SORRELL STRIKES

In my last blog post, I wrote about the possible implications for False Claims Act litigation arising out of the Supreme Court’s opinion in Sorrell v. IMS Health, Inc., -- U.S. --, 131 S. Ct. 2653 (2011), suggesting that we were about to see numerous challenges to off-label and kickback theories under the First Amendment. Well, the time has come. In a case we are litigating with the State of Texas against Janssen that is set to go to trial at the end of November, Janssen recently filed a “bench brief” asking that the jury get a special instruction on Janssen’s First Amendment rights. The court is set to decide whether such an instruction is appropriate on the eve of trial, in late November. In Keeler v. Eisai, an off-label case filed in the Southern District of Florida, the defendant moved to dismiss, arguing in part that the off-label claims were barred by the First Amendment. The district court has not yet ruled on this theory. The response that plaintiffs have made in both of these cases is that the conduct at issue includes false and misleading speech; false and misleading speech is not protected by the First Amendment; and the statutes at issue therefore regulate only speech that is not entitled to First Amendment protections. As I suggested in my previous blog, this argument has strong support in the explicit language of Sorrell. We will be watching to see if the courts agree.

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Loren Jacobson is a partner at Waters & Kraus, LLP, in the firm’s Dallas office. Her practice focuses on qui tam (whistleblower) cases and appellate matters.

Prejudgment Interest in Securities Cases can Substantially Add to a Whistleblower’s Potential Recovery

The Dodd-Frank Act allows whistleblowers who submit information about securities violations to the Securities and Exchange Commission (SEC) to recover from between 10%-30% of any SEC recovery, including civil penalties, disgorgement, and interest. The SEC must recover over $1 million in order for a whistleblower to receive an award for securities violation information. Civil penalties can be up to $150,000 for individuals and $750,000 for entities for each violation. The SEC can also seek disgorgement—which has been defined by the courts as all the profits a defendant derives from his ill-gotten gain. In addition to disgorgement, the SEC can also seek prejudgment interest on disgorgement.

The availability of prejudgment interest is one reason why awards for securities violations can be very large. In most other areas of law only post-judgment interest is available. In other words, the plaintiff only receives interest from the time in which the jury or judge enters judgment until the time that a defendant pays the award. In SEC cases, however, prejudgment on disgorgement may be awarded on a discretionary basis.[1] According to case law, "The time frame for the imposition of prejudgment interest usually begins with the date of the unlawful gain and ends at the entry of judgment."[2] One court explained the theory behind awarding prejudgment interest in saying had the defendant “been able to borrow the millions of dollars he spent that he obtained through his violations, he would have had to have paid significant interest on the loans.”[3] Prejudgment interest can greatly add to the amount the SEC recovers, particularly since there may be years between the time that the defendant commits the fraud and the time a court enters a judgment. For instance, in SEC v. Huff the court awarded $3 million in prejudgment interest on a disgorgement of $10.017 million for one of the defendants in the case.[4] Given the ability of the SEC to recover civil penalties, disgorgement, and prejudgment interest, companies that violate securities laws can expect to face heavy financial consequences for their violations.

    

[1] See S.E.C. v. Huff, 758 F.Supp.2d 1288, 1363 (S.D.Fla. 2010). 

[2] S.E.C. v. Yun, 148 F.Supp.2d 1287 (M.D.Fla. 2001). 

[3] S.E.C. v. Huff, 758 at 1363. 

[4] Id.  at 1366-67. 

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Jennifer L. McIntosh is an attorney at Waters & Kraus, LLP, in the firm’s West Coast practice — Waters, Kraus & Paul. Her practice focuses on class action cases, qui tam (whistleblower), and commercial litigation.

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Sorrell and the Supreme Court’s New Approach to Commercial Speech

Will All Pharmaceutical Regulation Now Be Subject to Heightened Scrutiny?

Early this summer, in Sorrell v. IMS Health, Inc., -- U.S. --, 131 S. Ct. 2653 (2011), the Supreme Court invalidated a Vermont law that prohibited pharmaceutical marketers from using prescriber-identified information, absent the prescriber’s consent, to market drugs to physicians. Because the law did not prohibit other groups—such as research facilities—from using the same information, the Court found that the law imposed both content-based and speaker-based burdens on protected expression. Most notably, the Court expanded the category of what kinds of speech count for the purposes of heightened scrutiny under the First Amendment to include marketing activities, or commercial speech. And, given the application of heightened scrutiny, the Court narrowed the kind of content-based restrictions that might be permissible to curtail commercial speech. The court noted, for example, that the government may have a legitimate interest in protecting consumers from “commercial harms.” Id. at 2672. Specifically, the Court acknowledged that government regulation of commercial speech would be legitimate where the regulations are meant to curtail fraud or the risk of fraud. Id.

As Justice Breyer pointed out in his dissent, this expansion of First Amendment protections to commercial speech (which prior to Sorrell was understood to only be deserving of at most intermediate scrutiny) may undermine many of the regulatory schemes that have been in place for years, including FDA regulation:

The ease with which one can point to actual or hypothetical examples with potentially adverse speech-related effects at least roughly comparable to those at issue here indicates the danger of applying a “heightened” or “intermediate” standard of First Amendment review where typical regulatory actions affect commercial speech.  . . . If the Court means to create constitutional barriers to regulatory rules that might affect the content of a commercial message, it has embarked upon an unprecedented task—a task that threatens significant judicial interference with widely accepted regulatory activity.

Id. at 2676-77, 2678.

Does Sorrell mean that the government cannot put restrictions on off-label marketing? Such restrictions are clearly content-based and speaker-based, since as Justice Breyer points out, the regulatory scheme seeks to regulate the sale of drugs, but not furniture. Id. at 2677. And what about the use of kickbacks? On the one hand, the payment of kickbacks cannot be said to be “speech” and the regulation of kickbacks surely falls within the legitimate interest identified by the Sorrell majority to curtail fraud or the risk of fraud. But one commentator has already suggested that Sorrell means that government cannot interfere with kickbacks that are paid to marketers, since this is content-based interference with speech. How far will the Sorrell case be taken, and how will it affect False Claims Act cases based on off-label and anti-kickback theories? That will remain to be seen. For now, those of us who litigate these cases can only take comfort in the fraud exception laid out by the Sorrell majority, and be willing and able to show that the regulations that underlie the off-label and kickback cases fall within this category of acceptable government regulation.

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Loren Jacobson is a partner at Waters & Kraus, LLP, in the firm’s Dallas office. Her practice focuses on qui tam (whistleblower) cases and appellate matters.

$150 Million Settlement Shows that Patients can be Successful Whistleblowers

Oftentimes, whistleblowers are current or former employees, but the recent case of United States ex rel West v. Maxim demonstrates that patients who notice discrepancies in their medical bills can successfully bring large scale fraud to the government’s attention. Mr. Richard West, the whistleblower in this case, received nursing services in his home provided by Maxim and paid for by the Medicaid program. Mr. West, a Vietnam veteran, received home health care for his muscular dystrophy. He kept detailed records of his care, including the hours and times that he received care. Mr. West discovered that Maxim was overbilling for the care they provided him when he received notice from the government that he exceeded the monthly cap for home health care services. Mr. West stated in regards to his fight against Maxim, “I never took any benefits I wasn't qualified for. Then to find out I was losing services I needed to stay in my own home, because the government was being billed for services I never received-- that was not going to happen!” 

In his complaint, Mr. West alleged that such overbilling was a national practice of Maxim. The government conducted both a criminal and civil investigation into Mr. West’s allegations. Several former employees of Maxim entered guilty pleas to criminal charges. Ultimately, Maxim entered into a settlement agreement of over $150 million, including criminal penalties, to resolve Mr. West’s allegations. Mr. West will receive approximately $14.8 million from the settlement. Mr. West said in regards to the successful outcome of his case, “From my wheelchair on a ventilator and oxygen, I have spent the last seven years in this fight. Sometimes the good guys win.”  This inspiring case demonstrates that patients can play an important role in bringing fraud against the government to light.   

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Jennifer L. McIntosh is an attorney at Waters & Kraus, LLP, in the firm’s West Coast practice — Waters, Kraus & Paul. Her practice focuses on class action cases, qui tam (whistleblower), and commercial litigation.

Retail Pharmacy Fraud

Pharmacies that fail to perform federally-mandated drug safety screening procedures or falsely certify compliance with federal and state professional standard requirements, may be liable for fraud under the False Claims Act. Pharmacists are not just robots paid to dispense drugs prescribed by doctors. As the only healthcare providers trained to understand the multitude of pharmaceuticals and their potential interactions, pharmacists are also paid to exercise their professional judgment and intervene to prevent potentially fatal drug interactions and allergic reactions by contacting prescribing physicians and/or counseling patients.

Federal and state healthcare programs pay pharmacies not just for a product--the prescription drug--but also for this service, known as drug utilization review or DUR. The pharmacy’s DUR responsibilities include screening of prescriptions for potential problems, maintaining records of patient medical histories and allergies, and offering to counsel patients about new prescriptions.

In billing government healthcare programs, pharmacies are often required to certify compliance with their DUR responsibilities and formulary restrictions on the dispensing of certain drugs. During the billing process, pharmacies also interact with point-of-sale or “POS” software systems developed by many government programs, including the Medicaid programs of most states. Using vast databases containing information about drugs, interactions, allergies and the medical/drug histories of program beneficiaries, these POS systems generate warnings or alerts for pharmacists about potential problems with the drugs that they are attempting to dispense and bill. The pharmacist is required to acknowledge each alert and indicate the action he/she has taken to resolve the problem, including contacting the prescribing physician, counseling the patient or otherwise exercising his/her professional judgment.

Pharmacies that knowingly override DUR alerts without performing the specified services, or falsely certify compliance with formulary restrictions, but nevertheless submit claims to government healthcare programs for payment, can be guilty of fraud or false claims actionable under the federal False Claims Act and its state-law counterparts.

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WM. Paul Lawrence, II serves as of counsel to Waters & Kraus, LLP. His practice focuses on appellate, class action, and qui tam (whistleblower) litigation under the False Claims Act.

Bad Medicine in the False Claims Context

Improper Financial Ties Between Hospitals and Their Referring Physicians

On Friday, September 9, 2011, the Department of Justice announced that the United States has partially intervened in a False Claims Act lawsuit against Halifax Hospital Medical Center located in Daytona Beach, Florida, and Halifax Staffing, Inc.[1]  The case was initially filed in July 2009 by the current Director of Physician Services for Halifax Staffing.  A Second Amended Complaint, filed in February 2011, alleged that Halifax “improperly admitted thousands of inpatients even though no medical necessity existed for the admissions and the Defendants have routinely paid excessive compensation, and provided illegal kickbacks, profit-sharing incentives, as well as compensation pooling, to physicians in violation of the Stark and Federal Anti-Kickback laws.”[2] 

The government has partially intervened with respect to allegations that Halifax violated the Stark law[3], which prohibits hospitals and other entities from submitting claims to Medicare for certain health care services referred by physicians with an improper financial relationship with the hospital or other entity.  Here, the U.S. alleges that “Halifax’s contracts with three neurosurgeons and six medical oncologists were improper, in part, because they either paid physicians more than fair market value, were not commercially reasonable or took into consideration the volume or value of the physicians’ referrals.”[4]

According to Tony West, Assistant Attorney General for the Civil Division of the Department of Justice, “Improper financial arrangements between hospitals and physicians threaten patient safety because personal financial considerations, instead of what's best for the patient, can influence the type of health care that is provided.” [5]

The government’s involvement in this case is part of the Health Care Fraud Prevention and Enforcement Action Team (HEAT), an initiative by the Justice Department and the Department of Health and Human Services to focus efforts on reducing and preventing Medicare and Medicaid financial fraud through enhanced cooperation. Robert E. O’Neill, U.S. Attorney for the Middle District of Florida, said that “[b]y bringing cases such as this one, we hope to ensure that precious health care resources are not being wasted as a result of questionable financial relationships between health care providers.”[6]

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[1] U.S. Department of Justice, Office of Public Affairs, “U.S. Joined False Claims Act Lawsuit Against Florida’s Halifax Hospital Medical Center and Halifax Staffing, Inc.,” (Sept. 9, 2011), available at: http://www.justice.gov/opa/pr/2011/September/11-civ-1162.html (hereafter “DOJ Announcement”).

[2] U.S. ex rel. Baklid-Kunz v. Halifax Hosp. Med. Ctr., et al., Case No. 6:09-cv-1002 (M.D. Fla.) (Doc. 29).

[3] 42 U.S.C. § 1395nn, et. seq.

[4] DOJ Announcement.

[5] Id.

[6] Id.

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Melanie Garner is an attorney at Waters & Kraus, LLP, in the firm's Baltimore office. She focuses her practice on toxic tort, product liability, and qui tam (whistleblower) cases.

What Distinguishes Medical Judgment from Fraud?

Many qui tam cases involve decisions by physicians—a decision to certify a patient as eligible for hospice, a decision to order services that are allegedly medically unnecessary, a decision to code a procedure a certain way. In all of these circumstances, defendants will argue that allegations that such conduct is fraudulent are not actionable because differences in scientific opinion, methodology, and judgments cannot support claims under the False Claims Act.

Recently, the U.S. Attorney’s office debunked such arguments in a Statement of Interest filed in U.S. ex rel. Wall v. Vista Hospice Care, Inc., Case No. 3-07-cv-0604 (N.D. Tex.). In the Statement of Interest, the Government argued that where a physician acts with deliberate indifference or reckless disregard of objective facts, a fraud claim can lie. Specifically, in the hospice context, if a physician certifies a patient for hospice care without sufficient information to make the certification or with deliberate indifference or reckless disregard for whether the patient actually meets the objective criteria for such certification, the certification and claims for payment of that patient’s hospice care are false. As the Government noted:

Hospice care provided to a patient who does not meet objective medical criteria for terminal illness can be false or fraudulent under the FCA. A defendant cannot defeat FCA allegations simply due to the existence of a physician certification of terminal illness when there is evidence that the provider knew or should have known such a patient was not terminally ill.

This reasoning has equal force in the other circumstances described above:  where there are allegations that a physician ordered unnecessary procedures or services, or deliberately upcoded procedures, so long as there is a good faith allegation that the physician knowingly acted in direct contradiction to objective facts, an FCA claim should lie. The key is to be able to show that the physician’s conduct is not being challenged as erroneous, but as fraudulent.

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Loren Jacobson is a partner at Waters & Kraus, LLP, in the firm’s Dallas office. Her practice focuses on qui tam (whistleblower) cases and appellate matters.

Government Contractors Who Fail to Pay Davis-Bacon Prevailing Wages are Liable Under the False Claims Act

The Davis-Bacon Act requires that companies with contracts with the federal government pay workers the prevailing wage of the area in which the work is performed. The Department of Labor is responsible for determining the prevailing wage. Federal regulations provide that contractors submit weekly payroll certifications, including certifications for all their subcontractors. Additionally, Davis-Bacon and federal regulations provide that government contractors are responsible for ensuring that subcontractors pay Davis-Bacon wages.  

Cases against contractors have been brought under the False Claims Act. United States ex rel. Wall v. Circle C., 700 F.Supp.2d 926 (M.D.Tenn. 2010) is an important case for both its holdings in regards to subcontractors and for its holding in regards to calculating damages. In this case the defendant, Circle C, was awarded a contract at Fort Campbell, an Army base in Kentucky. An employee who worked for a subcontractor of Circle C alleged that Circle C violated the False Claims Act by submitting false certifications to the government that it complied with Davis-Bacon when the subcontractor was not paying prevailing wages. The employee brought a whistleblower action on behalf of the United States in the Middle District of Tennessee. The United States brought a motion for summary judgment and Circle C moved to dismiss and for a judgment on the record.  

Ultimately, the court ruled in favor of the United States and awarded treble damages. According to the Court, Circle C did not take measures to ensure that its subcontractor, Phase Tech, was paying prevailing wages to its electricians. The Court found that Circle C submitted false payroll certifications by failing to list that Phase Tech had performed the vast majority of the electrical work on the contract. Additionally, Circle C’s certifications did not match Phase Tech records. At the time that Circle C submitted its certifications the prevailing wage for an electrical worker in Kentucky was $19.19 an hour with $3.94 in fringe benefits. Instead of this prevailing wage, Circle C’s subcontractor had paid some of its electrical workers $12-$16 an hour. The United States paid Circle C a total of $553,807.71 for the electrical work on the project that was performed by its subcontractor. Although Circle C argued that its damages should be the difference between the prevailing wage and the wages it subcontractors actually paid, the court refused to discount the damages in this way. The court entered a judgment of $1,661,423.13 against Circle C, which included treble damages but no statutory penalties.  

The decision against Circle C is important for several reasons. It affirms that contractors have a duty to ensure that subcontractors pay Davis-Bacon wages. In its decision the court noted that defendant did not have a contract with their subcontractor that provided that the subcontractor would comply with Davis-Bacon and did not attempt to inform the subcontractor of their duty to comply with Davis-Bacon. The court affirmed that defendants will not escape False Claims Act liability by willfully remaining ignorant of whether their subcontractors comply with Davis-Bacon. Most importantly, it provides that the measure of damages is not just the difference between wages actually paid and prevailing wage. Instead, damages are calculated by the total amount of prevailing wages that should have been paid. This is important because if defendants were not held accountable for the entire amount of their fraud, there would be a greater temptation to risk paying less than Davis-Bacon wages. Given that contractors may also be responsible for paying treble damages and other statutory penalties for their fraud, the False Claims Act is a powerful tool for ensuring that contractors pay Davis-Bacon wages on federal contracts.    

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Jennifer L. McIntosh is an attorney at Waters & Kraus, LLP, in the firm’s West Coast practice — Waters, Kraus & Paul. Her practice focuses on class action cases, qui tam (whistleblower), and commercial litigation.

Illicit Marketing of Drugs and Devices Extends Beyond Off-Label Promotion to False Marketing by Means of Biased Medical Research

For years, the Justice Department and qui tam whistleblowers have pursued cases in which drug or device manufacturers market their products for unapproved “off-label” uses after gaining FDA approval for limited “on-label” indications. Although doctors can prescribe drugs and devices for any indication they deem medically appropriate, whether on or off-label, it is illegal for manufacturers to promote their products for off-label uses. Also, government healthcare programs generally do not reimburse for experimental uses of drugs and devices that are not medically accepted as reasonable and necessary.

In the typical off-label case, the whistleblower and the government complain not only about off-label promotion, but also about kickbacks paid to clinicians to influence their script-writing decisions and/or money lavished upon medical researchers to bias their published reports in ways that downplay safety risks and overstate the efficacy of the manufacturer’s drug or device. Although qui tam or False Claims Act cases of this sort are generally lumped together under the rubric of “off-label marketing,” I believe the real heart of these cases is the use of drug or device maker money to illicitly influence the script writing decisions of clinical physicians, whether the drugs or devices in question are used on or off-label.

Generally, to violate the False Claim Act, a manufacturer must “cause” others (often doctors or pharmacists) to submit false or fraudulent claims to government healthcare programs.  A claim made against Medicare or Medicaid in many of these cases is false or fraudulent not so much because it involves an off-label use (a doctor can, after all, prescribe an off-label use if it is medically indicated), but because the medical decision to prescribe the drug or device has been influenced by kickbacks or false information provided to the clinician.

In other words, illicit or false marketing that is actionable in a case under the False Claim Act can take the form not only of off-label marketing, but also: (1) marketing that is illicit because of money paid to clinical physicians to influence their script-writing decisions—a garden variety kickback; and (2) marketing that is illicit because of money paid to medical researchers to  bias the published medical literature, thereby influencing the script-writing decisions of clinicians—a kickback once removed in the chain of causation.  

The second of these illicit marketing schemes has yet to be well-recognized as a False Claims Act violation, but should be. The causation test generally employed in False Claims Act cases is foreseeablility. If a drug or device maker can reasonably foresee that publication of biased or corrupted medical literature will cause submission of claims for its product to government healthcare programs, then the test of causation is satisfied. Claims caused by this sort of marketing are false or fraudulent not only because they have originated from kickbacks that create conflicts of interest for researchers, but also because biased or corrupted research studies can be considered false statements or false documents used to get claims paid within the meaning of the False Claims Act.

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WM. Paul Lawrence, II serves as of counsel to Waters & Kraus, LLP. His practice focuses on appellate, class action, and qui tam (whistleblower) litigation under the False Claims Act.

Blowing the Whistle: A Civic Duty?

On July 22—one year after President Obama signed the Improper Payments Elimination and Recovery Act[1]—Senators Tom Carper (D-Del.), Joe Lieberman (I-Conn.), Susan Collins (R-Maine), and Scott Brown (R-Mass.) introduced the 2011 Improper Payments Elimination and Recovery Improvement Act (S. 1409)[2].  The purpose of the bill, which includes provisions such as the establishment of a “Do Not Pay List,” is “[t]o intensify efforts to identify, prevent, and recover payment error, waste, fraud and abuse within Federal spending.”[3]  According to a press release on Senator Carper’s website, Senator Lieberman urged: “The nation’s weak economy demands that the federal government find more and better ways to avoid wasting $125 billion a year in taxpayer funds because of improper payments—whether to contractors who have been barred from working with the government or to deceased Social Security recipients.”[4] Senator Collins similarly stated: “Improper payments remain a serious problem across the government and cost taxpayers billions of dollars each year. . . ., not including major programs that aren’t even reporting their payment errors yet, such as the Medicare prescription drug program and about half the Pentagon’s payments.”[5]  

The current and proposed Acts target “improper payments,” which are “payments made in error, such as payments made to the wrong person or in the wrong amount,”[6] as opposed to payments made in response to fraudulent or false claims submitted to the government for payment by individuals or corporations, which are the subject of the False Claims Act.[7] Unlike the increased internal government oversight provided by the proposed legislation, the False Claims Act allows private citizens to file a qui tam (or whistleblower) lawsuit on the government's behalf to aid in the recovery of monies paid when the government has been defrauded through any federally funded contract or program. Although statistics regarding annual recoveries from qui tam lawsuits are available through the Department of Justice, it is difficult (if not impossible) to pinpoint the total amount of false claims for payment submitted to the government each year, especially where such claims go unreported.  Recent discussion on limiting improper payments is, nevertheless, a reminder of the powerful tools already available to help recover monies paid for false claims submitted to the government and to penalize those who made them.     

Of course, the decision to file a qui tam lawsuit is an individual one based on any number of personal and legal considerations; however, in today’s economy—in the wake of protracted debates over debt ceilings and downgraded credit ratings—query whether filing such a suit may be viewed as a civic duty . . . like serving as a juror or potential juror. What do you think?

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[1]See White House Press Release, “President Obama to Sign Improper Payments Elimination and Recovery Act” (July 22, 2010), available at: http://www.whitehouse.gov/the-press-office/%20president-obama-sign-improper-payments-elimination-and-recovery-act (last visited Aug. 8, 2011).

[2] The full text of the proposed bill is available at: http://www.gpo.gov/fdsys/pkg/BILLS-112s1409is/pdf/BILLS-112s1409is.pdf (last visited Aug. 8, 2011).

[3] See id.

[4] See Press Releases - Newswoom – Tom Carper, U.S. Senator for Delaware, available at http://carper.senate.gov/public/index.cfm/pressreleases?ID=457fc5ce-06b7-4d3e-8dfc-4350a5c1d8e4 (last visited Aug. 8. 2011).

[5] See id.

[6] See id.

[7] 31 U.S.C. § 3729, et seq.

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Melanie Garner is an attorney at Waters & Kraus, LLP, in the firm's Baltimore office. She focuses her practice on toxic tort, product liability, and qui tam (whistleblower) cases.

New Wrinkle in Consideration of Whether Severance Agreement Bars Qui Tam Suit

Back in May, I wrote about whether a general release in a severance agreement waived a potential whistleblower’s ability to bring a False Claims Act suit. An opinion out of the U.S. district court in Boston adds a new wrinkle to the analysis.

In general, courts have held that a general release in a severance agreement would not bar a whistleblower from bringing a qui tam suit if the release was signed prior to the whistleblower filing suit. Courts reasoned that in such circumstances it would violate public policy to bar the suit because they did not want to allow companies committing fraud to prevent the government from learning of their fraud by having employees sign severance agreements. Under the same reasoning, if the release were signed after a whistleblower brought suit, and therefore the government already had been notified of the fraud, those public policy issues were no longer a concern, and the release would bar the whistleblower’s claims.

In U.S. ex rel. Nowak v. Medtronic, Inc., the whistleblower had signed the severance agreement prior to bringing suit, but the court nevertheless held that his claims were barred. Why? The Nowak court found that many of the allegations brought by the whistleblower had been publicly disclosed—in news articles, to the FDA, and in other sources. The court thus found that since the government would have been aware of the fraud from the public disclosures prior to the whistleblower bringing suit, there was no public policy reason to prevent the release in the severance agreement from barring the whistleblower’s suit.

Thus, it is no longer generally the case that a release in a severance agreement signed prior to a whistleblower bringing a qui tam suit will not bar the suit. If information relating to the whistleblower’s allegations is in the public domain such that the government would be aware of the possible fraud, the release could bar the whistleblower from bringing suit.

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Loren Jacobson is a partner at Waters & Kraus, LLP, in the firm’s Dallas office. Her practice focuses on qui tam (whistleblower) cases and appellate matters.

DOJ Considers Joining Lawsuit Against Home Depot for Violating Buy American Act; Several Companies Settle Similar Allegations

Home Depot confirmed in June of 2011 that the Department of Justice (DOJ) is “taking a closer look” at allegations in a complaint filed in federal court that Home Depot violated the False Claims Act.[1]  The complaint alleges that Home Depot violated federal law by selling products manufactured in China and other countries to the federal government, in violation of the Buy American Act.  The Buy American Act requires that sellers to the federal government provide only products which were made in the United States, or one of the countries which the United States has a trade agreement with.  China does not have a trade agreement with the United States, and so products manufactured in China may not be sold to the United States government under federal law unless the products fall under a recognized exception to the Buy American Act.   Although news that the DOJ may intervene in the suit against Home Depot came recently, the DOJ has been investigating the case since the complaint was first filed in 2008.  Recently, the Judge in this case denied Home Depot’s Motion to Dismiss—a positive sign for the plaintiffs. 

Although the lawsuit against Home Depot has not yet been resolved, Staples, Office Depot, and Office Max have settled similar allegations.  In 2005 Staples entered into a $7.4 million settlement with the Department of Justice regarding its alleged violations of the Buy American Act.[2]  The DOJ also entered into a $9.8 million settlement with Office Max and a $4.75 million settlement with Office Depot regarding their alleged violations which arose under the same complaint.   

Home Depot, Staples, Office Max, and Office Depot are not the only companies that have faced allegations that they violated the Buy American Act.  In January of 2011 the DOJ announced that Fastenal, a Minnesota-based chain of hardware stores, reached a $6.25 million settlement with the DOJ over allegations that it violated the Buy American Act.[3]  Whatever the outcome may be in the pending lawsuit against Home Depot, it is clear that the DOJ is taking a serious stand against companies which falsely certify that products sold to the government were made in the United States. 

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[1]Maxwell Murphy, Justice Dept Considers Joining Home Depot Whistle-Blower Suit, Wall Street Journal, June 27, 2011, http://online.wsj.com/article/BT-CO-20110627-711891.html.

[2] Minnesota-based National Hardware Store Distributor Fastenal to Pay U.S. $6.25 Million to Resolve False Claims Act Allegations, Department of Justice Press Release, January 13, 2011, http://www.justice.gov/opa/pr/2005/October/05_civ_549.html. 

[3] Staples Pays United States $7.4 Million to Resolve False Claims Act Allegations, Department of Justice Press Release, October 18, 2005, http://www.justice.gov/opa/pr/2011/January/11-civ-042.html.

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Jennifer L. McIntosh is an attorney at Waters & Kraus, LLP, in the firm’s West Coast practice — Waters, Kraus & Paul. Her practice focuses on class action cases, qui tam (whistleblower), and commercial litigation.

Mortgage Fraud as the Basis for a Qui Tam (Whistleblower) Lawsuit

Although claims of mortgage fraud are abundant in our daily news stories (and perhaps the personal accounts of our family and friends), not all mortgage fraud forms the basis of a qui tam (whistleblower) lawsuit. In order to bring a qui tam suit in which a relator (the whistleblower) files suit on behalf of the government and may be entitled to a portion of the government’s recovery, there must be evidence of some sort of fraud against the government. Thus, fraudulent conduct by banks against homeowners or an individual against their lender would not necessarily give rise to a successful qui tam action, absent evidence of harm suffered by the government.

A possible example of such fraud is the subject of a lawsuit currently pending against Deutsche Bank AG and its subsidiary MortgageIT Inc. in the U.S. District Court for the Southern District of New York.[1] In that case, brought under the Federal False Claims Act, the United States has alleged, among other things, that Deutsche Bank and MortgageIT falsely certified that they had complied with various HUD (Department of Housing and Urban Development) requirements in order to obtain FHA (Federal Housing Administration) insured loans on behalf of their borrowers. More specific examples of the fraudulent conduct include allegations of failing to conduct due diligence in connection with a gift being used to fund a transaction, failing to assemble a borrower’s credit history, failing to document and verify a borrower’s investment in a property, failing to verify a borrower’s employment, and failing to secure a deposit—all while certifying that such due diligence had been completed. The United States further alleged that in each instance, the borrower subsequently defaulted on the mortgage and, as a result, HUD paid hundreds of millions of dollars in FHA insurance claims.[2]              

If you have witnessed or otherwise have personal knowledge of the government being cheated out of money through the fraudulent conduct of a bank, its members or employees, or any other entity or individual, you may be able to file a qui tam lawsuit to assist the government in recovering that money, and attorneys at Waters & Kraus, LLP will be happy to talk to you about your potential case.

[1] United States v. Deutsche Bank AG, et al., Docket No. 11-CIV-2986 (S.D.N.Y May 9, 2011).

[2] See id.

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Melanie Garner is an attorney at Waters & Kraus, LLP, in the firm's Baltimore office. She focuses her practice on toxic tort, product liability, and qui tam (whistleblower) cases.

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Can a Government Employee Bring a False Claims Act Case?

In our recent case, U.S. ex rel. Black & Montiel v. Novo Nordisk, which the Department of Justice settled for $25 million, one of the relators was a former Army officer who got some of the information that formed the basis for the lawsuit while he was in the Army. The question that the government and relators’ counsel struggle with in these cases is whether a government employee can be a relator. The Department of Justice generally takes a very strong stance on that issue, and will often tell government employee relators at the beginning of a case that they are not considered proper relators. During recent efforts to amend the False Claims Act, the DOJ supported an amendment that did not make it into any of the final bills that explicitly barred government employees from becoming relators.

For all intents and purposes, the viability of a False Claims Act suit brought by a government employee depends on whether any of the information underlying the complaint has been publicly disclosed. Under the FCA, if there has been a public disclosure, the relator has to qualify as an “original source,” which in turn requires the relator to have “voluntarily” disclosed the information about the fraud to the government. The government has argued that a government employee who is charged with disclosing fraud as part of his job cannot “voluntarily” disclose the information. The government is concerned, in these situations, that government employees who are charged with ferreting out fraud will file qui tam cases instead of doing their job. Several courts, considering these public policy implications, have accepted this argument. See U.S. ex rel. Fine v. Chevron, 72 F.3d 740 (9th Cir. 1996). But other courts have found that under certain circumstances, a government employee can be a relator. For example, if the employee has a job that does not require the reporting of fraud. Thus, while a government auditor may have trouble showing he is a relator, a postal worker, whose job it is to handle mail rather than uncover fraud, has a better chance at qualifying as an original source. See U.S. ex rel. Holmes v. Consumers Ins. Group, 318 F.3d 1199 (10th Cir. 2003). A government employee is also more likely to qualify as a relator where she reports the fraud up her chain of command,  and nothing was done about it, prior to filing suit, since under those circumstances, public policy favors consideration of the employee as an original source.

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Loren Jacobson is a partner at Waters & Kraus, LLP, in the firm’s Dallas office. Her practice focuses on qui tam (whistleblower) cases and appellate matters.