Justice Department Targets Fraud Claims

The Justice Department is on a roll. In the past several weeks, it settled whistleblower suits under the False Claims Act (FCA) against pharmaceutical companies for nearly $150 million. During that same period, the Department of Justice also settled a qui tam action involving a private lender for more than $25 million, and intervened in a separate FCA whistleblower suit in Texas.

Since January 2009, the Department of Justice's total recoveries have topped $3 billion in FCA cases. Although no industry that conducts business with the federal government is immune from FCA enforcement, particularly military defense, the pharmaceutical industry has been one of the Department of Justice's high priority targets. In fact, approximately $2.3 billion of FCA recoveries since January 2009 have stemmed from cases involving fraud against federal health care programs.

On May 4, the Department of Justice announced a settlement for over $72 million with Novartis Vaccines & Diagnostics Inc. and Novartis Pharmaceuticals Corp. The suit alleged that Novartis and its predecessor marketed TOBI, a cystic fibrosis drug, for unapproved uses leading to the submission of false claims to federal health care programs. Under the settlement agreement, the federal government will receive over $43 million, while various states were set to receive $29 million. And, the qui tam whistleblowers will receive nearly $8 million from the federal share.

The Novartis agreement came on the heels of a $75 million FCA settlement with Ortho-McNeil-Janssen Pharmaceuticals Inc., which resolved allegations that the company had "illegally promoted" an epilepsy drug, Topamax, and caused the submission of false claims to federal health care programs for psychiatric uses that were not medically accepted. Separately, Ortho-McNeil Pharmaceutical LLC agreed to plead guilty to a misdemeanor and pay a criminal fine concerning allegations that it violated the Food, Drug, and Cosmetic Act by misbranding Topamax. In the FCA matter, the federal share of the civil settlement was nearly $51 million, while state Medicaid received over $24 million. The qui tam whistleblowers received in excess of $9 million from the federal civil recovery.

Continuing its streak, the Department of Justice also recently settled for over $26 million with Ciena Capital LLC, a private, non-depository lender in New York City. This resolved allegations that Ciena and a subsidiary "falsely certified" compliance with Small Business Administration regulations by submitting claims for payments on loans they originated, underwrote, and serviced. Finally, the Department of Justice recently intervened in a qui tam suit in Texas against Kellogg Brown & Root, a key logistical support provider for the U.S. military in Iraq, and others concerning alleged kickbacks.

The Department of Justice's clear commitment to vigorous FCA enforcement should come as no surprise. In his Senate confirmation hearings, Assistant Attorney General for the Civil Division Tony West stated that protecting taxpayer dollars through vigilant anti-fraud and FCA enforcement was second only to national security and the war on terror on his list of priorities.

Once referred to as "Lincoln's Law," the FCA was enacted during the Civil War in an attempt to curtail then-rampant frauds against the federal government by military suppliers. The qui tam - "whistleblower" -provision of the FCA allows private citizens to bring anti-fraud suits on behalf of the government and to potentially share in any eventual recovery. This private attorneys general enforcement scheme went largely unused until 1986, when Congressional amendments incentivized its increased use.

In a typical FCA qui tam action, a private citizen - known as the "relator" - files a claim on behalf of the government in accordance with specific and strict procedural requirements. the The Department of Justice must then conduct a "diligent" investigation of the claim. This investigation is generally critical to the success or failure of any claim. At the end of its investigation, the Department of Justice may intervene and prosecute the action, decline to intervene and leave the relator to prosecute the action, or move to dismiss the relator's complaint. When the Department of Justice decides not to intervene, it usually results in the dismissal of the whistleblower suit.

In May 2009, the enactment of the Fraud Enforcement and Recovery Act (FERA) substantially amended the FCA. Specifically, FERA eased enforcement requirements and increased a defendant's potential exposure to liability by empowering the Department of Justice to more easily issue civil investigative demands; eliminating the "specific intent to defraud" requirement; expanding the definition of "materiality"; extending the scope of persons who are protected as whistleblowers; and penalizing "reverse" false claims.

Each of these amendments is significant. Of particular note, however, is the broad expansion of prosecutorial authority to issue civil investigative demands. In March 2010, the Department of Justice invoked its authority under FERA to allow all 93 U.S. Attorneys to issue civil investigative demands. Previously, the Attorney General had to personally approve them. These are powerful pre-litigation discovery tools that can be used by the Department of Justice to compel the production of documents, responses to interrogatories, sworn testimony, or a combination thereof. Because civil investigative demands can be used before litigation has actually commenced, potential defendants may have to respond to these inquiries without the benefits of formal civil discovery. With the recent changes regarding civil investigative demands, federal prosecutors are now even better equipped to investigate fraud under the FCA.

The FERA amendments, civil investigative demand expansion, and large recent settlements all indicate that the Department of Justice will continue to aggressively investigate and clamp down on companies violating the FCA. In this zealous enforcement environment, companies should be extremely vigilant regarding how they conduct business with the government to ensure compliance with the FCA.

There is no substitute for solid preparation. In fact, once the government has initiated an investigation a company may have already missed its best chance to stave off potential exposure under the FCA. Prudent companies and their officers and directors should therefore ensure that comprehensive and effective compliance systems have been implemented throughout the company. Further, these systems should be routinely and rigorously tested to promote ongoing effectiveness. Moreover, if an investigation by the Department of Justice has already commenced, the company and its counsel may be well served by working closely with the Department in an effort to preempt or avoid a possible FCA action.

In light of the recent large recoveries and significant developments under the FCA, undertaking a thorough review of existing policies and procedures will likely place an organization in a significantly better position to avoid the possibility of a qui tam suit and the threat of the Department of Justice action.

Thomas P. O'Brien is a partner in the Litigation Department of Paul Hastings and former U.S. Attorney for the Central District of California. Adam D. Schneir and John J. O'Kane are both associates in the Litigation Department of Paul Hastings Los Angeles office.