The recent announcement by the Department of Justice (DOJ) that it obtained more than $3 billion in judgments and settlements under the False Claims Act (FCA) in FY 2019 underscores the ongoing enforcement risks companies face in the health care, defense and other industries.

The DOJ's statistics reflecting its total yearly recoveries under the FCA demonstrate that the department's civil fraud enforcement efforts continue to be robust, particularly in the health care and life sciences industries, which generated about $2.6 billion of the recoveries last year. Qui tam actions filed by whistleblowers (relators) continue to be the source of most FCA payouts.

This article focuses on four important areas related to FCA investigations and litigation that companies and their counsel should be aware of: the DOJ's recent cooperation credit guidelines; cybersecurity and FCA liability; differing interpretations of the U.S. Supreme Court's Escobar decision and the DOJ's increased exercise of its authority to seek dismissal of FCA lawsuits.

DOJ Cooperation Credit Guidelines

Last May, the DOJ issued guidelines regarding the award of cooperation credit to defendants in FCA cases. Under the guidelines, which are set forth in Section 4-4.112 of the Justice Manual, a company can be eligible for cooperation credit by voluntarily disclosing wrongdoing, cooperating in ongoing investigations and settlements, or taking effective remedial actions.

Examples of cooperation include identifying individuals substantially involved in the misconduct and disclosing new facts and evidence to the government. Remedial measures that may result in credit include implementing or improving an effective compliance program. The guidelines note that the DOJ may consider the prior existence of a compliance program when evaluating a defendant's liability, underscoring the importance of strong corporate policies and controls.

The guidelines contain several caveats. Cooperation credit may not result in the company paying less than "full compensation" for the government's losses, including lost interest, costs of investigation and the relator's share. Also, cooperation does not include simply responding to a subpoena, civil investigative demand or other compulsory process. Nor do the guidelines change preexisting disclosure obligations, such as the mandatory disclosure rule set forth in Federal Acquisition Regulation (FAR) 52.203-13.

Cybersecurity and the FCA

Another potentially emerging area is FCA liability grounded in noncompliance with cybersecurity requirements. In May 2019, a California district court declined to dismiss a qui tam relator's allegations that an aerospace and defense contractor knowingly submitted false certifications of compliance with Department of Defense (DoD) and NASA cybersecurity requirements in federal acquisition regulations. And in July 2019, a software company settled FCA claims related to video surveillance software in the first FCA settlement or judgment involving cybersecurity.

FCA liability presents another layer of compliance risk for contractors trying to keep up with evolving cybersecurity regulations. On Jan. 31, DoD released its new cybersecurity maturity model certification (CMMC) framework, with a rulemaking process to follow. CMMC will use third-party verification to certify companies' compliance with a new standard to protect the defense supply chain. The impact of CMMC on FCA enforcement is unclear. As it stands, FCA liability based on alleged noncompliance with defense cybersecurity requirements is yet another consideration that companies should consider when preparing for CMMC.

Interpretations of 'Escobar'

Lower courts continue to grapple with how to interpret the U.S. Supreme Court's landmark decision in Universal Health Services v. Escobar, 136 S. Ct. 1989 (2016), in which it held that FCA liability may be based on an "implied false certification" theory. The court clarified that liability under such a theory can attach at least when two conditions are met: the defendant submits a claim that makes specific representations about the goods or services provided, but knowingly fails to disclose noncompliance with a material statutory, regulatory or contractual requirements, making those representations "misleading half truths."

Escobar emphasized that the noncompliance must be material to the government's payment decision. Lower courts have offered various views as to what allegations and evidence are necessary to establish materiality, both at the pleading stage and on the merits. In 2019, the Supreme Court denied several petitions for writ of certiorari seeking to revisit or clarify aspects of Escobar's materiality test. See, e.g., Pranther v. Brookdale Senior Living Communities, No. 17-5826; Stephens Institute v. Rose, No. 18-1124 and Gilead Science v. Campie (No. 17-936).

Materiality is likely to continue to play a critical role in FCA cases, with discovery and arguments focused on the government's likely or actual response to alleged infractions.

DOJ's Dismissal Authority

A fourth area is the DOJ's increased use of its statutory authority to file motions to dismiss in qui tam cases.

Under the "Granston Memo," codified in Section 4-4.111 of the Justice Manual, DOJ attorneys are directed to consider whether the United States' interests are best served by filing a motion to dismiss a qui tam case under 31 U.S.C. Section 3730(c)(2)(A). The DOJ has identified dismissal as a means of resolving cases whose continued pursuit by a relator without the DOJ's intervention would, according to the DOJ, undermine the goal of preventing fraud or other governmental interests.

According to a Dec. 19, 2019, letter from the DOJ to Sen. Chuck Grassley, the DOJ has filed motions to dismiss in 45 FCA cases since January 2018, which is less than 4% of the total 1,170 qui tam suits filed during that period. District courts have mostly granted the DOJ's motions, but there is a circuit split as to the proper standard of review for such motions.

The extent to which the DOJ relies on its dismissal authority, and the extent to which courts may review the DOJ's basis for seeking dismissals, will likely continue to generate attention in 2020.

Barak Cohen, a partner at Perkins Coie and litigation lead of the firm's Washington, D.C. office, is a former prosecutor with the U.S. Department of Justice. He can be reached at [email protected].

Alexander Canizares, senior counsel at the firm, is a former trial attorney with the U.S. Department of Justice's Civil Division. He can be reached at [email protected].