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Doj To Consider Dismissing Qui Tam Actions After Declination – Even Over The Objection Of The Relator

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  • Posted on: Feb 12 2018

Last November, this Blog wrote about an announcement Michael D. Granston (“Granston”), Director of the DOJ Commercial Litigation Branch, Fraud Section, made at a health care conference concerning the DOJ’s intention to seek dismissal of meritless qui tam cases. (Here.) Since the speech was not accompanied by a policy memorandum, there was skepticism within the False Claims Act (“FCA”) bar that there would be any material change in policy. That skepticism was met last month with a memo, titled “Factors for Evaluating Dismissal Pursuant to 31 USC 3170(c)(2)(A),” that Granston sent to all attorneys in the Fraud Section and all Assistant U.S. Attorneys handling FCA cases that encourage the DOJ to “seek[ ] dismissal” of non-intervened qui tam cases that “lack substantial merit” and discusses the factors that should guide the exercise of dismissal discretion (the “Granston Memo”).  A copy of the Granston Memo can be found here.

Under the FCA, whistleblowers, also known as relators, can sue persons or entities believed to have engaged in a fraud against the government. A relator can recover a reward equaling up to 35% of the damages and penalties (up to $21,916 per fraudulent filing) recovered by the government. Such an economic benefit serves as a powerful incentive for whistleblowers to come forward and report fraud on the government.  Critics (and the FCA defense bar) claim, however, that this economic incentive too often results in the filing of costly, meritless qui tam actions.

When a qui tam action is commenced, the complaint is filed under seal, to provide the Department of Justice (“DOJ” or “Department”) with time to investigate the allegations and decide whether to intervene and join the lawsuit. The FCA also provides that if the government determines its interests are not served by the lawsuit, it may seek dismissal, over the relator’s objections, provided the relator has an opportunity to be heard. 31 U.S.C. § 3730(c)(2)(A).

“Historically,” the DOJ has used Section 3730(c)(2)(A) “sparingly,” in large part because the FCA permits relators to pursue their claims even when the government declines to intervene in the action. And, because declination can be based on factors other than the merit of the claim, the government has been “circumspect” in its use of Section 3730(c)(2)(A).

Nevertheless, in order to fulfill its “gatekeeper role in protecting the False Claims Act,” and “to advance the government’s interests, preserve limited resources, and avoid adverse precedent,” the Granston Memo encourages Department attorneys to exercise their “authority to dismiss cases” under certain circumstances. The memo identifies a number of factors, gleaned from cases in which the government has sought dismissal, that Department attorneys should consider in determining “whether the government’s interests are served” by the qui tam action. These factors, which are intended to “ensure consistency across the Department,” and “serve as a basis for evaluating whether to seek to dismiss future matters,” include: (1) “curbing meritless cases,” “where a qui tam complaint is facially lacking in merit-either because relator’s legal theory is inherently defective, or the relator’s factual allegations are frivolous”; (2) “preventing parasitic or opportunistic qui tam actions,” where the relator only provides the government with “duplicative information” or “adds no useful information to the investigation”; (3) “preventing interference with agency policies and programs,” “where an agency has determined that a qui tam action threatens to interfere with an agency’s policies or the administration of its programs and has recommended dismissal to avoid these effects”; (4) “controlling litigation” and “avoid[ing] the risk of unfavorable precedent,” “to protect the Department’s litigation prerogatives,” such as to “avoid interference with the government’s ability to litigate the intervened claims”; (5) “safeguarding classified information and national security interests,” “particularly” in cases “involving intelligence agencies or military procurement contracts”; (6) “preserving government resources” in cases “when the government’s expected costs are likely to exceed any expected gains”; and (7) addressing “procedural errors” by relators, when they “frustrate the government’s efforts to conduct a proper investigation.”

The Granston Memo notes that “the factors identified above are not mutually-exclusive,” and are not “intended to constitute an exhaustive list.”  Indeed, “there may be other reasons for concluding that the government’s interests are best served by the dismissal of a qui tam action.”

Having said that, the Granston Memo contains an important qualifier, noting that “to maximize its resources” the DOJ typically only investigates a whistleblower action to the point needed to decide whether to decline intervention. Since that level of investigation “may not equate to a conclusion that no fraud occurred,” the relator should be afforded “an opportunity to further develop the case” before dismissal is considered.

Of the foregoing factors, perhaps the most interesting for defendants is the third – “preventing interference with agency policies and programs.” In discussing this factor, the Granston Memo recognizes that weak qui tam actions can be costly to entities that do business with the government: “[T]here may be instances where an action is both lacking in merit and raises the risk of significant economic harm that could cause a critical supplier to exit the government program or industry.” In support, the memo cites to a recent decision coming out of the Fifth Circuit, United States ex rel. Harman v. Trinity Industries, 872 F.3d 645 (5th 2017), in which the court reversed a $680 million judgment because the government agency had decided that the relator’s purported violations were not material to the government’s decision to pay. The memo’s citation to Harman suggests that the DOJ would be more inclined to dismiss cases where liability hinges on a minor contractual or regulatory violation that would not pass muster under  Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), but which could cost significant resources to defend in a qui tam action. Under Escobar, an alleged false certification must be material to a federal agency’s decision to pay the claim for the claim to become an FCA violation. [Ed. Note: It is possible that the guidance in the Granston Memo is intended to protect against adverse decisions post Escobar.]

This Blog has written about Escobar and its progeny here, here, here, here, here, here and here.

In a nod toward allowing relators the opportunity to decide whether to proceed with a qui tam action, the Granston Memo recommends that “to the extent possible,” Department attorneys should “consider advising relators of perceived deficiencies in their cases as well as the prospect of dismissal so that relators may make an informed decision regarding whether to proceed with the action.” Such information can save time and resources, especially when the agency affected by the qui tam action opines on “whether dismissal is warranted.” As noted in the memo, “[i]n many cases, relators … choose to voluntarily dismiss their actions, particularly if the government has advised the relator that it is considering seeking dismissal under section 3730(c)(2)(A).”

Takeaway

“Of the more than $3.7 billion in FCA settlements and judgements reported by the Department in 2017, $3.4 billion came from cases initiated by whistleblowers, who received nearly $393 million in whistleblower rewards.” (Here.)  In light of these statistics, this Blog remains skeptical that the Granston Memo will result in a material departure from past Department practice. Indeed, this Blog expects government attorneys to remain resistant to aggressively dismissing qui tam actions.

Notwithstanding, the Granston Memo provides useful guidance for relators and defendants to consider in cases in which the strength of the action is in question – guidance that can save the parties, and the government, significant costs in prosecuting or defending the action.

For defendants, it is reasonable to expect they will use the Granston Memo to persuade the DOJ that the qui tam complaint in which they are the subject lacks merit and should be dismissed following the initial meeting with the DOJ while the case remains under seal. For relators, it means that, while the case is under seal, they should be given the opportunity to use the factors to further develop their claims before the government acts – either by declination or a motion to dismiss.

In any event, whether the Granston Memo portends a sea change in Department policy or is simply a reminder for government attorneys to exercise their statutory authority to dismiss a qui tam action remains to be seen.  One thing is certain, however, even a small shift in the DOJ’s willingness to exercise its dismissal authority would be welcome by FCA defendants.

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