year of the whistleblower: how health care reform & … of the...a result of the bernie madoff...

Year of the Whistleblower:How Health Care Reform &

Dodd-Frank are Tipping the Scales

Juanita Brooks

Matthew Levine

Bill Mateja

Jose Sierra

© Fish & Richardson 2010

Agenda

I. The New Legal Landscape

II. Areas of Greatest Concern

III. Taking Proactive Steps — Now

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I. The New Legal Landscape

A. Fraud Enforcement and Recovery Act of 2009 (“FERA”)

B. Patient Protection and Affordable Care Act of 2010 (“PPACA”)

C. Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”)

D. Other Developments

1. “Park Doctrine”

2. Increased Foreign Corrupt Practices Act (“FCPA”) Enforcement

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Fraud Enforcement and RecoveryAct of 2009 (“FERA”)

FERA

Key Changes to FCA:

A. Direct Presentment Not Required

B. Intent Replaced by “Materiality”

C. Expansion of “Reverse” False Claims Liability

D. Greater Whistleblower Protection

E. Broader Use of Civil Investigative Demands (CIDs)

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Direct Presentment Not Required

Following FERA, liability attaches to a false claim presented to a “contractor, grantee or other recipient, if the money or property is to be spent or used on the government’s behalf or to advance a government program or interest.”

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Intent Replaced by Materiality

FERA reverses Allison Engine Co. v. U.S. ex rel. Sanders, 128 S.Ct. 2123 (2008) (requiring an element of intent – i.e., D must intend for Govt itself to pay the claim – to impose liability).

FERA expands liability to use of false records or statements “material” to false/fraudulent claims.

Objective Standard: “Material” = “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.”

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Expansion of “Reverse” False Claims Liability

“Reverse” False Claims Liability attaches to:

“Any person who… knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government…”

“Obligation” means: “an established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment…” (emphasis added)

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Greater Whistleblower Protection

No longer applies to just employees, but also to contractors and agents.

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Broader Use ofCivil Investigative Demands (CID)

CIDs are powerful investigative tools that include not only document requests but also interrogatories and depositions

Pre-FERA, only the Attorney General could authorize the use of CIDs

FERA authorizes the Attorney General to delegate CID authority to designees

FERA specifies that any information obtained by the Attorney General or a designee may be shared with any qui tam relator if deemed necessary to the investigation

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The Patient Protection and Affordable Care Act of 2010 (“PPACA”)

PPACA

Further Changes to FCA:

A. Anti-kickback Violation Now Basis for FCA Liability

B. 60-day Rule for Claims Retention of Overpayments

C. Public Disclosure Bar Lowered

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PPACA amends the FCA to provide that a violation of the Anti-Kickback statute constitutes a fraudulent act under the FCA.

—For that matter, a violation of the criminal health care fraud laws is now a predicate action for violation of the FCA.

—And, federal health care fraud laws have been amended to provide that a person need not have actual knowledge of the laws or specific intent to commit a violation of the laws.

PPACA

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PPACA further expands liability for reverse false claims.– Defines an “overpayment” as “any funds that a person

receives or retains [from a federal payor] to which the person, after applicable reconciliation is not entitled . . . .”

– Provides that all overpayments must be refunded within 60 days after “identification” of the overpayment.

– Any overpayment retained by a person after the deadline for reporting and returning such an overpayment is defined as an "obligation" subject to FCA.

– Very murky area as to when one supposedly “identifies” an overpayment!

PPACA

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Until PPACA, a whistleblower needed to have direct and independent knowledge of false claims submitted to the government.

Information that had already been publicly disclosed could not serve as the basis of a whistleblower suit.

Under PPACA, a whistleblower need not be the “original source” of the information.— The government must now be a party in a hearing in order for the

disclosed information to constitute a “public” disclosure.

— Information disclosed in private litigation and during state or local administrative proceedings may potentially be used as the basis of a whistleblower suit under the FCA.

— A plaintiff may now be a whistleblower merely by having knowledge that “materially adds to” allegations that have already been publicly disclosed.

Public Disclosure Bar Lowered

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Wall Street Reform andConsumer Protection Act of 2010

(“Dodd-Frank”)

Dodd-Frank Generally

A result of the Bernie Madoff scandal, in which the SEC was embarrassed for its publicized failure to timely investigate the largest Ponzi scheme in history

Congress adds revolutionary “bounty hunter” provisions to increase voluntary reporting of securities and commodities violations.

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Dodd-Frank Generally

Whistleblower provisions appear in two parts

– Section 922 (SEC) and Section 748 (CFTC)

Both provisions offer a bounty of 10% - 30% of collected monetary sanctions over $1 million recovered by SEC, CFTC, DOJ, SROs and other regulators

Rulemaking within 270 days

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Section 922 of Dodd-Frank provides that:

Any Whistleblower (meaning “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws” to the SEC)

Who voluntarily provides original information (meaning information that:

(a) “is derived from the independent knowledge or analysis of a whistleblower”;

(b) “is not known to the *SEC+ from any other source, unless the whistleblower is the original source of the information”; and

(c) “is not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information.”)

Dodd-Frank Bounty Hunter Provision

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To the SEC that leads “to the successful enforcement” of a covered judicial or administrative action” (meaning “any judicial or administrative action brought by the [SEC] under the securities laws that results in monetary sanctions exceeding $1,000,000.”)

Shall be entitled to an award “not less than 10% “and” not more than 30%” of what has been collected of the monetary sanctions imposed” in the underlying SEC enforcement action.


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Bounty hunter provisions are somewhat similar to whistleblower provisions of FCA, but much easier to meet

Dodd-Frank whistleblowers need not file and maintain lawsuits in federal court

Do not have to incur significant financial burdens that qui tam relators must shoulder under the FCA

Do not have to meet heightened pleading standards under FRCP 9(b)

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New Section 21F to the ‘34 Act prohibits employers from retaliating against whistleblowers who provide info to the SEC or engage in protected activity under SOX, the ‘34 Act or other SEC regulated laws/regulations.

Authorizes whistleblowers to bring retaliation claims directly in federal court:

—May obtain reinstatement, double back-pay with interest, attorney’s fees and costs

—6-year statute of limitations (potential for tolling under discovery rule up to 10 years)

More protection than SOX, which requires whistleblowers to file complaint with DOL prior to initiating court action and permits recovery of back-pay, but not double back-pay

Dodd-Frank Whistleblower Protection

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Dodd-Frank Bounty Hunters

Plaintiff law firms setting up new units and are expanding practices to take advantage of Dodd-Frank “bounty hunter” provisions.

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Examples:

“We are expanding very much due to Dodd-Frank because the incentives are strong for people who have information about fraud to come forward.” David Kovel, Kirby McInerney, LLP,*

*Dodd-Frank Spawns Cottage Industry, reported in Market Watch, December 7, 2010.

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“Clearly there is already developing a plaintiff’s bar of attorneys that will be trolling for business because of the windfall that can go to the whistleblower and their counsel.” George Terwilliger, White & Case LLP,*

*Dodd-Frank Spawns Cottage Industry, reported in Market Watch, December 7, 2010.

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Expected Increase in FCPA Whistleblowing

FCPA provisions which are incorporated into the ‘34 Act pose significant liability concerns under new Dodd-Frank bounty hunter provisions.

Pharma and DME manufacturers are increasingly multinational companies or conduct some drug testing and marketing activities outside the U.S.

More to follow on this topic.

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Increased Use of The“Park Doctrine”

NY CLE code: 225

Park Doctrine

A criminal liability theory named after the Supreme Court decision in United States v. Park, 421 U.S. 658 (1975).

The Government can seek strict liability misdemeanor conviction of a company official for alleged violations of the Food, Drug, and Cosmetic Act (FDCA) – even if the official was unaware of the violation – if the official was in a position of authority to prevent or correct the violation and did not do so.

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Early Park Cases

Minimal fines

– Dotterweich – $500

– Park – $250

Almost never jail time

– Dotterweich – 60 days probation

– Park – no jail time; no probation

No exclusion or debarment

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Recent Government Pronouncements

March 4, 2010 – FDA correspondence with Senator Grassley:– Committee recommendations included: “increase the

appropriate use of misdemeanor prosecutions, a valuable enforcement tool, to hold responsible corporate officials accountable.”

September 21, 2010 – Ann Ravel, Deputy Assistant Attorney General, who oversees DOJ’s OCL, stated at an FDLI conference: – “The Department is intent on identifying and, where

appropriate, prosecuting the individuals who are responsible for illegal off-label marketing.”

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Current Consequences of a Park Conviction

Jail time up to a year. Much larger fine – 21 U.S.C. § 333(a) and 18 U.S.C. § 3571 allow:

– $100,000 per count for individuals ($250,000 if death occurs)– $200,000 per count for corporations ($500,000 if death

occurs)– Fines can be increased to up to double the amount of

defendants’ pecuniary gain or victims’ pecuniary loss

OIG exclusion from participation in federal health care programs.

FDA debarment from working in or for the pharmaceutical industry.

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Increased FCPA Enforcement

The 1977 Foreign Corrupt Practices Act ("FCPA") generally prohibits gifts, or offers to give, anything of value to a “foreign official” with the intent of gaining or retaining an improper business advantage.

The prohibition generally applies to domestic public and private companies, as well as individuals, but can reach foreign companies as well.

Definition of “Foreign Official”: Many health care systems abroad are government owned or operated; DOJ broadly construes the term

– Physicians, employees and other health care personnel may be deemed "foreign officials" for purposes of the FCPA (e.g., Chinese physicians).

– A top Department of Justice official recently noted that, in certain countries, “nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing" of a drug may involve a “foreign official” within the meaning of the FCPA.


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A corporate executive in the United States may incur personal, criminal liability for disregarding an overseas salesperson's bribery of a foreign official.

The law does not require the offender to have acted affirmatively.

– “Willful blindness" towards offending conduct may be enough to violate the FCPA.

Consequences may range from fines, penalties and disgorgement totaling tens/hundreds of millions of dollars, while individuals face significant prison sentences.

– In 2008, a corporation paid fines and penalties exceeding $1.6 billion

– The longest prison sentence ever in an FCPA case – 87 months for a Virginia man – was handed down this past April.


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Government Pronouncements:

“Let me be clear, prosecuting individuals is a cornerstone of our enforcement strategy because, as long as it (bribery) remains a tactic, paying large monetary penalties cannot be viewed by the business community as merely “the cost of doing business” The risk of heading to prison for bribery is real from the boardroom to the warehouse.”*

U.S. Attorney General Eric Holder

* 2004: DOJ prosecuted 2 individuals

2009-10: DOJ prosecuted approx. 50 individuals


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“… I’m proud to say that our FCPA enforcement is stronger than it’s ever been — and getting stronger … *y+ou are right to be more concerned. As our track record over the last year makes clear,* we are in a new era of FCPA enforcement, and we are here to stay.”

Assistant Attorney General Lanny Breuer, November 16, 2010

*Over $1 Billion in criminal penalties in FCPA-related cases.


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“*O+ur focus and resolve in the FCPA will not abate and we will be intensely focused on rooting out foreign bribery in your (the pharmaceutical) industry.”

Assistant Attorney General Lanny Breuer, November 12, 2009


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Close in time to DOJ FCPA “letters of inquiry” directed at major pharmaceutical companies earlier this year.

Follows investigations of several medical device manufacturers over the last several years.

DOJ Investigating: paying government-employed doctors to purchase drugs; paying company sales agents commissions that are passed on to government doctors; paying hospital committees to approve drug purchases; paying regulators to win drug approvals. (Wall Street Journal 10/5/2010)


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II. Areas of Greatest Concern

A. Retention of “Overpayments” more than 60 days

B. More Whistleblower Sources

C. Coordination between Government(s) and Relators

D. Reduced Mens Rea For Management

E. Financial Incentives to Forego Hotline

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Areas of Greatest Concern

Retention of Overpayments— 60 day rule created to allow for normal

reconciliation of Medicare, Medicaid, Contract payments

— Companies must report overpayments and explain reasons for any overpayments

— However, inflated interim payment(s) resulting from fraud triggers the “obligation” to repay within 60 days, not following reconciliation

— Purpose of the rule is to ensure that companies are not rewarded for failing to have internal controls and compliance program to detect fraud

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More Whistleblower Sources

—Contractors or Agents of Company now qualify under FERA and PPACA

—“Public Disclosure” bar weakened under PPACA

• WikiLeaks could provide source material for whistleblowers!

— Anybody can be a whistleblower under Dodd-Frank

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Coordination between Government(s) and Relators—Delegation of CID authority to USAO offices makes it

easier to conduct parallel criminal / civil investigations

—AUSA can share information from CID with Relator; unclear what limits individual AUSA may require, if any

—Even if Government doesn’t intervene, Relator has the benefit of CID information

—PPACA requires greater coordination between states;

HHS must establish data collection program

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Reduced Mens Rea for Management

— Liability increased, even in the absence of “intent” or “knowledge” by senior management

Materiality instead of “intent to defraud” under FERA

Park Doctrine strict liability

— Liability for third-party conduct

Liability not limited to employees, but expands to include contractors and agents, particularly in FCPA context

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Financial Incentives to Forego Hotline

— Whistleblowers incentivized to forego internal reporting through the hotline and retain a qui tam lawyer, especially under Dodd-Frank

— SEC regulations won’t be published until 2011

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III. Taking Proactive Steps — Now

A. Enhance Compliance Program

B. Ongoing Risk Assessments

C. Internal Messaging

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Taking Proactive Steps — Now

Enhance Compliance Program

– Fortify Code of Conduct and Policies by requiring “affirmative obligation” to report suspected misconduct

Must emphasize that failure to “speak up” is a violation, particularly for managers

Put standard “speak up,” non-retaliation and whistleblowing clauses across all policies

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– Training must incorporate:

Affirmative obligation to “speak up” and non-retaliation duties

Live, scenario-based training

Online training to document employee attendance and competence

– Note: Building the “counter-narrative” starts with training

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– Field-based Monitoring / Auditing – Now Critical

C.I.A.s and government pronouncements make clear that real-time monitoring is necessary

Outsource field monitoring if necessary

Conduct random and targeted audits

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–Don’t Forget - Sales reps always follow the money!

–Modify Incentive Compensation Plans (ICPs) to dis-incentivize non-compliant behavior Segregate by specialty, if possible

If not possible, develop algorithm or formula for excluding HCPs with problematic prescribing patterns

Incorporate financial penalties for non-compliance whenever possible

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– Foreign activities (e.g., clinical trials, supply chain, etc.) require strong due diligence program for third party vendors, especially for FCPA purposes

– Examples of third-party intermediaries

Consultants, Agents, Representatives, Distributors, Resellers, Introducer/Finder, Joint-Venture Partners

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– Due Diligence requires meaningfully investigating foreign agents and partners

– Look for red flags

– Incorporate FCPA warranties in all contractual arrangements

– Document, document, document

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– Internal Investigations and Disciplinary Process. Must “Walk the Walk”

Streamline process

Consistency and fairness: Government will look to see what you do with high performers

Voluntary disclosure if necessary

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Ongoing Risk Assessments and Improvements to Internal Controls

– Look at problems identified through audits and internal investigations

Build into next risk assessment

– Test internal controls. Test, test, test again

– Consider testing controls for “Leaks”

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Internal Messaging – Broadcast, broadcast, broadcast

– Employees need to hear about compliance efforts on a regular basis

Employees who believe Company is compliant and is listening to them will be less likely to become whistleblowers

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Questions?

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year of the whistleblower: how health care reform & … of the...a result of the bernie madoff...

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