DOJ Policy Memos Signal Greater Checks and Balances for FCA Enforcement

Government Contracts Update

Date: February 08, 2018

Key Notes:

  • The DOJ Civil Fraud Section director has issued a policy memo signaling a more proactive approach by DOJ to use its authority under the False Claims Act to request dismissal of relator complaints.
  • The DOJ Associate Attorney General has issued a policy memo limiting DOJ use of agency guidance documents in FCA and other civil enforcement cases.
  • Together, the policy memos create greater checks and balances that will apply to relator FCA complaints and DOJ enforcement.

A pair of recently issued official Department of Justice internal memoranda, one by DOJ Civil Fraud Section Director Michael Granston and another by Associate Attorney General Rachel Brand, together signal more checks on whistleblowers and a greater balance in favor of defendants in DOJ’s enforcement of the False Claims Act (FCA). The memos show that DOJ intends to take a more limited approach to the scope and pursuit of government FCA actions and legal theories, combined with a more proactive approach to the dismissal of relator complaints.

The memo issued by Granston sets forth factors that DOJ should consider when deciding whether to request dismissal of a relator’s qui tam complaint and will impose greater constraints on whistleblower lawsuits. Brand’s memo limits the type and scope of enforcement actions that may be initiated or pursued by DOJ and will impose greater constraints on DOJ legal theories, with significant relevance to FCA lawsuits in particular. Although the memos address separate subjects, together they have implications that are favorable to potential FCA defendants, including government contractors.

Brand’s memo sets forth legal issues that DOJ must consider when evaluating the government’s position in lawsuits and other actions, and which may arise during the course of an FCA investigation. The issues addressed in the Brand memo could be considered when DOJ is conducting a government-initiated investigation, when a contractor makes a mandatory disclosure, or when DOJ is conducting an investigation triggered by a relator complaint. In addition, if a relator’s complaint fails the test in Brand’s memo, then by implication, under Granston’s memo DOJ may not only decline to intervene, it may also seek to dismiss the complaint.

At the same time, Brand’s memo reflects the extensive reliance by federal agencies on guidance documents, which calls attention to their common application to contractors through government contracts. But neither memo changes contractor compliance obligations, and government contractors must remain vigilant and proactive in their compliance efforts under not only statutes and regulations, but contractual requirements and applicable agency guidance.

The Granston Memo

On January 10, 2018, Granston issued his memo, “Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A),” to the attorneys in the Civil Fraud Section, signaling a more proactive approach by DOJ to motions to dismiss relator complaints under this provision of the FCA, which authorizes the Attorney General to “dismiss the action notwithstanding the objections of the person initiating the action.” As explained in the Granston memo, courts have held either that the United States has an “unfettered right” to dismiss qui tam actions under this provision, or that it must identify a “valid government purpose” that is rationally related to dismissal.

Reasons for Dismissal of Relator Complaints

As explained by Granston, his office has reviewed the cases since 1986 where DOJ moved to dismiss relators’ complaints under this provision and identified seven primary factors the government relied upon in those cases. Granston’s memo includes this non-exhaustive list of factors DOJ can rely on to request dismissal and provides case law precedent in support of each:

  • Curbing meritless qui tam [actions]
  • Preventing parasitic or opportunistic qui tam actions
  • Preventing interference with agency policies and programs
  • Controlling litigation brought on behalf of the United States
  • Safeguarding classified information and national security interests
  • Preserving government resources
  • Addressing egregious procedural errors

The Granston memo notes that “over the last several years, the Department has seen record increases in qui tam actions … with annual totals approaching or exceeding 600 new matters.” Granston explains the significance of this trend to DOJ’s decisions on whether to seek dismissal:

Although the number of filings has increased substantially over time, the rate of intervention has remained relatively static. Even in non-intervened cases, the government expends significant resources in monitoring these cases and sometimes must produce discovery or otherwise participate. If the cases lack substantial merit, they can generate adverse decisions that affect the government’s ability to enforce the FCA. Thus, when evaluating a recommendation to decline intervention in a qui tam action, attorneys should also consider whether the government’s interests are served, in addition, by seeking dismissal pursuant to 31 U.S.C. § 3730(c)(2)(A).

Further, Granston states that DOJ “plays an important gatekeeper role in protecting the False Claims Act, because in qui tam cases where we decline to intervene, the relators largely stand in the shoes of the Attorney General. That is why the FCA provides us with the authority to dismiss cases.” Granston’s memo indicates that both relators and defendants can expect DOJ to exercise this authority more frequently in the future.

The Brand Memo

On January 25, 2018, Brand issued her memo, “Limiting Use of Agency Guidance Documents In Affirmative Civil Enforcement Cases,” to the heads of civil litigating components and United States Attorneys. As noted above, Brand’s memo limits the type and scope of enforcement actions that may be initiated by DOJ, with a significant relevance to FCA lawsuits in particular.

The Brand memo followed a Guidance Policy issued by Attorney General Jeff Sessions on November 16, 2017 that prohibited DOJ components “from issuing guidance documents that effectively bind the public without undergoing the notice-and-comment rulemaking process.” This Guidance Policy also prohibits DOJ from “using its guidance documents to coerce regulated parties into taking any action or refraining from taking any action beyond what is required by the terms of the applicable statute or lawful regulation.”

Role of Guidance Documents in Affirmative Civil Enforcement

According to the Brand memo, the principles of the Guidance Policy “also should guide Department litigators in determining the legal relevance of other agencies’ guidance documents in affirmative civil enforcement (‘ACE’),” which includes FCA enforcement. More specifically, guidance documents:

cannot create binding requirements that do not already exist by statute or regulation. Accordingly, effective immediately for ACE cases, the Department may not use its enforcement authority to effectively convert agency guidance documents into binding rules. Likewise, Department litigators may not use noncompliance with guidance documents as a basis for proving violations of applicable law in ACE cases.

But the DOJ “may continue to use agency guidance documents for proper purposes in such cases.” For example, DOJ “may use evidence that a party read such a guidance document to help prove that the party had the requisite knowledge of the mandate.” However, Brand cautions that guidance documents cannot create new legal obligations and that DOJ should not:

treat a party’s noncompliance with an agency guidance document as presumptively or conclusively establishing that the party violated the applicable statute or regulation. That a party fails to comply with agency guidance expanding upon statutory or regulatory requirements does not mean that the party violated those underlying legal requirements; agency guidance documents cannot create any additional legal obligations.

Broad Scope of ACE and Guidance Documents

Brand’s memo defines “affirmative civil enforcement” as DOJ’s civil lawsuits on behalf of the United States to “recover government money lost to fraud or other misconduct or to impose penalties for violations of Federal health, safety, civil rights or environmental laws,” and thus the memo has wide implications beyond the FCA. But the memo includes a noteworthy example of the FCA in particular and appears to encompass the controversial implied certification theory:

For example, this memorandum applies when the Department is enforcing the False Claims Act, alleging that a party knowingly submitted a false claim for payment by falsely certifying compliance with material statutory or regulatory requirements.

As used in the Brand memo, “guidance document” means “any agency statement of general applicability and future effect, whether styled as ‘guidance’ or otherwise, that is designed to advise parties outside the federal Executive Branch about legal rights and obligations,” but does not include “internal directives, memoranda, or training materials for agency personnel,” among other exceptions. As noted below, this expansive definition of guidance document could encompass a large variety of agency directives and documents that are incorporated into government contracts or otherwise apply to contractors.

The Brand memo applies “only to future ACE actions brought by the Department, as well as (wherever practicable) those matters pending as of the date of this memorandum.” Finally, Brand notes that the memo itself is an internal DOJ policy and “is not intended to, does not, and may not be relied upon to, create any rights, substantive or procedural, enforceable at law by any party in any matter civil or criminal.” Thus, while a potential defendant may raise the issues addressed in the Brand memo during the course of a DOJ investigation, by the time a defendant is subject to an FCA lawsuit brought by DOJ, or DOJ’s decision to intervene in a qui tam lawsuit, it may be too late to point to the principles in the Brand memo.

Implications for Government Contractors and Grantees

Commentary to date on the Brand memo has focused on the implications in the health care field, because guidance documents are used extensively in the Medicare and Medicaid programs. However, guidance documents are relied upon extensively by every federal agency, are frequently applied to government contractors and grantees, and are frequently incorporated into or referenced by contractual or grant documents. Disputes often arise over whether certain documents were incorporated by reference or not, and whether or to what extent they were part of a contract’s or grant’s requirements. DOJ will need to consider whether the Brand memo applies in a variety of differing and complex factual circumstances that may arise in the interpretation of government contracts and grants.

While the Brand memo may provide relief from certain FCA lawsuits, it does not relieve a government contractor from its contractual and compliance obligations—and to some extent, it illuminates the extensive nature of guidance documents that may apply to a government contractor. But in the arena of FCA enforcement, the Brand memo may be expected to provide some measure of balance to defendants. It is particularly relevant to the application of the implied certification theory.

Impact on the Implied Certification Theory

In its June 2016 decision in Universal Health Services v. United States ex rel. Escobar, the U.S. Supreme Court unanimously held that “liability can attach when the defendant submits a claim for payment that makes specific representations about the goods or services provided, but knowingly fails to disclose the defendant’s noncompliance with a statutory, regulatory, or contractual requirement. In these circumstances, liability may attach if the omission renders those representations misleading.” The interpretations in the Brand memo would appear to limit the circumstances where this type of liability may attach under Escobar.

Escobar and subsequent cases following Escobar (as well as earlier cases based on the implied certification theory) highlight the risks for any participant in government contracts or grants, and indeed in all programs subject to the FCA. Brand’s memo may limit the potential type and scope of lawsuits that may be brought by DOJ under this theory, but it does not eliminate the many risks to potential defendants under Escobar, especially in lawsuits brought by relators rather than DOJ. The Brand memo itself points out that it is only internal guidance for DOJ and does not create rights for defendants. But taken together with the Granston memo, these DOJ policies point to a more balanced and moderate approach to FCA enforcement by DOJ. And under the Granston memo, DOJ may be more likely to seek to dismiss relator complaints that rely on theories of liability that are contradicted by the Brand memo.

Agency Guidance and Contractual Requirements

As noted above, government contracts frequently incorporate or otherwise refer to guidance documents of the type addressed in the Brand memo. The issues raised in the memo could arise in a variety of FCA investigations and in any number of agencies. And while FCA enforcement actions may be more limited because of the Brand memo, government contracts will continue to incorporate agency guidance, which may create enforceable contractual requirements and obligations.

For example, the DFARS incorporates or makes reference to a large number of Department of Defense manuals, instructions and other DoD-issued guidance. The Defense Security Cooperation Agency maintains the extensive Security Assistance Management Manual to implement DoD activities with international partners. The General Services Administration issues guidance to implement the GSA Schedule program. The Department of Homeland Security issues guidance on privacy, national security and cybersecurity issues. And the Department of Energy issues guidance on health, safety, security and environmental policy. Government contractors remain subject to agency guidance documents and must comply with contractual requirements that may incorporate agency guidance.

As one more specific example, under DFARS 252.204-7012, Safeguarding Covered Defense Information and Cyber Incident Reporting, a contractor that processes, stores or transmits covered defense information must comply with requirements set out by the National Institute of Standards and Technology (NIST). Further, the clause requires that cloud service providers comply with certain guidance documents established by the Federal Risk and Authorization Management Program (FedRAMP), available at a website referenced by the regulation that maintains more than 30 FedRAMP guidance documents. In addition, “covered defense information” is defined in part by the Controlled Unclassified Information (CUI) Registry maintained on a National Archives website. According to NIST, the CUI Registry is “the online repository for information, guidance, policy and requirements on handling CUI.”

The DFARS clause—like many FAR and agency FAR supplement clauses—contains a mixture of very detailed regulatory requirements and guidance documents that are incorporated or referenced by the regulation. As a matter of contract compliance, contractors and subcontractors are obligated to comply with both the applicable regulatory requirements and the incorporated guidance, and contractors must take a proactive approach to achieve full compliance with both. Eventually, the DFARS clause will be the subject of an enforcement action under the FCA, and that is an additional incentive for robust compliance efforts.

Conclusion

Agencies will continue to reference or incorporate guidance documents in FAR, DFARS and other agency regulations and clauses, as well as in contract provisions, and contractors will continue to be required to comply with them. The Brand memo does not address contract compliance requirements or interpretation issues, but rather DOJ enforcement of certain federal laws, including the FCA. But as noted above, the intersection between the two often involves the implied certification theory, under which government contractors, as FCA defendants, are frequently confronted with allegations in the nature of contract breach. The Brand memo should provide some appropriate balance to potential FCA defendants, including not only government contractors but companies in other highly regulated industries, who must rely on DOJ attorneys to implement the Brand memo in the course of their FCA enforcement duties. Together, the Brand and Granston DOJ policy memos should result in more appropriate constraints, checks and balances on both relator lawsuits and DOJ enforcement.

FOR MORE INFORMATION

For more information, please contact:

Joseph R. Berger
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Joseph.Berger@ThompsonHine.com

Tom Mason
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Thomas.Mason@ThompsonHine.com

Ray McCann
202.263.4152
Ray.McCann@ThompsonHine.com

Francis E. Purcell, Jr.
202.263.4118
Chip.Purcell@ThompsonHine.com

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