Governments at all levels are increasingly turning to federal and state false claims act statutes in an attempt to combat fraud against the government and to address the record deficits they are running. At the same time, legislatures have been steadily broadening the scope of what constitutes a false claim, while trying to limit the available defenses to these actions. Parties that get sued under false claims act legislation are subject to substantial attorney’s fees and other litigations costs, and face the possible risk of losing access to precious government contracts and programs. Thus, while companies must be prepared to litigate both meritless and meritorious false claims act cases, they should carefully and prudently consider and take preventative measures to try to limit their possible exposure to false claims act litigation. While this advice applies with even more force to companies in industries that are heavily targeted, such as healthcare, pharmaceuticals, energy and defense, any business that interacts with the government should consider their procedures and evaluate their potential exposure to such claims.
When dealing with the False Claims Act, it is most important to be proactive in identifying potential issues, performing a thorough and independent investigation, and addressing any potential issues at the earliest stage possible. This article summarizes seven measures that companies should consider to try to limit their potential exposure to False Claims Act liability.
1. Establish a Compliance Department. There are still sizeable corporations that do not have a compliance officer, let alone a compliance department. Failing to establish a compliance department, however, is asking for trouble. The compliance department is a vital tool in identifying potential issues before they become major problems. Further, while it is important to have a compliance department, it is equally important to ensure that it has the resources to make it effective, including clear policies and procedures and the necessary access to and buy-in of corporate decision makers. Although compliance officers historically reported to the company’s general counsel, the emerging (and now accepted) trend is to have an independent compliance department, the head of which reports to the CEO. Additionally, in a variety of areas (including with respect to the False Claims Act), regulators will consider whether your company had an effective compliance department with adequate resources. Consequently, it is prudent for any compliance department to establish procedures to document all compliance-related activities. As the saying goes, the legal department will tell you if you can do something, but the compliance department will tell you if you should do something.
2. Encourage Employees to Report Internally. A company should strongly encourage its employees to report concerns within the company. Set up a variety of ways for employees to report their concerns and a system to report violations, and make sure all employees are aware of them. While employees should be comfortable reporting their concerns and should be assured that they will not be punished for doing so (see point five below), anonymous reporting may encourage employees to be freer about reporting perceived violations. For example, consider setting up an anonymous phone number or email address that enables employees to report concerns without fear of disclosing their identity. And do not assume that all potential whistleblowers are disgruntled employees. While some whistleblowers are unhappy and (not surprisingly) motivated by financial gain, many truly like their employer and believe they are acting in its best interest. In fact, a number of recent qui tam actions have been brought by former in-house counsel and compliance officers. In any event, just because an employee may be “bitter” does not mean his or her concerns are without any merit.
3. Regularly Check for Problems Internally. Be persistently vigilant about attempting to identify potential problems before any employee feels the need to report outside the company. Establish proactive internal audit programs where necessary. When checking within, involve your HR department and make sure HR personnel are working with compliance. Oftentimes HR is more in tune with the particular employees who are aware of problems and/or likely to raise complaints outside the company. Issue regular questionnaires to employees (particularly in key areas dealing with the government) and follow up to ensure you have received feedback. Use exit interviews with employees to discover any complaints they might have, and consider having exiting employees sign a certification that they are not aware of any unlawful activity and have told you about any concerns they might have. Alternatively, consider going so far as to ask current employees for annual certifications regarding whether they are aware of any violations.
4. NEVER Ignore a Complaint. Once an employee reports a complaint, what do you do? Well, one thing you never do is ignore the complaint. You should investigate every complaint (see above about ensuring that compliance has the necessary resources to do so). Bring in outside counsel if necessary, but never ever ignore a complaint.
Depending on the issues involved, there may be a variety of ways to investigate a complaint. HR, with active oversight from the legal or compliance departments, can conduct an investigation if the alleged conduct is minor and easily remedied. Otherwise, the legal or compliance departments should manage the investigation. Problems, however, often appear less serious at first than they truly are. Therefore, it may be prudent to involve outside counsel early in the process until the scope of the issue is determined. The added expense up front may save substantial time and expense later on. Moreover, regardless of who is conducting the investigation, be sure to evaluate the company’s document preservation obligations. You do not want to compound a potential false claims issue by destroying evidence.
After investigating, if you disagree with the employee reporting the complaint, consider sharing (or at least explaining) your findings with him or her. Doing so may convince the employee that you took the complaint seriously, and may eliminate his or her personal need to report outside the company. Additionally, if the government becomes involved, your investigation will be an important way to show the government that you took the complaint seriously. While you can explain that you believe that the whistleblower is wrong, just telling that to the government does not constitute a thorough response to the allegations. Additionally, the government will likely be as interested in your investigation of the alleged misconduct as it is in the misconduct itself. The government will not be surprised that a corporation may have some employees that acted improperly. However, the government will be unhappy to find out that the company ignored the complaint or tried to sweep issues under the rug by failing to conduct a thorough, independent investigation of the allegations, including ensuring that such conduct is not repeated and those responsible are disciplined appropriately.
5. NEVER Retaliate against the Reporting Employee. Although this should be obvious, it bears repeating and reinforcing. Retaliating against an employee may be the quickest way to turn a reporting employee into a qui tam relator. Keep in mind that retaliation can comprise a wide variety of activities. For example, it is not just terminating the employee (after all, a relator will not necessarily quit his or her job). It also includes demotions, reductions in pay, responsibility, or reporting structure, disciplining, or many other negative consequences. And it matters what state you are in. For example, New York allows an employee to provide company documents to the attorney general to aid a False Claims Act investigation. You should certainly confer with counsel before barring any employee from data or documents they need for their work duties. Lastly, “coincidences” matter in this context. An employee with a previously exemplary record who has received nothing but sterling reviews may very well claim retaliation if he or she starts receiving negative performance reviews or other forms of discipline after reporting a complaint. Do not retaliate: it’s just not worth it.
6. Regularly Train Your Employees. Ensure that employees (particularly those dealing with the government) are familiar with the False Claims Act and its requirements and receive proper training in all relevant areas related to their employment. A single annual training may not be enough. In addition, consider semi-annual refresher courses for those in the most relevant areas, and also provide regular and relevant informal updates. If an employee has a question about an issue that would implicate a false claims statute (including whether it applies in a particular situation), always make sure he or she knows where to turn for guidance. However, do not assume that non-lawyers will automatically know to seek guidance on these issues. Legal and compliance departments should proactively try to identify and eliminate potential problems before they arise.
7. Consider Self-Disclosure. If you believe a complaint has merit, evaluate whether you should self-disclose that violation. Federal law may require you to do so. For example, the Federal Acquisition Regulation requires contractors to “timely” self-disclose “credible evidence” of certain violations of the False Claims Act. But even if you are not required to self-disclose, doing so may be in your best interest. Note that self-disclosure does not eliminate a potential problem, and you should definitely get advice from outside counsel before doing so. Additionally, there is generally a short window of time in which to self-report violations. For example, the False Claims Act requires a defendant to provide all information to the government about a perceived violation within 30 days of first obtaining that information. Depending on the circumstances and seriousness of the alleged conduct, you also will need to determine where to report the violation (e.g., the agency’s inspector general, the Department of Justice, United States Attorney, etc).
While this is a complicated and fact-specific issue, there are, generally speaking, several benefits to self-disclosure. These benefits include (i) potentially lower damage payments; (ii) avoidance of penalties; (iii) reducing the risk of being barred from participating in certain federal programs; (iv) less likely imposition of corporate integrity agreements; (v) greater likelihood of reaching a global resolution with other interested agencies; (vi) avoidance of a formal governmental investigation; and (vii) blunting the impact of whistleblowers. Self-disclosure, however, may not prevent a lawsuit (whether from the government or a qui tam relator), and providing documents to the government may result in a privilege waiver (although the government cannot require you to waive privilege). The government will also expect you to continue cooperating once you have made a self-disclosure, and the thoroughness of your internal investigation will be relevant. Therefore, you should be sure to weigh all pros and cons before contacting the government. After doing so, you may find self-disclosure to be in your company’s best interest.
Conclusion
The False Claims Act is a potent weapon that the government has and will continue to use to try to address perceived fraud. While companies must be prepared to litigate aggressively when necessary, this is truly an area in which an ounce of prevention is worth a pound of cure. For the foreseeable future, any company that interacts with the government in any manner must be prepared to address false claims issues early and effectively. The above suggestions are cost-effective ways to try to limit potential false claims liability and to ensure that any existing issues are addressed before they become more significant.
Published March 22, 2013.
