Cooperation Credit in False Claims Act Cases
Companies facing liability under the False Claims Act (FCA) often desire early resolution with the Department of Justice (DOJ) through settlement. Hand in hand with the decision to settle comes the decision of whether or not to cooperate.
Cooperation with DOJ can posture a company to receive reduced damages and reduction in statutory penalties in the settlement. Michael Granston, head of the Department of Justice Civil Fraud Section, confirmed during his March 1, 2019 keynote speech at the Federal Bar Association's Qui Tam Conference that DOJ would "meaningfully reward cooperation" in FCA cases. Granston's comments echoed those of Deputy Associate Attorney General Stephen Cox earlier this year. Cox, speaking at an FCA conference in New York, stated that "the Department is committed to rewarding companies that invest in strong compliance programs and who cooperate with our investigations into wrongdoing."
Given the potential for treble damages and statutory per-claim penalties, plus collateral exclusion or suspension/debarment risk, cooperation becomes an attractive proposition. In his speech, Granston highlighted a recent case in which DOJ and the defendant settled for nearly single damages -- a significant settlement accomplishment in FCA cases. Granston credited the company's extraordinary cooperation during the investigation as a motivating factor for DOJ's low damages determination.
Cooperation is an amorphous concept though, and varies from one case to the next. So, what steps must a company take in order to receive cooperation credit in an FCA case? And what identifiable benefits can a company expect from cooperating?
Concrete answers to these questions may be on the horizon. Granston indicated during his speech that DOJ may issue formal guidance regarding cooperation credit in FCA cases. Cox also appeared to hint at this forthcoming guidance during his speech, advising attendees to "stay tuned." This would be a welcome addition to the policy guidance Granston has already put in place as head of the Civil Frauds Section.
What does cooperation look like?
While the standards for cooperation in FCA cases are yet unknown, recurrent themes found in the Justice Manual regarding civil and criminal cases, other agencies' cooperation policies, as well as comments from Cox and Granston, offer insight into the factors Civil Frauds is likely to consider in crafting its own definition of cooperation. These concepts are not all encompassing, nor are they mutually exclusive. Ultimately, each case would be evaluated on its own individual merits with certain factors playing more significant roles than others, depending on the facts of the case.
A company's decision to voluntarily self-disclose improper conduct to the government will undoubtedly be a primary consideration in evaluating cooperation credit. Cox aptly described self-disclosure as "the most valuable form of cooperation." In addition to evidencing responsible corporate citizenship, self-disclosure contributes to the efficient use of enforcement resources.
In agencies with established enforcement regimes, self-disclosure is similarly a paramount consideration in awarding cooperation credit. For example, under DOJ's recently issued Foreign Corrupt Practices Act (FCPA) corporate enforcement policy, absent aggravating circumstances, DOJ will presumptively decline to prosecute companies that (1) voluntarily disclose known issues, (2) cooperate with investigators, and (3) institute timely and fulsome remediation. Formal cooperation programs involving voluntary disclosure are also in place at the Securities and Exchange Commission, the Environmental Protection Agency, the Commodity Futures Trading Commission (CFTC), the U.S. Treasury's Office of Foreign Assets Control (OFAC), and within the Department's Antitrust, National Security (NSD), and Environmental and Natural Resources (ENRD) divisions.
Indeed, the FCA itself recognizes the value of self-disclosure. Section 3729(a)(2) provides for double, rather than triple damages, where the company makes a disclosure within 30 days after the date the defendant obtained the information. The disclosure must also occur before the defendant had knowledge of the FCA investigation. The U.S. Sentencing Guidelines (U.S.S.G.) likewise require the disclosure to occur "prior to an imminent threat of disclosure or government investigation" in order to qualify as a voluntary self-disclosure. U.S.S.G. § 8C2.5(g)(1). The requirement to disclose prior to awareness of the violation is also present in each agency's guidance on cooperation credit. For example, the FCPA voluntary disclosure policy parrots the U.S.S.G. requirement as does the SEC's stated policy on individual cooperation credit, which looks to whether the individual "was first to report the misconduct to the Commission or to offer his or her cooperation in the Investigation, and whether the cooperation was provided before he or she had any knowledge of a pending investigation or related action."
Application of this rule to FCA cases can prove difficult because management often first learns of a potential FCA violation only after the company receives a subpoena or civil investigative demand (CID). This is because FCA allegations are often based on nuanced interpretations of regulatory requirements that may not be readily apparent absent notice of the theory or partial unsealing of the complaint. It is also not uncommon for relators to have themselves participated in the misconduct and/or been involved in maintaining the secrecy of the scheme. Even where company leadership is alerted to potential misconduct through internal reporting channels, investigating these issues often takes more than 30 days (as is evident from DOJ's frequent requests to extend the 60-day seal during its investigative process). Although companies may provide preliminary disclosures and follow up after a reasonable period of investigation, the forthcoming guidance might serve to expand the statutory reduction in damages by allowing for a more reasonable investigation period. That said, the forthcoming guidance will undoubtedly place premium value on self-disclosures that come early in a case life cycle, possibly with additional credit to those companies that self-disclose prior to knowledge of any ongoing investigation.
Even where a company first learns of its violation after a the government's investigation has begun, the company can recoup its opportunity to self-disclose by proactively providing evidence not known to investigators and without being requested to do so. The Justice Manual describes this proactive approach to self-disclosure in civil cases:
To be eligible for cooperation credit in a civil corporate case, a corporation must provide meaningful assistance to the government's investigation. To earn maximum cooperation credit, a corporation must do a timely self-analysis and be proactive in voluntarily disclosing wrongdoing and identifying all individuals substantially involved in or responsible for the misconduct, without making the government compel such disclosures with subpoenas or other investigative demands.
Justice Manual § 4-3.100.
While the ability to self-disclose is beneficial in many cases, it can be a double edged sword. The failure to self-disclose known issues could negatively impact a company's ability to receive full cooperation credit, thus resulting in a harsher penalty. Recent settlements in the FCA sector suggest that where a company has knowledge of an issue, failure to disclose it and retract impacted programs will result in expanded corporate liability for seemingly individual-based conduct.
DOJ will require any self-disclosure to be fulsome in order to receive credit. Partial disclosure of known issues does little to serve the efficiency of the investigative process. The Director of the Division of Enforcement for the CFTC frankly described the concept as "…requir[ing] an active effort to find all related wrongdoing, and not taking a squinty-eyed view of the facts to minimize the misconduct or avoid disclosures."
To be considered fulsome, DOJ will expect the disclosure to include identification of individuals substantially involved in the wrongdoing. This concept was presented in DOJ's 2015 memo regarding Individual Accountability for Corporate Wrongdoing, known as the Yates memo. In that directive, DOJ signaled that "to be eligible for any credit for cooperation, the company must identify all individuals involved in or responsible for the misconduct at issue, regardless of their position, status or seniority, and provide to the Department all facts relating to that misconduct." The memo specifically called out FCA investigations, noting the "Department's position on 'full cooperation' under the False Claims Act, 31 U.S.C. § 3729(a)(2), will be that, at a minimum, all relevant facts about responsible individuals must be provided."
Recognizing that it was time-consuming and costly to investigate every potentially responsible individual over a protracted time period, DOJ revised this policy in 2018. Companies may now receive cooperation credit if they "identify individuals who were substantially involved in or responsible for wrongdoing." Identification of those substantially involved plays a particularly important role in FCA cases where "collective knowledge" is generally considered insufficient to establish scienter under the FCA. See United States v. Sci. Applications Int'l Corp., 626 F.3d 1257, 1275 (D.C. Cir. 2010) (rejecting plaintiff's attempts to prove "scienter by piecing together scraps of 'innocent' knowledge held by various corporate officials, even if those officials never had contact with each other or knew what others were doing in connection with a claim seeking government funds"). In the FCA context, Cox indicated that "[t]here is no longer an 'all or nothing' approach to awarding credit for cooperation in civil cases. [Companies] don't have to boil the ocean in an effort to identify every employee who played any role in the conduct in order to receive any credit for cooperating." Even a partial disclosure will likely result in partial credit where appropriate.
2. Direct cooperation in the investigative process
DOJ is statutorily obligated to investigate each qui tam suit filed. The resources required to uphold this directive are not inconsequential: According to DOJ, there were over 645 qui tam suits filed this past year – an average of more than 12 new cases every week. Moreover, these figures do not even account for DOJ's need to investigate cross-referrals from other agencies and self-initiate cases based on internal governmental enforcement priorities.
In light of this strain on DOJ's resources, participation in the investigative process can and should be encouraged as a significant means of obtaining cooperation credit. Proactive cooperation will likely result in more cooperation credit than reactive participation because it allows DOJ access to critical case information without expending valuable resources. Where the investigation is conducted in phases, cooperation may require rolling disclosures when appropriate.
DOJ's guidance on cooperation in criminal cases focuses on the provision of facts relevant to the conduct at issue. Justice Manual § 9-28.720. It asks, "How and when did the alleged misconduct occur? Who promoted or approved it? Who was responsible for committing it?" These questions have equal consideration in the context of the FCA and any forthcoming guidance will likely credit a company that discloses the facts it discovered during its internal investigation. The scope of the defendant company's investigation will undoubtedly vary based on its understanding of the issues. DOJ often discloses the referred allegations or partially unsealed FCA complaint to the defendant. When done early in the case life-cycle, this gives companies the chance to investigate in a timely and fulsome manner and best promotes cost-shifting from DOJ to companies.
Companies walk a fine line in deciding what information to disclose, as most "facts" are uncovered in privileged settings and are often inextricably intertwined with privileged information. In these situations, it is of particular value to investigators when a company makes the additional effort to find, compile, and disclose underlying documentation that reveals the nature of the violation and the circumstances of how it occurred, yet maintaining the privilege. DOJ may also request that the company attribute disclosed facts to the underlying source, as is seen in other guidance such as the NSD voluntary disclosure program. However, this requirement is fraught with pitfalls that could easily result in unintentional violations of the attorney-client privilege or lawyer-witness issues. Counsel for the company must navigate these requests carefully, as there is some case law to suggest that even "oral downloads" of witness interviews result in a waiver of the privilege. Counsel should be permitted to explore alternative methods for providing attribution that still result in meaningful cooperation.
Companies can also gain cooperation credit by identifying and providing access to individuals for interview. De-confliction requests may come as part of the employee interview process. In this rather controversial tactic, the company agrees to defer interviewing employees for a limited period of time until DOJ has interviewed the employees first. Though rare in the FCA context, a company that entertains these requests should be rewarded with cooperation credit.
Cooperation credit in FCA cases could also be awarded where companies provide organized records in support of proffered facts and witness interviews, and assist with data culling and analysis, claims filtering, technical or engineering support for complex issues, and interpretation of business records. In the case Granston discussed during his speech, he specifically credited the company for sharing investigative work product and developing a meaningful damages model. Calculation of damages can be one of the more burdensome aspects of an FCA case, particularly in the health care space where the sheer number of claims compounds an already complicated analysis of medical judgment and coding determinations.
A company's decision to toll the statute of limitations should also be considered as an element of direct cooperation. Tolling not only allows DOJ to make a meaningful analysis of the allegations without rushing issuance of the complaint in intervention, but also allows DOJ to avoid having to re-prioritize investigation of cases based on the statute of limitations.
3. Remedial Action
Taking appropriate remedial action is the final macro-consideration for cooperation. Companies should be credited for conducting an analysis to determine the root cause of the issue and for meaningfully improving their processes and procedures in response. Companies must also terminate or reprimand wrongdoers, including high-level executives who were substantially involved in the wrongdoing.
4. Self-policing and compliance
Even companies with robust and effective compliance programs cannot curb every fraud perpetrated by wayward employees. But compliance programs can create a culture where company employees and management are informed of improper practices and are encouraged to work as a team to self-identify problems. One hallmark of a strong compliance program is an internal reporting structure that results in meaningful investigative follow-up. DOJ may award cooperation credit where there is proof that this structure was in place and employed prior to the case. A company may also receive some direct credit for significant enhancements made to its compliance program even after discovery of the investigation.
In addition to rewarding proactive compliance programs with a reduced damages multiplier, credit might also come in the form of directed investment in compliance. This concept, which has been used previously in criminal cases, directs the defendant to spend a specified portion of the damages sought on enhancing its internal compliance program and increasing employee training.
Benefits of Cooperation
The obvious benefit of cooperation is a reduction in damages. The discretion to settle for less than treble damages resides entirely with DOJ, subject to fairness determinations afforded to the relator(s).
The question remains whether DOJ will quantify the reduction amount. In the FCPA corporate enforcement policy, cooperation has a quantifiable benefit. DOJ's guidance provides that in the event a "criminal resolution is warranted for a company that has voluntarily self-disclosed, fully cooperated, and timely and appropriately re-mediated, the Fraud Section will accord, or recommend to a sentencing court, a 50% reduction off of the low end of the U.S. Sentencing Guidelines (U.S.S.G.) fine range, except in the case of a criminal recidivist." Civil frauds may similarly decide to specify the potential damages multiplier available for cooperation credit. DOJ may also make a quantitative reduction or elimination of statutory penalties as a benefit of cooperation.
In addition, DOJ's FCPA corporate enforcement policy also indicates that it "generally will not require appointment of a monitor if a company has, at the time of resolution, implemented an effective compliance program." Though monitors in FCA cases are rare, similar consideration could be afforded to cooperating companies.
The more common scenarios faced by companies in FCA cases are the administrative exclusion proceedings before the Office of the Inspector General and suspension debarment proceedings before agency Suspension Debarment Officials. Because these entities operate independently, DOJ cannot promise that these entities will not require Corporate Integrity Agreements, Administrative Agreements, or other external monitors. DOJ could, however, impress upon these entities the value of the company's cooperation as part of the settlement process.
We are "staying tuned" to see what other benefits Civil Frauds may propose.
Thank you to Caitlin Eberhardt for her assistance in preparing this article.