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DOJ’s COVID-19 Fraud Enforcement Efforts Described by Top Official

September 2, 2020

Ethan P. Davis, the Principal Deputy Assistant Attorney General for DOJ’s Civil Division recently described how the Civil Division will approach COVID-19 fraud enforcement. His remarks follow Senate testimony in early June by DOJ officials on the early battles against COVID-19 fraud. Mr. Davis’ extensive remarks focused on fraud in COVID-19 financial stimulus programs as well as fraud involving tests, treatments, and vaccines.

Two General Principles Will Guide DOJ’s COVID-19 Fraud Enforcement Efforts

Mr. Davis articulated two broad principles that will guide the Civil Division’s corporate enforcement efforts during the pandemic.

First, DOJ “will energetically use every enforcement tool available to prevent wrongdoers from exploiting the COVID-19 crisis.”  This includes the False Claims Act (FCA), which he described as “one of the most effective weapons in our arsenal.” DOJ will deploy the FCA to fight fraud related to the various COVID-19 stimulus programs, such as the Paycheck Protection Program and the Main Street Credit Facility. In addition, DOJ intends to use “all other available tools—both civil and criminal—to safeguard consumers from COVID-related scams and unsafe products.” This includes the Food, Drug, and Cosmetic Act.

Second, DOJ will use its enforcement powers in accordance with the President’s May 19, 2020 Executive Order. Among other things, that Order directs federal agencies to recognize “the efforts of businesses to comply with often-complex regulations in complicated and swiftly changing circumstances.” The Civil Division will “respect the critical role that the private sector is playing in helping to bring an end to the pandemic and in restarting our economy.” Indeed, Mr. Davis noted that the Civil Division and “its agency partners at the FDA, HHS, and elsewhere have exercised enforcement discretion with respect to certain legal requirements that might otherwise slow down innovation.” However, DOJ is “also committed to ensuring that American businesses have the certainty and level playing field needed to respond to the pandemic and to make the economy roar back to life.”

The tension between these two general principles may create a difficult balancing act for DOJ when making enforcement decisions. Such decisions include whether to intervene in an FCA qui tam case involving COVID-19 fraud. Mr. Davis sought to shed light on how DOJ would balance these principles.

COVID-19 Related Stimulus Programs Are a DOJ Enforcement Priority

Stimulus Programs Under the CARES Act Implicate FCA Liability

There are a number of financial stimulus programs enacted into law, principally through the Coronavirus Aid, Relief, and Economics Security (CARES) Act (P.L. 116-136). Among the best known is the Paycheck Protection Program (PPP). The PPP already has provided assistance to more than “4.5 million small businesses, issuing forgivable loans totaling more than $500 billion.” Mr. Davis pointedly emphasized:

That’s a lot of money, and it creates a number of opportunities for fraud … In a time when the government is injecting vast amounts of federal funds into the U.S. economy, vigorous FCA enforcement is more important than ever to ensure that taxpayer dollars are spent as intended …  Going forward, the Civil Division will make it a priority to use the False Claims Act to combat fraud in the Paycheck Protection Program.

The terms of the PPP require borrowers to  make certain certifications to be eligible for funding and to make additional certifications to seek forgiveness of a loan. Mr. Davis stressed that if an applicant “knowingly answers any of these questions falsely, it may face False Claims Act liability.”

Another CARES Act assistance program is the Main Street Lending Program (also referred to as the Main Street Credit Facility). It provides loans to small and medium-sized businesses and non-profit organizations that were in sound financial condition before the onset of the COVID-19 crisis, but now need loans to help maintain their operations. As with the PPP, the program imposes conditions on borrowers and lenders, including eligibility requirements. Again, Mr. Davis stressed that DOJ “will use the [FCA] Act to hold accountable those who knowingly attempt to skirt those requirements.”

The Provider Relief Fund (PRF) is targeted specifically to health care providers, including hospitals. To date, the federal government has allocated $175 billion in payments to be distributed through the PRF and has distributed over $72 billion. Providers who receive funds must agree to a number of terms and conditions. In his remarks, Mr. Davis again made clear that “Where a provider knowingly violates these requirements, the False Claims Act may come into play.”

It is not just entities receiving funds that may be liable under the FCA. Private equity firms that invest in companies receiving CARES Act funds may also be vulnerable. Mr. Davis stated that “Where a private equity firm takes an active role in illegal conduct by the acquired company, it can expose itself to False Claims Act liability.” Indeed, as he noted, DOJ has held private equity firms responsible under the FCA pre-pandemic.

DOJ Will Exercise Discretion in Deciding Whether to Use the FCA in COVID-19 Fraud Enforcement

Mr. Davis’ remarks affirmed that DOJ will use the FCA to combat fraud relating to the CARES Act. However, he also emphasized that “We will be careful not to discourage businesses, health care providers, and other companies from accessing in good faith the important resources that Congress made available in the CARES Act.” Mr. Davis said that “complying with thousands of rules, terms and conditions, and complicated guidance can be a dizzying task under normal circumstances; it is significantly more difficult in times like today.”  Accordingly, DOJ will “pursue cases only where the borrower knowingly failed to comply with material legal obligations and certifications.” Companies that “made immaterial or inadvertent technical mistakes in processing paperwork, or that simply and honestly misunderstood the rules, terms and conditions, or certification requirements” will not face FCA enforcement… We are concerned only with actionable fraud.”

Furthermore, DOJ recognizes that, since the beginning of the pandemic, many agencies including HHS, FDA, and others have waived certain requirements or issued enforcement discretion policies. Thus, “If a business in good faith took advantage of the regulatory flexibility granted by federal agencies in time of crisis, it may not be appropriate to impose False Claims Act liability. Indeed, where the agencies are exercising their discretion to waive or not enforce certain requirements, a qui tam case may fail as a matter of law for lack of materiality and knowledge.”

Similarly, several agencies (including HHS and CDC) have issued guidance and recommendations related to the pandemic. DOJ considers these to be non-binding guidance documents, and “it is the Department’s position that noncompliance with guidance documents cannot by itself form the basis of an FCA case.” Justice Manual provisions 1-19.000 & 1-20.000-205 on the Issuance and Use of Guidance Documents. Moreover, DOJ will consider dismissing FCA qui tam cases where “there was a reasonable attempt to comply with the guidance.”

COVID-19 Tests, Treatments, Vaccines, and Devices Are a DOJ Priority

Mr. Davis noted that the Civil Division’s Consumer Protection Branch plays a key role in “addressing fraudulent or otherwise illegal COVID tests, treatments, and purported cures.”

Many unscrupulous actors view the pandemic as an opportunity to profit off people’s fear. Peddling products they promise will prevent harm from the virus, these actors put consumers—especially those in vulnerable populations—at risk.

DOJ already has brought numerous enforcement actions. Fraudulent schemes in those matters included a company that was selling a fraudulent COVID-19 vaccine and companies that were marketing industrial bleach, ozone therapy, and silver products as cures for the coronavirus. In addition, DOJ shut down over a hundred websites selling fake or unapproved treatments.

At the same time, DOJ will work to be “consistent with the increased regulatory flexibility afforded to companies developing and distributing COVID-19 tests, treatments, and protective equipment.  When a company seeks in good faith to operate within this regulatory framework, it should not have to fear first learning of government disapproval through a civil or criminal action.”

As with stimulus fund fraud discussed above, balancing aggressive enforcement with “regulatory flexibility” may prove challenging. Indeed, Mr. Davis remarked that “We likewise want to make sure that the risk of unwarranted False Claims Act liability does not discourage companies from helping to address” the COVID-19 threat. However, his statements suggest that the balancing of these competing principles may favor enforcement in the following areas. If so, that would be good news for public health and safety and the public fisc.

Clinical Trial Fraud: Developing Drugs, Vaccines, and Medical Devices

The FDA is responsible for approving any drug, biologic (such as a vaccine), or device before it may be sold on the market. Properly designed and conducted clinical trials are the key component in showing that a product is safe and effective.  Currently, there are over 2500 COVID-19 related  clinical trials. This includes numerous vaccine candidates under Operation Warp Speed for which the government has already committed over $10 billion.

Mr. Davis emphasized that:

“[DOJ] will monitor potential clinical trial fraud in the development of drugs and medical devices …  many products designed to treat or prevent COVID-19 are currently in clinical trials, and more are in the pipeline.  As companies rightly push to bring their products to market as quickly as possible, they must also ensure the integrity and accuracy of their clinical trial data—regardless of whether they are conducting trials themselves or outsourcing those trials. We will vigorously pursue claims against companies and executives that knowingly create or relay false or manipulated data in connection with clinical trials.” (emphasis added)

This unequivocal statement is reassuring. The public has a strong interest in bringing these products to the market as quickly as possible. However, it also needs to know that companies are ensuring the integrity and accuracy of their clinical trial data. Otherwise, public money and public safety and health are at risk.

Clinical trial fraud may form the basis for FCA liability. For example, DOJ and Duke University reached a $112.5 million settlement in a whistleblower’s FCA case alleging clinical trial and grant fraud. And courts have recognized that clinical trial fraud may lead to FCA liability. See U.S. ex rel. Krahling v. Merck & Co., 44 F. Supp. 3d 581 (E.D. Pa. 2014); United States ex rel. Brown v. Pfizer, Inc., No. CV 05-6795, 2017 WL 1344365 (E.D. Pa. Apr. 12, 2017).

Producing and Distributing Safe and Effective Treatments

Once a product is approved or authorized by the FDA, the product must be manufactured and distributed in accordance with the FDA’s regulations governing current good manufacturing practices (cGMP). The Civil Division “will focus on ensuring that products—in particular, drugs and active pharmaceutical ingredients—comply with current safety regulations. We will take action both here and abroad against companies that flout these requirements.”

This unequivocal statement is also reassuring. Violation of cGMP requirements has been the basis for several successful FCA cases. For example, DOJ successfully resolved FCA cases against GlaxoSmithKline, Ranbaxy Pharmaceuticals, and McKesson Corp. involving cGMP violations.

Guidance for Potential Whistleblowers and Their Attorneys

The Government is spending vast sums to fight the COVID-19 public health and economic emergencies. Accordingly, DOJ will use the FCA and other laws aggressively to protect the public fisc and public health. A key soldier in this war is the whistleblower. And a key weapon is the qui tam provision of the FCA.

Anyone contemplating an FCA qui tam action would be well advised to consider the DOJ enforcement priorities articulated by Mr. Davis before bringing a lawsuit.