Cooperate with Government Investigations to Secure Reduction in Penalties

The Justice Department release new guidance to its FCA (False Claims Act) litigators which explains the manner in which the Department awards "credit" to defendants who cooperate with the Department during a FCA investigation. It includes a comprehensive list of the types of cooperation eligible for credit.

Justice wants to incentivize companies who voluntarily disclose misconduct and cooperate with its investigations. FCA defendants can merit a more favorable resolution by providing meaningful assistance to the Justice Department from voluntary disclosure (the most valuable form of cooperation) to various other efforts like sharing information gleaned from an internal investigation and taking remedial steps through enhanced compliance programs. Besides the formal voluntary disclosure program, the list includes"

1. Identifying individuals substantially involved in or responsible for the misconduct.
2. Disclosing relevant facts and identifying opportunities for Government to obtain evidence relevant to the Government's investigation that is not in the possession of the entity or individual or not otherwise known to the Government.
3. Preserving, collecting, and disclosing relevant documents and information relating to their provenance beyond existing business practices or legal requirements.
4. Identifying individuals who are aware of relevant information or conduct, including an entity's operations, policies and procedures.
5. Making available for meetings, interviews, examinations or depositions an entity's officers and employees who possess relevant information
6. Disclosing facts relevant to the Government's investigation gathered during the entity's independent investigation including attribution of facts to specific sources rather than a general narrative of facts, concerns, including rolling disclosures of relevant information.
7. Providing facts relevant to potential misconduct by third-party entities and third-party individuals.
8. Providing information in native format, and facilitating review and evaluation of that information if it requires special or proprietary technologies so that the information can be evaluated
9. Admitting liability or accepting responsibility for the wrongdoing or relevant conduct.
10. Assisting in the determination or recovery of the losses caused by the organization's misconduct.

Under the Justice Department's policy of "cooperation", the Department will take into account these kinds of activities in the form of a reduction in the damages multiplier and civil penalties.

Read more about the new or clarified policy here.

Unsealing "Qui Tam" Cases

The publicizing of a "Qui Tam" suit happens at the time the Government decides whether to intervene. The underlying investigation took months, and sometimes years, to complete.U

Under the False Claims Act (FCA), private parties may bring suit in the name of the United States. The private parties, known as qui tam relators, must initially file the complaint under seal. Sealing protects the United States' investigation while the Government determines whether to intervene in the action. Once the United States decides whether to intervene, the qui tam complaint is unsealed. This is keeping with the general presumption that the public enjoys free and unfettered access to Court records.

To justify continued sealing of qui tam court records, the risk of disclosure must outweigh the public benefits in access to court records. What might those risks be? Such risks for continued sealing would be a showing that the particular pleading either includes confidential investigative techniques, jeopardizes an ongoing investigation or risks injury to non-parties. By contrast, if the pleading merely discloses routine investigative procedures which anyone with rudimentary knowledge of the investigative process (i.e. someone who watches crime shows on television) would assume would be utilized in the regular course of business and contains no information about specific investigatory techniques, then the pleading would be unsealed.

Sometimes the Government will try to maintain pleadings under seal. Perhaps the real reasons for trying to do do are not disclosed but the Government still tries and usually fails. In one recent case, the Government cited motions for extensions of time, routine investigative matters such as the numbers of subpoenas issued, witnesses interviewed, and pages of documents reviewed. as justification for continued sealing. The Court ruled that none of the pleadings implicate specific people or provide any substantive details about the investigative or decision-making efforts beyond memorializing routine investigative steps involved in any such process.

Materiality is Critical to a False Claims Allegation

A United States District Court (Middle District of Florida, Tampa Division) vacated a $350 million jury verdict against Salus Rehabilitation, an operator of specialized nursing facilities, under the Federal False Claims Act (FCA). The Judge ruled that the relator (a Qui Tam relator - the Government did not enjoin this particular suit) failed to establish that Salus' failure to (i) maintain comprehensive care plans and (ii) sign and date documents were material to payment decisions by Medicaid.

The Whistleblower alleged that Salus failed to maintain comprehensive care plans for each patient and failed to properly sign and date documents as required by the Medicaid program. A Jury agreed and the $350 million judgment was levied against Salus.

But wait a minute. Were these significant infractions? The Federal Judge ruled that the Whistleblower failed to offer evidence of materiality. Under a previous case, the Court ruled that an FCA claim on an implied false certification theory fails if the non-compliance is disclosed to, or discovered by, the United States; and if the United States pays notwithstanding the disclosed or discovered non-compliance. Thus, for a relator to prevail on an FCA claim, the defendant must know, or reasonable should know, that its non-compliance was material when it sought payment, and the defendant's misrepresentation must be material to the Government's decision to pay.

In the Salus case, the Court found no evidence on how the Government might have addressed the disputed practices and the lack of evidence left the jurors to guess. According to the Court, the Government was and is aware of the disputed practices, aware of this action, aware of the allegations, aware of the evidence, and aware of the judgments for the relator. But the Government never ceased to pay or even threatened to stop paying Salus for the services provided to patients.

The controlling question in this case is whether the Government would refuse to pay a provider on a large scale because of a dispute about the method or accuracy of payment after the Government  permitted the practice to remain in place for years without complaint or inquiry. Every day that the Government continues to pay for a good or service, the greater the practical impediment to proof of materiality.

You can read the full decision here.

Defense Contractor Sues DCAA for Defective Auditing

There are probably some contractors thinking to themselves right now: "Its about time" - perhaps even some of those are ready to file Amicus Curiae briefs.  Yesterday, Kellog Brown & Root Services Inc. (KBR) filed a suit against the U.S. Government acting through its agent, the Defense Contract Audit Agency (DCAA) in Federal Court (the U.S. District Court for the District of Delaware). The lawsuit seeks to recover $12.5 million in legal fees incurred by KBR in defending against what were ultimately determined to be "defective" DCAA audits.

There are many facets to this lawsuit but the underlying complaint is that DCAA was negligent in performing its audit work and did not follow a number of Generally Accepted Government Auditing Standards (GAGAS). Which standards? Oh, some of the basic ones including qualifications, independence, planning, risk assessment, written audit program, briefing the contract, field work, supervision, and sufficient evidence to support conclusions.

Take the lack of "independence" for example. The complaint uses harsh language in alleging that DCAA was more concerned about how they would look before Congress than in gathering and understanding the facts:

... in an act intended to pander to an investigating Congressional committee, and at the behest of a similarly-minded PCO, DCAA took steps to enable the Army to recapture costs incurred by KBR ...

...amid persistent political pressure from Congress, DCAA issued an audit report in which it concluded that KBR had billed approximately $99.6 million in allegedly "unallowable" costs ... But the conclusions in the audit report were demonstrably false, and it is now clear DCAA performed this audit in a negligent manner...

The contract, known as LOGCAP III required KBR to perform a wide variety of functions, including construction and operation of military dining facilities, laundry, welfare and recreation services, facilities maintenance, power generation and distribution, waste management, water supply, vector control, fire protection, billeting, and equipment maintenance.

The contract included a clause that required the Army to provide "force protection" to KBR and its subcontractors commensurate with that provided to DoD civilians. By 2003, however, KBR was performing work in a hostile environment where insurgent attacks were frequent. In fact, KBR and its subcontractors lost 75 employees as a result of hostile actions and almost 500 more injured. As a result of the hostilities and the Government's failure to provide force protection, KRB hired some private security contractors and charged those costs to the Government.

DCAA decided that since the contract provided for Army protection, the cost of the private security contractors was not allowable and disallowed an estimate of those costs. Ultimately, KBR appealed this action before the ASBCA (Armed Services Board of Contract Appeals) and won. The ASBCA ruled that the private security costs were indeed allowable under the contract. Simultaneously, the Government filed a false claims act violation against KBR for violations of the civil False Claims Act for billing costs associated with the use of armed private security. A short time later, the Government voluntarily dismissed the FCA case. In both cases, according to the current complaint, the Government's case was jeopardized by DCAA's defective auditing.

Keep in mind that this complaint presents only one side of the story. Ultimately KBR is going to have to prove its case in court. But, its going to be interesting to watch and the outcome, if favorable to KBR, may embarrass DCAA. It is important to note however, that many of the criticisms levied at DCAA in this lawsuit have already been addressed and rectified by that Agency. The latest peer quality review conducted by one of its loudest critics, the DoD Office of Inspector General, was rated a "pass".

If you would like to read the full complaint, you can download a copy here.

Underbidding Can be a False Claim?

The U.S. Court of Appeals for the Ninth Circuit issued a decision in US ex rel. Hooper v. Lockheed Martin Corp (No. 11-5528) last week, reversing a lower court decision, in which a "qui tam" whistleblower (Hooper) alleged that the contractor (Lockheed) had fraudulently underbid and/or relied upon false estimates to obtain a government contract. A district court had previously sided with Lockheed and Hooper appealed.

Lockheed argued that allegedly "false" estimates cannot be the basis for liability under the FCA (False Claims Act) because an estimate is a type of opinion or prediction, and thus cannot be said to be a "false statement" within the meaning of the FCA. Specifically, Lockheed argued that "estimates of what costs might be in the future are based on inherently judgmental information, and a piece of purely judgmental information is not actionable as a false statement".

The Ninth Circuit Court felt otherwise. After the Air Force rejected one of Lockheed's bids, Lockheed went back to the drawing table to revise it. The Court noted that Lockheed management had instructed its employees to lower their bids without regard to actual cost. When one employee (Hooper) protested, he was cut out of the bidding process. Ultimately, Lockheed cut its initial bid in half and was awarded the contract. The Court stated that there was a genuine issue as to whether Lockheed had actual knowledge, deliberately ignored the truth, or acted in reckless disregard of the truth when it submitted its allegedly false bid.

The Ninth Circuit reversed and remanded the district court's dismissal of Hooper's claim that Lockheed violated the FCA by knowingly underbidding the contract. "Having determined that FCA liability may be premised on false estimates, we hold that there is genuine issue of material fact whether Lockheed acted either knowingly in a deliberate ignorance of the truth, or in reckless disregard of the truth when it submitted its bid for the ...contract".

This is dangerous ground for contractors.