How to Avoid False Claims Act Liability — What Every Compliance Officer Needs to Know

March 26, 2010

In this communication we discuss what you can do to reduce the likelihood that your school will be the subject of a False Claims Act (“FCA”) lawsuit, and if it is, what steps you can take to help successfully defend the lawsuit and avoid liability.  With the increase in FCA lawsuits being brought against schools, a strong compliance program has become more and more valuable.  An effective compliance program will help prevent violations and FCA lawsuits, limit potential damages if a lawsuit is filed, and serve as an equitable factor in your school’s favor in the eyes of the government and the Court.

As discussed in the past several communications, a qui tam FCA lawsuit is an extremely powerful tool under which an individual can bring a lawsuit in the name of the government for civil fraud committed against the government.  Potential damages for a school’s violations of the FCA are extremely high with plaintiffs arguing that damages include all Title IV funds received by students.  In addition, the collateral consequences of a finding of FCA liability include the possible loss of Title IV eligibility, state license, or accreditation, bad publicity, and if publicly traded, possible securities and derivative actions.

What Can You Do to Reduce the Likelihood That Your School Will Be Hit With an FCA Lawsuit?

An Effective Compliance Program

A strong compliance program is the best defense to an FCA action.  First, it can reduce violations that could potentially be alleged in an FCA lawsuit.  Second, because a plaintiff in an FCA action must prove that the school knowingly violated the law or regulation, a strong and effective compliance program helps establish that any violation was not knowing, but rather the consequence of negligence or the conduct of a rogue employee, and contrary to the school’s policies and practices.  Third, it can help in convincing the government not to intervene in the lawsuit by showing that the conduct was that of a renegade employee or group of employees who were acting contrary to school policy and that the school acted responsibly when it learned of the violation.  The government’s intervention decision is extremely significant and impacts the perceived seriousness of the lawsuit.  Of the approximately $9.6 billion that has been recovered in qui tam FCA actions — over $9.2 billion was recovered in cases in which the government intervened or otherwise pursued the action.  The slim remainder came in those cases where the government did not intervene.  Fourth, it helps limit damages by showing the school acted responsibly.

An effective compliance program should include:

  1. The buy-in and participation of senior management;
  2. Proper training of employees and students;
  3. Clear and effective policies and procedures;
  4. Processes that assist the school in discovering, remedying, and reporting violations, including involving legal counsel as early as possible with regard to serious allegations or reports of a violation;
  5. A system for employees (and students) to report violations.  Schools may want to consider annual certifications by employees that they are aware of and have complied with the school’s compliance policies and that they are not currently aware of any violations;
  6. Proactive internal audit programs tailored to audit the issues of the particular school or department within the school; and
  7. A procedure to document all compliance activities.

Monitoring and Handling of Concerns and Reports of Violations

The vast majority of FCA lawsuits are brought by disgruntled employees — both current and former.  Employees should be encouraged by Human Resources to report any concerns or violations, and their concerns and reports should be investigated and taken seriously.  Human Resources needs to ensure that there is no retaliation against a reporting employee, which can itself give rise to a separate legal action against the school.  Once an investigation is underway, if possible, the reporting employee should be given feedback so the employee knows that his or her concerns and reports are being taken seriously.  If ignored, the employee may become a whistleblower and file an FCA lawsuit.

Human resources should also be on the alert for warning signs that there may be potentially disgruntled employees or students.  Media reports or spikes in student and employee claims on websites can often indicate there may be issues that should be addressed.

If an FCA Lawsuit Is Filed, What Can You Do to Increase the Likelihood of a Successful Outcome?

While your first line of defense is to prevent violations that could give rise to an FCA lawsuit, no matter how effective and how many resources you devote to this function, you are going to have disgruntled employees.  Sometimes this is all it takes for an FCA lawsuit to take root.  Early detection that an FCA lawsuit has been filed is an important step in preventing the government from intervening in the case.  In addition, you must also have document retention policies and processes in place that will help you defend against the lawsuit.

How Do You Determine That an FCA Lawsuit Has Been Filed Against Your School?

An FCA lawsuit is filed under seal, so your school will not be served or informed of the lawsuit until after the government decides whether or not to intervene or take over the lawsuit.  Because the government’s decision of whether or not to intervene has  such a great impact on the lawsuit, it is important to look for signs that an FCA lawsuit has been filed so that you and your legal counsel can reach out to the government and attempt to convince the government to not intervene.  Warning signs that an FCA lawsuit has been filed under seal include:

  • The government begins interviewing current or former employees;
  • A pattern of complaints;
  • Statements made by employees in the termination process or employee disciplinary actions;
  • Rumors, news articles, postings on websites;
  • An “unusual” Department of Education program review or Office of the Inspector General audit; or
  • Receipt of a subpoena or request for documents.

If you become aware of any of these signs, do not be passive. Contact your legal counsel and ask them to evaluate the situation.

The government’s decision regarding whether to intervene in an FCA lawsuit is made on a case-by-case basis.  Common factors considered are whether the allegations are supported by the facts, the extent of the government’s damages, and the credibility of the plaintiffs.  The mere fact that an employee or student may be disgruntled is not enough to prevent the government from intervening.  The government cannot discount allegations in their entirety merely because a plaintiff has an axe to grind against the school.  The government will also consider the school’s reputation and history of compliance and whether the school has an effective compliance program.

Document Retention Policies and Procedures Are Essential to Your Defense

One of the other most important areas in defending and prevailing in an FCA lawsuit is document retention.  Plaintiffs’ counsel often approach litigation by focusing far less on the actual merits of their claims and instead focus on anything that will give them leverage to extract — or extort — a large settlement from the defendant.  As a result, document discovery has become a huge part of almost all litigation.  Plaintiffs’ counsel will try to establish that the defendant failed to retain documents or destroyed documents relevant to the claims raised in the lawsuit — and then ask the court for severe sanctions against the defendant, which courts have granted on occasion.  Alternatively, plaintiffs’ lawyers try to make document discovery so difficult and expensive that defendants will have no choice but to try to settle the litigation.  Because, in light of the recent decisions of the Seventh and Ninth Circuits, more of these FCA lawsuits will be going to discovery, a clear and comprehensive document retention policy is an absolute necessity in responding to one of these lawsuits.

A document retention policy should be a formal written policy.  Among other things, the policy should cover e-mail and other electronic documents and data.  As you know, employees often use e-mail casually and are more likely to say things in e-mail that they would never say in a more formal communication.  While you may not be able to stop every employee from saying careless things in e-mail, you should certainly try by reminding them about the nature of email.  Reminders about the proper purpose of company e-mail accounts are also often constructive.

Your written policy should also cover shredding or intentional destruction of documents.  Allegations of document shredding come up in virtually every qui tam FCA lawsuit or investigation.  The reason is that documents are often shredded in order to protect student privacy.  As you can imagine, it’s not hard for plaintiffs’ counsel to allege that a school is shredding documents showing illegal activity.  Having and following a policy regarding the shredding of documents should help you respond to these sorts of allegations.

Summary

Maintaining a culture of compliance and respect is the first step in preventing an FCA lawsuit against your school.  A school should monitor its employees and make sure they comply with the formal compliance policies and procedures, including document retention policies.  Any accusations of wrongdoing should be taken seriously and schools should watch out for warning signs that a disgruntled employee or student might initiate an FCA lawsuit.

Gibson Dunn will continue to keep a close eye on developments as they relate to FCA cases, particularly with respect to actions schools can take to avoid or win FCA lawsuits.


Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn attorney with whom you work, or any of the following:

Los Angeles
Timothy Hatch (213-229-7368, thatch@gibsondunn.com)  
Marcellus McRae (213-229-7675, mmcrae@gibsondunn.com)
James Zelenay (213-229-7449, jzelenay@gibsondunn.com)

Orange County
Wayne Smith (949-451-4108, wsmith@gibsondunn.com)
Joseph Busch (949-451-3898, jbusch@gibsondunn.com)
Nick Hanna (949-451-4270, nhanna@gibsondunn.com)
Kristopher Diulio (949-451-3907, kdiulio@gibsondunn.com)
Jessica Boschee (949-451-3857, jboschee@gibsondunn.com)

Washington, D.C.
Douglas Cox (202-887-3531, dcox@gibsondunn.com)
Amir C. Tayrani (202-887-3692, atayrani@gibsondunn.com)
Nikesh Jindal (202-887-3695, njindal@gibsondunn.com)

 

© 2010 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice