Compliance Programs: An Answer To The Risks Posed By The False Claims Act

Monday, August 1, 2011 - 00:00

The Editor interviews Antonia F.Giuliana , Partner in the New York City office of Kelley Drye & Warren LLP, in the litigation department, where she focuses on commercial litigation and arbitration.

Editor: What is your background? Describe your practice area or the services you provide.

Giuliana: I am a litigator with a practice that is both nationally and internationally focused. It includes all aspects of complex commercial litigation and arbitration, including international arbitration. For the past eight years, a large part of my practice has centered on representing multinational pharmaceutical companies in federal and state government investigations, Congressional investigations, class action litigation, and whistleblower actions under the federal and state False Claims Acts for alleged health care fraud. I also advise pharmaceutical manufacturers on how to avoid or minimize civil and criminal liability under the federal and state False Claims Acts, the federal Food Drug & Cosmetic Act, and other laws in connection with sales, marketing, and manufacturing practices. In the past year, I co-authored a chapter on Health Care Institution Litigation in the treatise Commercial Litigation in New York State Courts (3d ed.) and a chapter on False Claims Act Litigation in the treatise Business and Commercial Litigation in Federal Courts (3d ed.) . I am also an editor and commentator for the blog FCA Alert (http://www.fcaalert.com), which reports on emerging trends in False Claims Act litigation and investigations.

Editor: What is the False Claims Act?

Giuliana: The False Claims Act, 31 U.S.C. §§ 3729-3733, is a federal statute that imposes civil liability for treble damages and penalties on those who submit false claims or make false statements to obtain payment from the government. It was enacted in 1863 at the height of the Civil War to combat rampant fraud by vendors that sold broken guns, sick horses, rancid food, and other worthless equipment to the Union Army. The original Act contained a whistleblower provision that rewarded private citizens for bringing such fraud to the government's attention. The Act lay relatively dormant until Congress significantly strengthened certain key provisions, including the whistleblower and damages provisions in 1986. Since then, False Claims Act litigation has increased dramatically, with 11,359 new cases (including 7,202 whistleblower actions) filed. The government has recovered more than $28 billion in proceeds to date, much of it coming from settlements with large pharmaceutical companies and health care institutions in the past ten years. As of earlier this year, there were more than 1,300 new whistleblower suits under seal and being investigated by the federal government.

Editor: How does the whistleblower provision of the False Claims Act work?

Giuliana: A key feature of the False Claims Act is its whistleblower provision, which authorizes private citizens to commence civil actions for violations of the Act in the name of the United States government. The Act requires whistleblowers to follow unique filing requirements to commence an action. Whistleblowers must be represented by counsel and must file their complaints under seal with the court while the government investigates the allegations and determines whether or not it will intervene. If the government does not intervene in the case, the whistleblower, with assistance of counsel, may pursue the action on its own on the government's behalf. Such actions, however, are not nearly as profitable for whistleblowers as those in which the government joins. For example, in 2010, total recoveries under the False Claims Act were $2.3 billion in cases in which the government intervened compared to $97 million in cases in which the government declined to intervene. The government exercises its intervention rights sparingly and intervenes in less than 20 percent of whistleblower cases.

Editor: Who can be a whistleblower for purposes of the False Claims Act?

Giuliana: Whistleblower suits are most commonly brought by former employees but may also be brought by almost any other individual or entity with inside information about alleged violations of the Act, including current employees, competitors, or other organizations or corporations.

Editor: What compensation does a whistleblower receive for pursuing a False Claims Act case?

Giuliana: Successful whistleblowers may share up to 30 percent of any judgment or settlement obtained in the action. In larger cases, this can amount to a windfall. Last year a former employee who filed a False Claims Act lawsuit against GlaxoSmithKline received $96 million, which is reported to be the largest whistleblower award in history. On the flipside, if a whistleblower proceeds in a case in which the government has declined to intervene and ultimately loses (as happens in 94 percent of such cases), the whistleblower may be ordered to pay the defendant's attorneys' fees and costs if the court finds the whistleblower's claim to be "clearly frivolous, clearly vexatious, or brought primarily for the purposes of harassment." See 31 U.S.C. § 3730(d)(4).

Editor: What is the impact of the False Claims Act on U.S. and foreign companies?

Giuliana: Any company that submits claims for payment from the federal treasury or otherwise does business with the U.S. government directly - or indirectly - is potentially at risk. These risks include mandatory statutory treble damages, penalties of $5,500-$11,000 per violation of the Act, and exclusion from government contracts and government funded programs. These risks are heightened because of the False Claims Act's whistleblower provisions; most whistleblower complaints are filed by company insiders. Popular targets under the False Claims Act include pharmaceutical and medical device manufacturers, hospitals and other health care institutions, defense contractors, banks, and other financial services institutions. That being said, virtually every industry has been involved in False Claims Act litigation.

Editor: If a company does not actually submit claims for payment to the government, how can it possibly be liable under the False Claims Act?

Giuliana: An entity is not required to directly submit a claim to be liable under the Act. As reflected in many cases against pharmaceutical and medical device manufacturers concerning products reimbursed by Medicare and Medicaid, an entity may be liable if it "causes" a third party to submit a false claim (or "causes" a third party to make a false statement to get a false claim paid). Two recent and high-profile examples of the government attempting to impose liability in such instances are the Deutsche Bank and GlaxoSmithKline cases.

Editor: What happened in the Deutsche Bank case?

Giuliana: In May 2011, the U.S. Attorney's Office for the Southern District of New York filed a billion dollar False Claims Act lawsuit against Deutsche Bank and its U.S. subsidiary MortgageIT for alleged mortgage fraud during the last decade's housing bubble. The complaint alleges that Deutsche Bank and MortgageIT participated in the FHA mortgage program, pursuant to which the federal government provides insurance for residential mortgages of qualifying low-income borrowers who would not otherwise qualify for mortgages. It further alleges that, under this program, Deutsche Bank and MortgageIT had obligations to ensure that potential borrowers met all of the qualifications. The government alleges that Deutsche Bank violated the False Claims Act by falsely certifying compliance with these obligations which led the federal government to insure residential mortgages which ultimately defaulted. Significantly, the government does not allege that Deutsche Bank made a claim for payment - or otherwise sought or received payment - from the federal government for any of the loans that defaulted. Nevertheless, the government is seeking to hold Deutsche Bank liable under an indirect theory of liability for allegedly "causing" the submission of false claims. It is also noteworthy that the complaint alleges that most of the violations occurred prior to Deutsche Bank's acquisition of MortgageIT (the loan originator) in 2007. The case is currently pending. One of the lessons of the Deutsche Bank case is that companies should include, and plan for, potential False Claims Act liability as part of their due diligence when considering the acquisition of target companies.

Editor: What happened in the GlaxoSmithKline case?

Giuliana: In 2005, a former quality assurance employee filed a whistleblower suit against GlaxoSmithKline for allegedly "causing" false claims for drug reimbursement to be submitted to Medicare, Medicaid and other government funded health care programs. The whistleblower alleged that several drugs manufactured at the company's Cidra, Puerto Rico plant were sub-potent, super-potent, or otherwise defective as a result of the plant's alleged violations of current good manufacturing practices ("cGMP") set by FDA. Although GlaxoSmithKline did not submit any drug reimbursement claims to the government, the whistleblower alleged that False Claims Act liability attached because the company "caused" such claims to be submitted by other entities (like pharmacies). The government intervened in the matter, and the case settled in October 2010 for $750 million, prior to judicial review of the merits of the whistleblower's theory of False Claims Act liability. The GlaxoSmithKline settlement is groundbreaking because it marks the first time the government has ever attempted to impose False Claims Act liability against a pharmaceutical company for manufacturing violations. Previous False Claims Act cases involving pharmaceutical companies have focused on the companies' sales and marketing practices. The GlaxoSmithKline case shows that healthcare manufacturing practices are now a source of potential False Claims Act liability. Accordingly, pharmaceutical and medical device manufacturers should consider reviewing their current manufacturing practices to ensure they are in compliance with cGMP and other FDA manufacturing requirements.

Editor: How can companies avoid or, at least, minimize the likelihood of becoming targets of whistleblower complaints and investigations under the False Claims Act?

Giuliana: First and foremost, companies should implement a robust compliance program (or make enhancements to an existing compliance program) so that there are procedures in place to ensure compliance with federal and state law and regulatory requirements. Compliance programs are industry-dependent; a health care company's compliance program will look very different from a financial services institution's program. Moreover, compliance standards are constantly evolving, and it is important for companies to stay informed of the most recent expectations for their industry. For companies in the health care industry, recent Corporate Integrity Agreements posted on the Office of the Inspector General for the U.S. Department of Health and Human Services' website are good sources of information for current industry compliance expectations. Second, companies should perform a legal audit to determine whether their practices meet current industry compliance standards, and if not, take corrective action as necessary. Third, companies should include False Claims Act exposure as part of the due diligence they conduct when considering potential acquisition targets, especially those whose products or services are heavily used or reimbursed by the government. Due diligence should include a review of the government contracts executed by the target, applicable contractual and regulatory obligations, and the target's compliance with the same.

Editor: Will the False Claims Act continue to be a source of concern for companies?

Giuliana: Unfortunately, yes. False Claims Act litigation and investigations continue to expand dramatically in new and diverse ways reaching virtually all industries. Companies should be aware of the risks presented by the False Claims Act and take measures to avoid or minimize exposure under the Act as set forth above.

Please email the interviewee at agiuliana@kelleydrye.com with questions about this interview.