The Department of Justice (DOJ) doubled-down on emphasizing corporate compliance programs with new guidance from the Criminal Division Fraud Section with the “Evaluation of Corporate Compliance Programs” (Criteria).  This document, released February 8 without much fanfare, contains a long list of benchmarks that DOJ says it will use to evaluate the effectiveness of an organization’s compliance program.  The Criteria may publicize the factors Hui Chen, the Criminal Division’s 2015 compliance counsel hire, uses to evaluate compliance programs.  The Criteria also provides practical guidance on how organizations can evaluate their compliance programs.  This document operationalizes DOJ’s Principles of Federal Prosecution of Business Organizations (knows as the “Filip Factors”), which stated that the existence and effectiveness of a corporation’s preexisting compliance program is a factor that the DOJ will review in considering prosecution decisions.

The Guidance contains 11 topics that shift the analysis among examining how the alleged misconduct could have occurred, the organization’s response to the alleged misconduct, and the current state of the compliance program.  One entire category, titled “Analysis and Remediation of Underlying Misconduct,” has an obvious focus.  But, the other categories contain questions that touch on each of the three themes.  For example, the “Policies and Procedures” category asks questions about the process for implementing and designing new policies, whether existing policies addressed the alleged misconduct, what policies or processes could have prevented the alleged misconduct, and whether the policies/processes of the company have improved today.  Other categories examine the company’s historic and current risk assessment process and internal auditing, training and communications, internal reporting and investigations, and employee incentives and discipline.  DOJ also discusses management of third parties acting on behalf of the company and, in the case of a successor owner, the due diligence process and on-boarding of the new company into the broader organization. Continue Reading DOJ Releases Detailed Criteria for Evaluating Compliance Programs

According to a report released last week, the Health Care Fraud and Abuse Control Program (HCFAC) returned over $3.3 billion to the federal government or private individuals as a result of its health care enforcement efforts in fiscal year (FY) 2016, its 20th year in operation. Established by the Health Insurance Portability and Accountability Act of 1996 (HIPAA) under the authority of the Department of Justice (DOJ) and the Department of Health and Human Services (HHS), HCFAC was designed to combat fraud and abuse in health care. The total FY 2016 return represents an increase over the $2.4 billion amount reported by the agencies for FY 2015.

The report serves as a useful resource to understand the federal health care fraud enforcement environment. It highlights costs and returns of federal health care fraud enforcement, providing not only amounts recovered from settlements and awards related to civil and criminal investigations but also outlining funds allocated for each departmental function covered by the HCFAC appropriation. Total HCFAC allocations to HHS for 2016 totaled $836 million (approximately $255 million of which was allocated to the HHS Office of Inspector General (OIG)) and allocations to DOJ totaled $119 million. The report touts a return on investment of $5 for every dollar expended over the last three years.

The report also includes summaries of high-profile criminal and civil cases involving claims of violations of the False Claims Act (FCA), among other claims. The cases include OIG and HHS enforcement actions as well as some of those pursued by the Medicare Fraud Strike Force, which is an interagency task force composed of OIG and DOJ analysts, investigators, and prosecutors. Successful criminal and civil investigations touch virtually all areas of the health care industry from various health care providers to pharmaceutical companies, device manufacturers and health maintenance organizations, among others.

The report follows an announcement by the DOJ last December declaring FY 2016’s recovery of more than $4.7 billion in settlements and judgments from civil cases involving fraud and false claims in all industry sectors to be its third highest annual recovery, the bulk of which, $2.5 billion, resulted from enforcement in the health care industry.

The law is uncertain. One example of this uncertainty is how the “Yates memo” is to be applied in civil cases — in particular, what constitutes “cooperation” and how cooperation may benefit a company under investigation for False Claims Act violations. On September 29, 2016, DOJ attempted (for a second time) to address the lack of clarity surrounding cooperation in civil matters. While DOJ provided some more detail on what it viewed as “full cooperation,” and indicated that “new guidance” had been issued within DOJ on cooperation in civil enforcement matters, it still failed to give concrete guidance on how such cooperation may benefit a company in a FCA or other civil resolution. In essence, DOJ is saying “Trust Us” to companies considering the potential benefits of cooperation.

Read the full article here.

One of the more concerning trends for the defense bar in False Claims Act cases is an uptick in parallel criminal and civil proceedings. While the pursuit of parallel proceedings is long-standing DOJ policy, the last few years have seen a “doubling down” by the government on the use of these proceedings — for instance, the 2014 Department of Justice policy requiring an automatic criminal division review of each qui tam complaint and the 2015 Yates Memorandum’s requirement for defendants to identify all culpable individuals to obtain “cooperation” credit in reaching a resolution with the government. From the defense side, parallel proceedings raise important and troublesome issues, including protecting the defendant’s Fifth Amendment rights while mounting a robust defense in the civil case. But, as shown in recent decisions from the Eastern District of Kentucky and Southern District of New York, parallel proceedings may also prove challenging to DOJ when a judge is impatient with the progress of case on its docket or when the relator is not on board with how the government would like the case to proceed.

Continue Reading The Perils of Parallel Proceedings: To Stay or Not to Stay

On June 29, 2016, the US Department of Justice (DOJ) issued an anticipated interim final rule that substantially increases penalties under the False Claims Act (FCA).  Under the interim final rule, minimum penalties per claim will dramatically spike from the current $5,500 to $10,781, and the maximum penalties per claim will jump from $11,000 to $21,563.  As we previously reported, the substantial increase in FCA penalties has been expected since the Railroad Retirement Board (RRB) issued a similar interim final rule in May 2016.  The massive increase in FCA penalties comes in response to the Bipartisan Budget Act of 2015, which requires agencies to adjust penalties for inflation over the past 30 years.

The increased FCA penalties are set to go into effect on August 1, 2016 and will apply to claims after November 2, 2015.  As we have observed, the increased FCA penalties may raise constitutional concerns regarding defendants’ due process rights and under the Eighth Amendment’s bar on excessive fines.  With FCA cases increasingly involving tens of thousands of claims, the application of these increased penalties could easily result in circumstances where punitive recoveries are dramatically out of proportion with single damages.

There is a 60-day comment period associated with the interim final rule, which is available here.

On June 9, 2016, Acting Associate Attorney General Bill Baer delivered a speech regarding the impact of the Yates Memorandum’s focus on individual accountability and corporate cooperation at the American Bar Association’s 11th National Institute on Civil False Claims Act and Qui Tam Enforcement.  The focus of the speech was on the interplay between the Yates Memorandum and investigations and litigation under the False Claims Act (FCA), underscoring the fact that the US Department of Justice’s (DOJ’s) focus on individuals is not limited to the criminal context. Continue Reading Acting Associate Attorney General Remarks on Yates Memorandum and False Claims Act

On May 27, 2016, the US Department of Justice said it will appeal to the Eleventh Circuit its loss in the False Claims Act (FCA) case against hospice chain AseraCare Inc. The government’s decision to appeal comes as no surprise, and it means that the substantial attention this case has received will continue.

As a reminder, this case, U.S. ex rel. Paradies v. AseraCare, Inc., focused on whether AseraCare fraudulently billed Medicare for hospice services for patients who were not terminally ill. AseraCare argued (and the district court ultimately agreed) that physicians could disagree about a patient’s eligibility for end-of-life care and such differences in clinical judgment are not enough to establish FCA falsity.

The government appealed three orders issued by the US District Court for the Northern District of Alabama. We previously posted about each of these three orders.

The first order on appeal is the district court’s May 20, 2015 decision bifurcating the trial, with the element of falsity to be tried first and the element of scienter (and the other FCA elements) to be tried second. The government had unsuccessfully sought reconsideration of this decision.  This is the first instance in which a court ordered an FCA suit to be tried in two parts.

The second order on appeal is the district court’s October 26, 2015 decision ordering a new trial, explaining that the jury instructions contained the wrong legal standard on falsity. This order came after two months of trial on the element of falsity and after a jury verdict largely in favor of the government.

The third order on appeal is the district court’s March 31, 2016 decision, after sua sponte reopening summary judgment, granting summary judgment in favor of AseraCare. In dismissing the case, the court explained that mere differences in clinical judgment are not enough to establish FCA falsity, and the government had not produced evidence other than conflicting medical expert opinions.

The government must file its opening brief 40 days after the record is filed with the Eleventh Circuit. We will be watching this case throughout the appellate process.

Last week, the Department of Justice (DOJ) announced charges against a former hospital CFO, two orthopedic surgeons, a chiropractor, and a health care marketer for their alleged roles in a series of fraudulent referral and billing schemes.  According to the DOJ, these referral schemes paid illegal kickbacks to physicians for spinal surgery referrals and caused “nearly $600 million in fraudulent billings over an eight-year period.”  These charges underscore the federal government’s recent emphasis on greater individual accountability for fraudulent healthcare schemes and the potential for those involved to face significant liability.

According to a statement from the U.S. Attorney’s Office, the schemes generally involved paying tens of millions of dollars in kickbacks for referrals to two California hospitals, Pacific Hospital in Long Beach and Tri-City Regional Medical Center in Hawaiian Gardens, for spinal surgeries.  Those hospitals then billed those surgeries to California’s workers’ compensation system, the U.S. Department of Labor, and workers’ compensation insurers.  The schemes implicated dozens of surgeons, orthopedic specialists, chiropractors, marketers, and other medical professionals.

These charges are the latest development in an ongoing coordinated government investigation dubbed “Operation Spinal Cap.”   The investigation is specifically focused on providers and other individuals who may have been involved in these spinal surgery-related schemes.

In early 2014, the ex-CEO of Pacific Hospital was indicted and pleaded guilty to paying illegal kickbacks and federal conspiracy charges.  He was also the subject of a qui tam suit and a suit by the County of Los Angeles on state false claims grounds.  According to those cases, the CEO used a network of shell corporations, physician-owned distributorships, and sham contracts to facilitate the referral and billing schemes.

Notably, not all improper kickback payments are clear-cut cash transactions.  The schemes described above are alleged to have used multiple vehicles for providing and concealing kickback payments. For example, the U.S. Attorney’s Office statement described several “bogus contracts” deployed as part of the Pacific Hospital referral scheme.  These included agreements where physicians were paid for a “right to purchase” their medical practices, but the option was never exercised; operations-based agreements that compensated physicians at rates above fair market value; agreements for consulting or directorship work that was never performed; and even lease agreements that paid doctors for space that was never or rarely used.  Corporations should be mindful of these improper arrangements when structuring their compliance programs and evaluating their financial relationships with physicians.

Pacific Hospital’s former CFO, whose case was unsealed last Tuesday, was allegedly responsible for, among other things, tracking the referrals from and payments to physicians.  He pleaded guilty to participating in a conspiracy that engaged in paying kickbacks in connection with a federal healthcare program and in mail fraud, among other charges.  The charges brought against the individuals are varied.  For example, one orthopedic surgeon was charged with filing a false tax return; his plea agreement admits he did not report his kickback payments as income on his taxes.  Additionally, a health care marketer who admitted to recruiting doctors to make referrals pled guilty to conspiring to commit mail fraud.

While the crimes charged vary, they are consistent with the federal government’s recent enhanced focus on individual actors and their roles in health care fraud schemes.  The government’s focus on individuals was notably described in Deputy Attorney General Sally Quillian Yates’ recent memo, which focused on themes of cooperation and individual accountability for involvement in corporate crimes (see our former pieces on the Yates memo here and here.

A copy of the DOJ’s Press Release on these charges can be found here.

On September 9, 2015, Deputy Attorney General Sally Quillian Yates issued a memorandum outlining the Department of Justice’s increased focused on individual responsibility in investigations of corporate wrongdoing, now colloquially referred to as the “Yates Memorandum.”  (We previously reported on the Memorandum here).

Pursuant to the Yates Memorandum’s directive that the U.S. Attorneys’ Manual (USAM) be revised to reflect this increased focus on individuals, on November 16, 2015, such revisions were released.  In a speech on that date to the American Banking Association and the American Bar Association Money Laundering Enforcement Conference, Deputy AG Yates highlighted the important nature of the revisions: “We don’t revise the USAM all that often and, when we do, it’s for something important.  We change the USAM when we want to make clear that a particular policy is at the heart of what all Department of Justice attorneys do and when we want to make sure that certain principles are embedded in the culture of our institution.”

Among other things, the revisions to the USAM update the “Filip factors” concerning criminal prosecution of organizations and associated commentary.  The revisions urge an early focus on individual culpability and possible prosecution in corporate criminal investigations.  The revisions, like the Yates Memorandum itself, also make clear that to receive any credit at all for cooperation, corporations must identify culpable individuals and disclose nonprivileged information concerning their misconduct.  In her speech, Deputy AG Yates remarked that this “seems to be the policy shift that has attracted the most attention,” but also stated that this concept of corporate cooperation is nothing new.  She went on:

“What is new is the consequence of not doing it.  In the past, cooperation credit was a sliding scale of sorts and companies could still receive at least some credit for cooperation, even if they failed to fully disclose all facts about individuals.  That’s changed now.  As the policy makes clear, providing complete information about individuals’ involvement in wrongdoing is a threshold hurdle that must be crossed before we’ll consider any cooperation credit.”

In response to concerns that this policy will require broad and expensive internal investigations, Yates noted that investigations should be tailored to the wrongdoing, and not every investigation needs to be a “years-long, multimillion dollar” effort.  She further suggested that if there are doubts about what is required in terms of an investigation, the requisite extent of the investigation could be vetted with the prosecutor.

Yates observed that nothing about the policy requires waiver of the attorney-client privilege.  But at the same time, she invoked the adage that “legal advice is privileged.  Facts are not.”  As such, while a law firm’s interview memoranda prepared during the course of an internal investigation may not need to be disclosed in order for the corporation to receive credit, “the corporation does need to produce all relevant facts—including the facts learned through those interviews—unless identical information has already been provided.”

Yates further observed that the edits to the USAM make clear that timing “is of the essence,” and a “company should come in as early as it possibly can, even if it doesn’t quite have all the facts yet.”  Moreover, the USAM revisions distinguish the concept of timely/voluntary disclosure from cooperation, noting that while they are related concepts, “prompt voluntary disclosure by a company will be treated as an independent factor weighing in the company’s favor.”

Importantly, Yates also highlighted revisions to the civil chapter in the USAM, which adds a new section directing assistant U.S. attorneys (AUSAs) to focus on individual responsibility from the inception of civil investigations, much like in criminal investigations.  “In this new civil section on individuals, we are directing our civil attorneys to follow the same principles that guide our criminal prosecutors.”  Among these is the principle that corporate resolutions should not provide protection from individual criminal or civil liability, absent extraordinary circumstances.  As Principal Deputy Assistant Attorney General Benjamin Mizer stated in an October 22, 2105, speech to the 16th Pharmaceutical Compliance Congress and Best Practices Forum, “in order to qualify for the reduced multiples provision under the False Claims Act, the organization must voluntarily identify any culpable individuals and provide all material facts about those individuals.” Read the full speech here.

The revisions to the USAM translate the principles announced in the Yates Memorandum into practical application.  While some of those principles have received criticism—including concerns about a corporation’s ability to meet the standard of cooperation, thus leading to less cooperation—Deputy AG Yates responded, “I suppose that may happen, but I am not convinced… But if fewer companies cooperate and our corporate settlements are reduced, we’re okay with that.”  In any event, from the perspective of FCA defendants, it is clear that corporations faced with FCA investigations and litigation will need to give ample consideration early on to the DOJ’s focus on individuals, now codified in the USAM.

On September 9, 2015, the U.S. Department of Justice (DOJ) released a memorandum to prosecutors nationwide regarding “Individual Accountability for Corporate Wrongdoing,” authored by Deputy Attorney General Sally Q. Yates.  Dubbed the “Yates Memorandum,” this missive consolidates both long-standing DOJ policy and newly minted guidance for prosecutors and civil enforcement attorneys that could significantly alter the course of both criminal and civil investigations under the False Claims Act (FCA) particularly for health care entities.  The day after releasing the memo, Yates spoke at NYU School of Law, where she noted that DOJ’s mission is “not to recover the largest amount of money from the greatest number of corporations,” but rather, “to seek accountability from those who break our laws and victimize our citizens.”

At its core, the Yates Memorandum calls for a substantially increased focus on individual accountability for corporate wrongdoing and amendment of prior Department policies that have become standard operating procedures in both criminal and civil investigations.  While this is nothing new for FCA defendants, the renewed focus on individuals – and the corresponding guidance in the Yates Memorandum – will have an immediate and lasting impact on internal investigations, pre-intervention negotiations, litigation and any extra-judicial resolution of the case.

Leaving aside the policy statements that deal solely with internal DOJ operations, the Yates Memorandum outlines three key areas of focus that will be relevant for FCA defendants facing exposure from an investigation or qui tam litigation:

Increased Focus on Individuals

As part of this increased focus, corporations will be incentivized to tailor internal investigations to include a hard look at individuals.  First, the DOJ will limit or decline to provide “cooperation credit” unless the corporation “completely disclose[s] to the Department all relevant facts about individual misconduct.”  While the application of cooperation credit in criminal cases is more commonplace, the Yates Memorandum makes clear that this principle will apply equally in the civil context.  Citing the FCA, the Department’s position on “full cooperation” under 31 U.S.C. 3729(a)(2) will be “at minimum, all relevant facts about responsible individuals must be provided.”  The Yates Memorandum also directs prosecutors and civil attorneys to proactively investigate individuals “at every step of the process – before, during, and after any corporate cooperation.”  By focusing on individuals from the inception of the investigation, the DOJ hopes to “increase the likelihood that individuals with knowledge of the corporate misconduct will cooperate with the investigation and provide information against individuals higher up the corporate hierarchy.”

The implications of these directives will impact all stages of the corporate response to an FCA investigation.  While the DOJ recognizes that investigations must be “tailored to the scope of the wrongdoing,” corporations should anticipate a need to expand internal investigations to gather facts and potentially assess the roles played by individuals in the overarching corporate wrongdoing at issue.  As the corporation seeks to resolve the corporate liability, the Yates Memorandum suggests that defense attorneys will be under increased pressure to focus attention on individual employees and former employees creating pressure to share information with the government regarding individuals in order to receive favorable treatment in the negotiated resolution.  While it is uncertain how the DOJ will value such cooperation, it is possible to envision a scenario where a favorable settlement for the corporation will only be reached if the Department perceives that the corporation was forthcoming about all individuals involved in the wrongdoing (as opposed to the “sacrificial lamb” that may have been put forth in the past).

Limited Release of Individuals When Resolving Corporate Case

In perhaps the most significant departure from the current regime for resolving FCA cases, the Yates Memorandum dictates that “[a]bsent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals.”  Such a directive discouraging prosecutors from providing a commonly expected settlement term in a civil FCA matter – i.e., the release from liability of the corporation’s officers, directors and current/former employees – could significantly complicate the settlement decision-making process of senior management.  In the absence of the traditional global civil and administrative release, not only could DOJ consider pursuing individuals under the FCA, but the Office of Inspector General (OIG) would also be free to consider pursuing individuals for civil monetary penalties.  OIG may have a different – and lower – dollar threshold for deciding to pursue those cases than DOJ.

Another aspect of the Yates Memorandum guidance is the directive that corporate cases will not be resolved without a “clear plan” to resolve related cases against individuals.  This guidance appears to be aimed at ensuring that prosecutors are diligent in their investigation of individuals in order to keep those efforts on track with the corporate resolution.

Relevance of Individual Ability to Pay

Finally, the Yates Memorandum calls on attorneys in civil enforcement efforts to look beyond an individual’s ability to pay as the basis for pursuit of claims against the individual.  In prior years, resource constraints at the DOJ have influenced the qui tam intervention decision‑making process.  Under the new guidance, civil attorneys are urged to consider the seriousness of the individual’s misconduct, whether it is actionable, whether the admissible evidence is likely to obtain and sustain a judgment, and whether pursuit of the action “reflects an important federal interest.”  Civil attorneys are advised to follow the model of their criminal prosecutor colleagues by considering the individual’s misconduct, past history and the circumstances related to the misconduct when determining whether to expend limited federal resources to pursue individual cases.  The Yates Memorandum notes that while cases against individuals may not result in substantial monetary recovery in the short-term, pursuit of these cases will result in “significant long-term deterrence.”  Whether the DOJ implements this directive remains to be seen.

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In summary, senior management, including boards of directors, in-house corporate counsel and chief compliance officers, should take notice of the Yates Memorandum and prepare for the ways this enhanced focus on litigating claims against individuals could impact the company’s action plans for responding to, defending and ultimately resolving FCA qui tam litigation.