. McGovern). [29] Barenblatt, 360 U.S. 109, 126 (1959). [30] Watkins, 354 U.S. at 198. [31] See id. at 197–98. [32] See, e.g., Perry v. Schwarzenegger, 91 F.3d 1147, 1163 (9th Cir. 2009). [33] See Quinn v. United States, 349 U.S. 155, 163 (1955). [34] See Fisher v. United States, 425 U.S. 391, 409 (1976). [35] See United States v. Doe, 465 U.S. 605, 611 (1984). [36] See 18 U.S.C. § 6002; Kastigar v. United States, 406 U.S. 441 (1972). [37] See In re Grand Jury Subpoena Duces Tecum, 112 F.3d 910, 924 (8th Cir. 1997). [38] See H.R. Res. 6, 116th Cong. § 103(a)(1) (2019). [39] Cong. Rec., supra note 7. [40] See H.R. Res. 6, 116th Cong. § 104(f)(1)(A) (2019). [41] This committee was previously named the House Select Committee on Energy Independence and Global Warming. Republicans disbanded the committee when they regained control of the House in 2011. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work or the following lawyers in the firm’s Congressional Investigations group in Washington, D.C.: Michael D. Bopp – Chair, Congressional Investigations Group (+1 202-955-8256, mbopp@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Thomas G. Hungar (+1 202-887-3784, thungar@gibsondunn.com) Alexander W. Mooney (+1 202-887-3751, amooney@gibsondunn.com) Tommy McCormac* (+1 202-887-3772, tmccormac@gibsondunn.com) * Not yet admitted to practice in the District of Columbia and currently practicing under the supervision of the Principals of the Firm. © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.