The False Claims Act (FCA) provides the Department of Justice (DOJ) with extensive pre-litigation investigative tools that allow it to subpoena documents, take testimony under oath, and serve interrogatories on potential defendants before the DOJ makes any determination that wrongdoing has occurred. The DOJ often investigates for years, engaging in what can only be described as one-way discovery. Naturally, companies are not pleased by the expense associated with these investigations, the disruption to day-to-day business functions, and the potential exposure that can result under the FCA.
Following the Supreme Court’s decision in Escobar and its emphasis on the importance of materiality under the FCA, defendants are more aggressively pursuing discovery during litigation seeking evidence that could undermine the government’s assertion that an alleged false or fraudulent statement was material to the government’s decision to pay a claim. But this is not the only affirmative avenue being tested by defendants.
Last week, Quicken Loans resolved a case for $32.5 million related to its origination of residential mortgage loans that were endorsed for Federal Housing Administration (FHA) insurance, a much smaller payment compared to its FHA counterparts Wells Fargo ($1.2 billion), Bank of America ($800 million), JP Morgan ($614 million), and SunTrust Mortgage ($418 million). Quicken’s FCA case began with Quicken taking the unusual step of firing the first shot across the bow, preemptively filing a complaint against the DOJ and the United States Department of Housing and Urban Development (HUD) alleging violations of the Administrative Procedure Act’s prohibition on arbitrary and capricious agency action and the due process clause of the Fifth Amendment. While Quicken’s case was dismissed, it set the stage for a hard fought battle that would come.
In another case, a hospital defendant facing an intervened qui tam action alleging violations of the Anti-Kickback Statute and the Stark Law, is attempting to turn the tables on the relator by filing its own action against the relator alleging that he breached his fiduciary duty by, among other things, failing to internally report the fraud he now alleges took place. The action, filed by Wheeling Hospital, asserts that the relator, Louis Longo, who served as Wheeling Hospital’s outside consultant and then as its Vice President of Human Resources, had an obligation to report any fraud to the Board of Directors of Wheeling Hospital and to exercise “good faith and loyalty” towards the corporation, which relator allegedly breached by failing to report the alleged fraud and by “threatening to bring false claims in an effort to extort a settlement.” The FCA case, claims Wheeling Hospital, has even been characterized by Longo and/or his associates as “Lou’s Revenge.”
While relators already take a professional risk by coming forward with allegations of fraud, rarely do relators also face personal liability stemming from their allegations. If Wheeling Hospital’s case proves successful, that could present additional trepidation for relators as they are often current or former employees of the defendant organizations and learn of the alleged fraud during their employment.
Derek Adams, a former Trial Attorney with the Department of Justice, Civil Fraud Section, is a partner in the firm’s False Claims Act, FIRREA, and Litigation practice groups. Derek has extensive experience with False Claims Act matters, and can be reached at email@example.com or (202) 466-8960 if you have any questions or need help with FCA compliance, investigations, or litigation.