June 12, 2019
In late 2018, the Department of Justice issued its annual press release on False Claims Act cases and recoveries. For the fiscal year ending on September 30, 2018, DOJ had recoveries of more than $2.8 billion, including $625 million in our AmerisourceBergen case, the largest FCA recovery of the year. While the total annual amount recovered is large, it was the lowest in nearly a decade. The total represented a 17 percent dip from $3.5 billion in 2017, which in turn represented a 30 percent decline from the nearly $5 billion recovered in 2016. The statistics understandably triggered speculation about the cause for the decline in both recoveries and cases filed, and the future of FCA enforcement. Upon reflection, we see several possible reasons for the decline, but we also see many positive indicators and remain bullish on the future of the FCA.
Of the over $2.8 billion in total recoveries in FY 2018, $2.1 billion was attributable to qui tam cases, with nearly $119 million recovered in cases declined by the DOJ. Healthcare fraud continues to dominate—with some 87% of the recoveries coming in healthcare fraud cases. The government paid out $301 million in relator awards to the individuals who exposed fraud and false claims by filing these actions. Of this, only $32.6 million in shares was paid in declined cases, showing once again that a relator’s overall chance of success is higher where the government intervenes. Unfortunately, the average percentage award seems to be continuing a downward trend, with average awards declining each year for the last few years, and now near the low end of the range for both intervened and declined cases.
In terms of case filings, 645 new FCA qui tam cases were filed during the 2018 fiscal year, with another 122 investigations opened in non-qui tam matters. Again, healthcare dominates—accounting for close to 70% of the 645 new filings: 446 cases were healthcare; 34 were Department of Defense; and 165 cases involved other types of alleged fraud.
It is too soon to tell if the 2018 False Claims Act recoveries downturn in recoveries is the start of a longer term trend or a blip on the screen. It is not unusual to see the annual recoveries jump up and down: for example, in the nine years before 2018, annual recoveries ranged from a low of some $2.4 billion in 2009 to a still-record $6.1 billion in 2014, and then back down to $3.1 billion in 2015. Annual recoveries can be skewed by large settlements in one sector, for example, the large settlements with the banking and mortgage industries as a result of the Great Recession or with Big Pharma. While new case filings in 2018 are down slightly over the prior two years, the pattern has been fairly consistent over the last several years, with over 600 cases filed annually.
The lower recoveries may well be purely happenstance. The reality is that fraud investigations often take several years, and when a case is ready to settle or a court enters judgment is not determined by the fiscal year. For example, our AmerisourceBergen FCA qui tam case that settled in September 2018 was filed in 2010 and the criminal settlement and recovery occurred in 2017.
Having said that, there are several factors that may well have caused lower False Claims Act cases and recoveries in 2018. It is of course hard to quantify the effects of any one or more of these factors, but some points are worth noting:
The Brand Memo: During early FY 2018, then Attorney General Sessions issued a memorandum prohibiting DOJ components from issuing “guidance documents” that “purport to create rights or obligations binding on persons or entities outside the Executive Branch.” This was followed in January 2018 by a memorandum issued by then Associate Attorney General Brand applying these principles to DOJ litigators engaging in civil enforcement. Her memo curtailed fraud prosecutors’ ability to rely on certain types of agency regulatory guidance. This came as a surprise to DOJ fraud prosecutors and the relators’ bar, but the defense bar wielded it immediately, crafting arguments to undermine existing FCA cases and investigations. Eventually, DOJ Civil Frauds evolved its position to counter such defense arguments, including filing briefs in court that articulated how certain FCA cases could successfully survive such attacks, and the courts agreed. Then in December 2018, after the end of FY 2018, these positions were memorialized in newly-drafted Justice Manual provisions issued by then Deputy Attorney General Rod Rosenstein. The new provisions implemented and clarified the prior DOJ memoranda and carved out significant exceptions permitting appropriate use of guidance documents. But some damage was likely already done: we know anecdotally of some cases that were on a promising investigative track, but were slowed down or fell victim to the Brand memo. Even where cases survived, DOJ had to devote resources to fighting off Brand attacks by the defense, rather than investigating cases.
The Granston memo: issued in January 2018 by DOJ Civil Fraud Section Chief Michael Granston, this memo directed DOJ fraud attorneys to evaluate the dismissal in FCA qui tam actions under various factors. The defense bar used the memo to attempt to dismiss declined cases being pursued by relators. Further, the defense bar’s aggressive use of attempts to take burdensome discovery of government agencies, purportedly to test the Escobar materiality element of the False Claims Act case, dovetailed with one of the elements of the Granston memo. While hard to quantify, we suspect the Granston memo, and the accompanying threat by DOJ to seek dismissal of a relator’s case, had some chilling effect on relators’ (and their counsels’) willingness to pursue certain cases.
The defense bar aggressively used the Escobar decision’s discussion of materiality as an element of FCA cases to seek dismissal of pending FCA cases. Many courts bought into the defense arguments, dismissing several pending cases. In addition, at least two very large jury verdicts were vacated including: in 2017, the Fifth Circuit vacated a judgment against Trinity Industries totaling over $663 million; and a district court in Florida vacated a 2017 healthcare fraud judgment of some $347 million (the latter case is now on appeal to the Eleventh Circuit). Together these two cases would have accounted for over $1 billion in FCA qui tam recoveries, probably during FY 2018. It remains to be seen how much more damage the lower courts’ interpretation of Escobar causes, but the good news is that DOJ now has a strong and well settled position on the Escobar issue that it is advocating with more and more success.
DOJ, U.S. Attorney’s Offices, and law enforcement agencies were underfunded in some of the years prior to 2018, and even subject to a short shutdown in fiscal year 2018 (in January). Lack of funding is disruptive, and affects not only personnel slots, but also money to pay for investigations, travel to interview witnesses, etc. Since recoveries realized in 2018 are the result of cases filed years earlier, the lack of resources in earlier years could have had a ripple effect on later recoveries. It will be interesting to see the FY 2019 statistics, which could well be impacted by the longest shutdown in government history, lasting 35 days in FY 2019 (December 2018-January 2019).
While we continue to be mindful of the Brand memo, the Granston memo, and the Escobar decision in evaluating whether to bring or continue a case, we remain bullish on the FCA. From where we sit, we see that DOJ and USAOs now have more resources than ever, are committed to aggressively working cases, and are actively seeking new cases from the relators’ bar. Anecdotally, the U.S. Attorney’s Office for the District of Massachusetts, a leader in FCA recoveries for many years, recently announced at a conference that it had more cases filed in 2018 than in any year since 2013.
The success of FCA enforcement ebbs and flows, and whether cases succeed or when cases settle can be influenced by many factors. But with partners in our firm having represented relators since 2003 and having worked FCA matters for the government at various times from 1989 to 2018, we have repeatedly seen the government and the relators’ bar successfully handle a wide variety of challenges and attempts to undermine the FCA. Relators and their counsel must continue to be vigilant, fully vet potential new cases, and only pursue the most promising ones. We have survived the “one, two, three” punch of the Brand memo, the Granston memo, and the Escobar decision. Whistleblowers are key to the success of the FCA. We will continue to fight for the FCA and the taxpayers.