US Gets Bolder in Probing Companies for Defrauding Government

The Justice Department is more aggressively targeting companies that have fraudulently billed government agencies, expanding the volume and complexity of investigations that could be years away from producing results.

Big Law attorneys defending cases under the Civil War-era False Claims Act say enforcers are less sympathetic to pandemic-era concerns that penalties could drive health-care providers and other employers out of business. Justice Department attorneys, in collaboration with private whistleblowers who file most false claims litigation, are also pursuing sophisticated FCA cases that rely on advanced data analysis and novel legal theories while gaining leverage with the threat of parallel criminal probes.

“If you want to know what keeps corporate compliance officers and general counsel up at night, particularly in companies that do business with government programs, it is less traditional white-collar criminal enforcement and more FCA civil cases,” said Eric Sitarchuk, a partner at Morgan Lewis in Philadelphia.

Sitarchuk, who represents businesses nationwide, said he’s noticed a “significant uptick in the number of active FCA investigations, the level of resources the government is putting into them, the number of agents that are working them, and the level of teamwork and coordination between US attorneys and Main Justice.” That’s on top of an “evergrowing proliferation of whistleblower litigation,” Sitarchuk said.

It could be well into the next presidential administration until the public sees the results of these shifts, some of which stem from Biden administration policy tweaks and others the product of career lawyers’ evolving approach to false claims investigations.

Whistleblower- filed lawsuits remain under seal for often more than a year before the department decides if it will intervene on behalf of the plaintiff. Investigations, settlement negotiations, and protracted litigation further elongate the process.

In fiscal 2021, DOJ obtained $5.6 billion in FCA settlements and judgments—the second largest total in the law’s history. The 2021 figures were skewed by Purdue Pharma’s $2.8 billion resolution related to opioid prescriptions. Attorneys also noticed some cases wrapping last year that would’ve otherwise been captured in the prior fiscal year if not for the pandemic.

Kurt Erskine, who was US attorney based in Atlanta before leaving in August for Polsinelli, had a firsthand view of seeds that he predicts will grow into soaring levels of funds recouped from contractors, Medicare billers, and others who knowingly cheated the government.

“I saw a definitive uptick in workload among the civil prosecutors who were doing False Claims Act work, and I would expect that will continue,” Erskine said. “And we’ll begin to see, not only in my office but probably across the country, those numbers continue to increase over the next five years.”

Historically, FCA filings were concentrated in a few districts, like the pharmaceutical hubs of Philadelphia and Massachusetts. Then in recent years, US attorneys’ offices elsewhere gained expertise.

“You are seeing a much broader dispersion of cases filed across the country,” said Brenna Jenny, a Sidley Austin partner who defends companies from FCA claims.

Policy Changes

The False Claims Act has long received bipartisan support for protecting congressionally-authorized funds. The top Republican on the Senate Judiciary Committee, Chuck Grassley of Iowa, co-sponsored amendments to the FCA in 1986 that that strengthened the law substantially by allowing private citizens to file qui tam claims on behalf of the government.

While FCA enforcement policy generally stays consistent from one administration to the next, a few Trump-era revisions that were considered friendly to defendants have been abandoned under Attorney General Merrick Garland.

Garland rescinded a memo that had prevented FCA enforcers from citing subregulatory guidance, or agency interpretations of rules and statutes that never received public input. The move armed DOJ attorneys with a larger pool of potential arguments to prove false claims were submitted, defense lawyers say.

The department also backtracked on the prior administration’s initiative to dismiss some FCA whistleblower complaints, returning to the standard of rarely, if ever, exercising this authority before judges. The US Supreme Court agreed in June to hear arguments on DOJ’s authority to dismiss false claims cases against whistleblower objections.

Greater Complexity

The department also wants to deploy the FCA in a new, largely untested way by launching investigations into companies’ cybersecurity practices.

Since last fall, DOJ leadership has prioritized cyber fraud cases, although the initiative has yet to show public evidence of gaining traction. FCA attorneys are waiting with interest to see which types of test cases the department will pursue, given DOJ’s high burden to prove that a company’s misrepresentation about its cyber safety protocols was “material” to the agency’s payment decision.

Investigations are likely underway, particularly after DOJ saw a whistleblower defeat Aerojet Rocketdyne’s motion to dismiss charges that the company misled the government about its cybersecurity practices to gain missile defense and rocket engine contracts. This led to a $9 million FCA settlement in April.

In more traditional sectors like healthcare, some defense attorneys are noticing a spike in cases in which the department is deploying data analytics to spot anomalies that allow them to initiate investigations without requiring a whistleblower.

“They’re doing data analytics, they’re leveraging contract audits that their client agencies are doing in the ordinary course, they’re looking at hotline complaints that aren’t filed in court but might go anonymous complaints to agencies,” said Jonathan Phillips, a partner at Gibson Dunn. These are all designed to “to identify potential leads for fraud investigations where they won’t necessarily be held up by the process of a qui tam that’s filed in court.”

Data analysis has been around for years, but “they’ve become more adept at utilizing the tools that are available, over time,” said Terra Reynolds, a partner at Latham & Watkins.

Plaintiffs Want More

The whistleblower bar—which remains the primary driver of FCA action—still sees room for improvement. For instance, the department should staff up the Civil Division fraud section to clear out a “massive backlog” of cases, said Reuben Guttman, an attorney with Guttman, Buschner & Brooks.

Helping to offset that challenge, DOJ has started declining cases “more expeditiously,” deferring to outside plaintiff attorneys who are now better financed in litigating these matters, said Renee Brooker, a former supervisor in Civil’s fraud section who now represents whistleblowers as a partner at Tycko & Zavareei.