Claiming credit for False Claims Act success in 2014

Reuben Guttman Articles, Whistleblowers Blog

At year’s end, here in the nation’s capital there is the ritual they call “credit claiming.” Legislators claim credit for everything from corn and soy subsidies, programs or pieces of legislation. Credit claiming is not limited to elected officials — even government agencies do it.

At the U.S. Department of Justice, its press office, pointing to nearly $6 billion in 2014 recoveries under the False Claims Act, is spinning claims of success. The FCA, a law dating back to Lincoln’s presidency, allows the government to seek redress from individuals or entities that have in some way caused false statements to be used in the process of securing payment of government monies. The FCA is mostly known for its “qui tam” provisions that allow private citizens — commonly called whistleblowers — to bring suit in the name of the government, and to be paid a bounty from recovered funds. Once these suits are brought, the DOJ may intervene and pursue the case with or without the help of the whistleblower and his or her counsel.

For its part, the media has trumpeted the DOJ’s claim to success as have public interest groups and even some whistleblower lawyers. No doubt, the $5.69 billion in recoveries is a high water mark for FCA recoveries; but is there more to the story?

It turns out that of the $5.69 billion, $2.3 billion was recovered from healthcare providers, including the pharmaceutical industry, and $3.1 billion was recovered from the financial services industry including the big banks. This means that $5.4 billion was recovered from entities that had no direct procurement relationship with the federal government or the states. How does this work? The FCA makes it unlawful to file a false claim or to “cause”one to be filed. Marketing drugs for purposes not approved by the Food and Drug Administration, and provision of healthcare that is not medically necessary are just some examples of conduct that cause the Medicare and Medicaid systems —and state and federal health plans — to pay out dollars that should not have been paid.

That only a fraction of the $5.69 billion was recovered from direct procurement contractors, including Boeing and Hewlett Packard, is telling. It is a statistic that has remained a constant year in and year out as most FCA recoveries have come from entities — particularly healthcare providers — where the accused culprit does not have a direct government procurement relationship. Indeed, the top fifteen FCA recoveries of all time are with entities, including Abbott, Bank of America, and GlaxoSmithKline, that have no direct procurement relationship with the government.

Does this mean there are more indirect relationships than direct procurement relationships? Of course not. The Department of Energy, the Department of Defense, the Department of Education, the Environmental Protection Agency, and the Department of Transportation, spend billions of dollars each year on direct procurement contracts. But with these agencies spending so much money on private contractors, why is it that only a fraction of the 2014 FCA recoveries can be attributed to contractors working with these mammoth government agencies? Is it that these agencies do such a stellar job of managing their contractors?

Not a chance. These agencies are undoubtedly rife with contractors who skimp on standards, violate specifications, and overbill for their work. In 2011, the bi-partisan Commission on Wartime Contracting estimated that the military efforts in Iraq and Afghanistan resulted in $31-60 billion in contractor waste and fraud. Commission Co-Chair, Michael Thibault, former Deputy Director of the Defense Contractor Audit Agency, noted at the time that while large numbers of contractors were used in these military efforts, the government had no effective management and oversight of contractor spending.

One looming question is whether the agencies themselves are so in need of their contractors that they are willing to overlook derelictions. Are these agencies protecting rogue contractors and, if so, does it make a difference when it comes to civil prosecution under the FCA?

First, the statistics seem to point in this direction. Second, absent agency cooperation, the Department of Justice is — to some degree — unable to secure relief under the FCA. Think of it this way: the DOJ is the law firm for the government, and its clients are government agencies. If the client says it has not been harmed, it is hard for the lawyer to pursue litigation. Naturally an agency cannot waive requirements that are matters of law or regulation, but it is still no easy task to pursue a case when the client is not cooperative.

Now what about this $5.69 billion figure? While we know this was the amount recovered, what we do not know is whether it represents single, double, or treble damages, and whether civil penalties — between $5,000 and $11,000 for each false claim —were waived or collected. In settling cases, the government has made a practice of waiving penalties and not imposing the full three times damages provided by law. But does this really make sense, particularly when — despite the optics of large FCA sanctions — some accused culprits are undeterred with repeat violations of the FCA?

No doubt the $2.3 billion in healthcare fraud recoveries is a large chunk of change. Yet by whose standards? In 2010, Acting Deputy Attorney General, Gary Grindler, projected that healthcare fraud accounted for between 3 and 10 percent of total government healthcare spending, or between 27 and 80 billion dollars, in that year alone. By these lights, accused fraudsters can still walk away with exponentially more than they are being required to put back.

The point of all this is that it is time to ask hard questions of our government credit claimers. And maybe the media should take a lesson from whistleblowers, who make their mark by questioning norms and claims that are commonly accepted.

Tort Reform: A Lion in Sheep’s Clothing

Reuben Guttman Articles, Whistleblower News, Whistleblowers Blog

Tort reformers cite a range of cases as frivolous litigation. But, says Reuben Guttman, many of these lawsuits raise fundamental issues.

The United States Chamber of Commerce, a few academics and some media pundits have their lists of cases arguably supporting the proposition that people will sue over anything and hence the need for tort reform to prevent so called ‘frivolous litigation.’  Out of the countless number of cases filed each year in United States federal and state courts, the tort reformers love to harp on the suit brought by the woman against McDonalds for serving hot coffee and the class action now pending against Subway for allegedly misrepresenting the size of its advertised foot-long sandwiches.

Golden oldies

Since the tort reformers seem to keep dwelling on the same few cases, it might be worth mentioning a few oldies but goodies which have eluded their attention. First, there is the “classroom kick case” where an elementary school child was sued for kicking another student on the knee.  This heinous event occurred in a classroom. The court allowed the case to go forward, holding that if the offending kicker had made his offensive contact on the playground, the kick might have been permissible.

Then there is the “falling scale case” involving a man on a railroad platform; running to jump on a train, he was pulled on board by a conductor.  Struggling to board the moving rail car, the man dropped a package containing fireworks; the fireworks exploded, knocking a scale down at the end of the platform.  The scale fell on another man who sued the railroad!

Finally, there is the case brought by parents who allowed their child to play on railroad tracks.  The child wandered onto a railyard and was injured by a turntable used to reposition rail cars.  The parents sued the railroad!

These are real cases; Vosberg v. Putney, 80 Wis. 523 (Wisc. 1891), Palsgraf v. Long Island Railroad, 248 N.Y. 339 (N.Y. 1928) and Sioux City & Pacific Railroad Co. v. Stout, 84 U.S. 657 (1873).  The thing is that they are not new.  I found them in a casebook on torts belonging to my dad.  While the casebook was published in 1934, I too had studied them in law school.  Back in law school, I actually read a lot of cases that made me wonder why courts spend so much time on matters that are small or that by some lights should not exist at all. Yet from seemingly small cases, judges have for years extrapolated important legal doctrine. The holding and dissent in Palsgraf, written by Justices Cardozo and Andrews respectively, are well studied and cited works. These writings are at the heart of the common law of negligence.  The doctrine of “attractive nuisance,” or at least variations of it, flow from Stout and similar cases.

It is cases like Vosberg, Palsgraf and Stout —  actually landmark decisions studied for decades by laws students —  that today’s tort reformers might cite in support of their claim that frivolous litigation clogs the courts and burdens business. Yet it is these matters – cases with simple sets of facts – that allow judges to articulate important rules that can be applied to weightier cases.

The lion and the zoo

In his closing argument to the jury in Silkwood v. Kerr McGee, 464 U.S. 238 (1984), lawyer Gerry Spence talks about the case in “Old England” where the lion escaped from the zoo and the zoo was responsible for the damage caused by the lion even if it exercised due care in caging the animal.  Of course the Silkwoodcase involved the escape of plutonium from a Kerr McGee plant.  From the simple case of the lion, Spence explains the law of strict liability, telling the jury “if the lion got away, Kerr McGee must pay.”

The truth is that the common law is replete with small cases; some that others would never bring; some that tort reformers might argue are completely frivolous and some that appear at the time to be small yet provide critical insight into the application of the rule of law and the expectation for compliance.  And so do we really want to be in the business of telling that family whose kid was kicked in the knee that there is no place for that suit in a court of law?

Now, about the cases involving coffee and that other one about the foot-long Subway sandwich?  Well, it turns out that the woman who brought suit against McDonald’s sustained serious burns when a scalding cup of coffee, purchased at a drive-in, spilled on her lap.  And, while the tort reformers may consider her case frivolous, have you ever noticed that most coffee shops now check the temperature of their coffee before serving it?

Fundamental issues

I reached out to the lawyer who is bringing that foot-long Subway sandwich case.  He asked me what the difference was between a fast food enterprise serving a smaller quantity than advertised and a bank charging each depositor a few extra cents in interest each month?   Small damages for each consumer?  Perhaps.  Large damages across the board for a class?  Undoubtedly.  But does the case raise fundamental and perhaps important issues about truth in advertising which may create precedent for more weighty matters?  Absolutely.  And this is what our common law tradition is all about.

For more insight into the Tort Reform movement, I recommend this video, Debate on Tort Reform After Viewing of Documentary ‘Hot Coffee’

“Hot Coffee” is an HBO documentary about the Tort Reform Movement and who is really behind it.  More information and the trailer is available here.

Original Source and The Third Circuit

Featured, Federal False Claims Acts, Reuben Guttman Articles

Yesterday, the 3rd Circuit issued an opinion regarding direct and independent knowledge requirement of the original source exception to the public disclosure bar.  It found that, among other things, “knowledge of a scheme is not direct when it is gained by reviewing files and discussing the documents therein with individuals who actually participated in the memorialized events.”

The relator, Karl Schumann, was the VP of contracting for Medco.  He alleged that Bristol-Myers Squibb (BMS) paid Medco sham data fees and rebates relating to the drug Coumadin, and that the BMS failed to include those amounts when calculating the price thereby inaccurately reporting an incorrect best price to the government.  He made the same allegations regarding AstraZeneca and its Prilosec and Nexium drugs.  The trial court dismissed the case on public disclosure grounds as he was not an original source.  In the lower court, he argued that “he had learned of BMS’s conduct by reviewing existing agreements and internal documents in Medco files, discussing them with Medco colleagues, negotiating rebate and data fee agreements with BMS, and comparing the terms of those agreements with others he had seen in his years in the pharmacy-benefits industry.”

Upon appeal, the third circuit addressed the standard for having direct and independent knowledge under the FCA.  Citing and quoting from prior cases it said that:

  1. Direct and independent are separate requirements that have to be met;
  2. “Direct knowledge” is “knowledge obtained without any intervening agency, instrumentality, or influence: immediate” and is “first-hand, seen with the relator’s own eyes, unmediated by anything but [the relator’s] own labor, and by the relator’s own efforts, and not by the labors of others, and . . . not derivative of the information of others.”  (Slip opinion at 16, citations omitted); and
  3. Independent knowledge means that “knowledge of the fraud cannot be merely dependent on a public disclosure”, it means the relator “must possess substantive information about the particular fraud, rather than merely background information which enables a putative relator to understand the significance of a publicly disclosed transaction or allegation.” (Slip opinion at 16-17, citations omitted).

In applying the law to the case before it, the Court agreed with the lower court that Relator’s knowledge was not direct and independent.  The key section states:

First, knowledge of a scheme is not direct when it is gained by reviewing files and discussing the documents therein with individuals who actually participated in the memorialized events. See Paranich, 396 F.3d at 335-36; Stinson, 944 F.2d at 1160-61. Second, Schumann’s description of his involvement in Medco’s business with BMS, including negotiating rebate and data fee agreements and recognizing that BMS was aware of its best-price reporting obligations, does not evince direct and independent knowledge of any improper kickback or inaccurate best-price report. See Paranich, 396 F.3d at 336 & n.11 (noting such knowledge gained when relator’s involvement constituted filing false claims on defendant’s behalf); Houck on behalf of the United States v. Folding Admin. Comm., 881 F.2d 494, 505 (7th Cir. 1989) (finding relator’s knowledge direct when he was involved by helping others file false claims); see also In re Pharmacy Benefit Mgrs. Antitrust Litig., 582 F.3d at 434 (explaining PBMs negotiate discounts and rebates from drug makers). Finally, Schumann’s conclusions that BMS intended to pay kickbacks to Medco and to submit false claims to the government, based on his experience in and understanding of the PBM industry, do not qualify as independent knowledge under the FCA.

Here is a copy of the opinion: Schumann v BMS.

A Tale of Two Cases

Reuben Guttman Articles, Whistleblowers Blog

The SEC needs more transparency

The SEC needs to begin identifying those receiving bounties as another $30 million goes to an unidentified whistleblower, says Reuben Guttman of Guttman, Buschner & Brooks PLLC.

Last week the United States Securities and Exchange Commission (SEC) announced the award of a $30 million bounty to an undisclosed whistleblower who reported undisclosed conduct by an undisclosed publicly traded scofflaw. With the SEC’s announced settlement of yet another unidentified case, it would seem that the agency has the hearing sensitivity of a canine and is responding to dog whistles. I mean isn’t whistleblowing about exposing wrongdoers and the factual basis of their wrongdoing to public scrutiny?

The SEC’s failure to tell us a little bit more about the basis for this award would be the story except for a snippet of information that the SEC did share with the public. It seems the $30 million award was made to a foreign whistleblower and the announcement of that decision comes only several weeks after the United States Court of Appeals for the Second Circuit in Liu v. Siemens refused to extend the anti-retaliation protections of the Dodd-Frank statute to a foreign whistleblower who reported alleged violation of the Foreign Corrupt Practices Act.

FCPA allegation

According to a lawsuit Liu filed in a United States District Court in New York, he discovered that Siemens employees were indirectly making improper payments to officials in North Korea and China in connection with the sale of medical equipment to those countries. Liu complained internally, and was terminated, whereupon he reported to the SEC that Siemens had violated the Foreign Corrupt Practices Act – an Act prohibiting companies that trade stock on US exchanges from making payments to foreign officials to secure business. Liu also alleged that Siemens had violated Dodd Frank’s anti-retaliation provisions.

The District Court dismissed Liu’s case, and the U.S. Court of Appeals for the Second Circuit sustained that decision, refusing “extraterritorial” enforcement of the Dodd Frank anti-retaliation proscriptions. The Second Circuit found it of no consequence that Siemens trades its stock on U.S. exchanges – and presumably to U.S. purchasers – or that Liu may be entitled to a bounty from the SEC if the agency successfully pursues Siemens for FCPA violations. The Court justified its holding by maintaining that there is a presumption against extraterritorial application of a law where there is no clear congressional intent to do so.

Local versus foreign

In this tale of two cases, it would appear that while the SEC is willing to pay significant bounties to foreign whistleblowers who provide information leading to successful compliance enforcement, the Second Circuit Court of Appeals has taken the position that these very whistleblowers – who have been so helpful to the SEC — are not necessarily entitled to redress in a US Court if their employer terminates their employment for the very cooperation that aids US regulatory enforcement actions.

While the SEC whistleblower programme is undoubtedly a work in progress, the notion that whistleblower assistance can leverage compliance enforcement is sound. In a global economy where corporate tentacles span geographic boundaries, there are not enough agency officials to monitor compliance on a global scale. Triple agency staff and the problem still will not be solved. There is a need for eyes and ears on the ground with the technical and language abilities and cultural sensitivities necessary to gather and synthesize information. This is the role whistleblowers play.

They are a means to leverage agency enforcement ability. And even where they never set foot on US soil, foreign whistleblowers can be well positioned to provide regulators, including the SEC, with information and analysis critical to compliance enforcement in the United States. For these foreign individuals who can be so helpful to domestic compliance enforcement it is incongruous that at least one court will not extend the full protections of the Dodd Frank anti-retaliation proscriptions. And that is the tale of two cases.

Arbitrary application of law in a global economy

Reuben Guttman Articles, Whistleblower News

by Reuben A. Guttman. Guttman practices law with Guttman, Buschner & Brooks PLLC 

There are more than 3,000 drug trials being conducted in China. Indeed, data from these trials is almost certain to find its way into applications filed back in the United States with the Food and Drug Administration.

Do large drug companies – which trade on U.S. domestic securities exchanges – accurately report complete information about drug trials conducted in China? Or do language barriers and cultural differences make it difficult – if not impossible – to secure unbiased results from these trials? Understanding that concepts imbedded in the western rule of law, including “conflict of interest,” “kick back,” and “independence,” may have different meanings elsewhere is crucial to understanding the magnitude of the problem, and we have no way of answering these questions with complete certainty.

The scary part is that our regulators – including the SEC, the FDA and the EPA – are so woefully understaffed that they lack the resources to fully enforce compliance in the United States, let alone on a global scale.

In a global economy, understanding and investigating conduct abroad is essential to domestic compliance enforcement. But triple the staff of domestic compliance enforcement agencies, and there still would not be enough government officials to enforce compliance in a global economy.

The truth is that since the founding of our republic, we have recognized that compliance enforcement cannot be left solely in the hands of government regulators. Compliance with our most fundamental constitutional protections, including the landmark decisions in Brown v Board of Education and New York Times v. Sullivan, have been accomplished through private party litigation — not government enforcement actions.
Our environmental, antitrust, and civil rights laws have specific provisions allowing private citizens to bring enforcement actions. Our laws are constructed this way because we as a nation understand that substantive law absent an ability to enforce compliance is meaningless. To have an enumerated right or privilege that cannot be protected or secured is the same as having no right or privilege at all. To ensure compliance enforcement, we have created mechanisms that leverage our abilities so that culprits understand that being caught and sanctioned is more than a mere theoretical possibility.  Indeed, Congress has passed laws, including the False Claims Act and the Dodd-Frank Act, that reward whistleblowers who bring to the government information about conduct that causes the wrongful payment of government monies and that lead to a recovery.
These laws tap the technical, cultural, and even language expertise of whistleblowers on both a domestic and global scale. In 2001, a German citizen named Kurt Bunk brought suit under the False Claims Act in a federal court in Virginia against freight companies engaging in a conspiracy – conceived in Europe – to elevate the cost of shipping services sold to the U.S. military.  The case resulted in the recovery of millions of dollars to the U.S. Treasury.  While not a U.S. citizen, Bunk’s expertise in the shipping industry, his knowledge of the German language, his ability to review thousands of documents written in German, and his account of facts necessary to prove the wrongful conduct were essential to a domestic compliance effort.

It would seem obvious that individuals who participate in compliance enforcement that benefits U.S. citizens or U.S. regulatory agencies should minimally receive protection in our courts. At a time when our State Department spends millions of dollars abroad extolling the virtues of U.S. “rule of law,” it would be ironic that a foreign citizen who aids in the enforcement of our laws would not be extended protection by our courts against retaliation. Yet, that is exactly what happened recently to Liu Meng-Lin, a citizen of Taiwan and a compliance officer for the healthcare division of Siemens China, Ltd.
According to a lawsuit Liu filed in a New York federal court, he discovered that Siemens employees were indirectly making improper payments to officials in North Korea and China in connection with the sale of medical equipment to those countries. Liu complained internally, and was terminated, whereupon he reported to the SEC that Siemens had violated the Foreign Corrupt Practices Act – an Act that prohibits companies that trade stock on U.S. exchanges from making payments to foreign officials to secure business. Liu also alleged that Siemens had violated Dodd Frank’s anti-retaliation provisions.
The federal court dismissed Liu’s case, and the U.S. Court of Appeals for the Second Circuit recently sustained that decision, refusing “extraterritorial” enforcement of the Dodd Frank anti-retaliation proscriptions. The Second Circuit found it of no consequence that Siemens trades its stock on U.S. exchanges – and presumably to U.S. purchasers – or that Liu may be entitled to a bounty from the SEC if the agency successfully pursues Siemens for FCPA violations.  The Court justified its holding by maintaining that there is a presumption against extraterritorial application of a law where there is no clear congressional intent to do so.
Really? In a global economy where the court conceded that Liu might actually be entitled to a monetary award from the SEC?
There’s another irony: At a time when large corporations through the U.S. Chamber of Commerce are maintaining that whistleblowers should report their grievances to internal compliance personnel before going to regulatory bodies, a big publicly traded company has established – at least in one court – that foreigners have no rights of redress in U.S. courts if their internal disclosure results in retaliation.

Regardless of whether the Second Circuit is correct in its analysis, its decision is a blow to whistleblower programs essential to enforcement of laws that, at the very least, protect those who reside within our domestic boundaries.  If the Second Circuit is correct that Congress was not clear in its intent to protect foreigners who help in the enforcement of domestic laws, it is time for Congress to speak up.

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