The Unintended Consequences of Secrecy and Confidentiality in Qui Tam Settlement Agreements (Part One)

One of the stated purposes of the False Claims Act is the following: “If the qui tam lawsuit is successful, it not only stops the dishonest conduct, but also deters similar conduct by others…”

The three blogs that follow examine stages in the settlement process where, in spite of the Government being paid damages and the Plaintiff/Relator/Whistleblower being rewarded, nonetheless, certain clauses negotiated by corporate defendants in the settlement process conspire to undermine the FCA’s stated goal of “deterring similar conduct by others.”

 

1. The Settlement Announcement

When Philip Morris agreed to settle a smuggling lawsuit (not a qui tam action) for $1.2 billion, the full extent of the terms and conditions of the settlement were not publicly released. When the case began, there was a 188-page complaint brought by the European Union that alleged Philip Morris and other tobacco companies were “guilty of violations of the Racketeer Influence and Corrupt Organizations (RICO) Act of 1970.” The accusations, when the complaint was filed, included unsavory charges such as “money laundering, wire fraud and mail fraud” along with “involvement in organized crime in pursuit of a massive, ongoing smuggling scheme.”

Years later, when the settlement was reached, it provided very few clues as to why the case was settled, leaving one to search in vain through the settlement documents for the real reasons behind Philip Morris’s willingness to cough up $1.2 billion. The (jointly released) press release noted only that Philip Morris International was required “to take steps to make sure sales volumes were commensurate with legitimate market demand,” whatever that meant. It also declared that “this cooperation agreement represents a major step forward against the common enemy of counterfeit and contraband cigarettes.” Wow, that sure set an example! With this type of announcement, it’s not difficult to conclude that one of the conditions Philip Morris must have insisted upon before paying a thousand times a million dollars was to be allowed the freedom, when the settlement was announced, to paint itself as one of the good guys. The result is soothing, all’s-well-that-ends-well language like “The efforts of Philip Morris International, along with those of governments in the European Union to prevent the diversion of cigarettes into contraband channels, have borne fruit.”

From what was said, the public learned nothing more about the accusations – the money laundering, the organized crime, or the ongoing smuggling schemes. It is ‘only’ the $1,200,000,000 Philip Morris was paying that led to one’s concluding that Philip Morris might be taking some responsibility. But reading the settlement documents, one is left without a clue as to why Philip Morris might finally be admitting some sort of involvement in the smuggling. The reason for this is because the corporate entity that is paying the megabucks – in this instance Philip Morris – also is allowed to control “the spin” of the settlement.

This brings us to settlements under the False Claims Act, where the same process takes place. The starting point for the spin is the Settlement Agreement: What follows is the preamble to a settlement agreement where $69,000,000 was being paid to the Government to settle a qui tam lawsuit:

  1. The Settling Defendants deny all claims and allegations and deny any wrongdoing or that they have any liability relating to the Covered Conduct.

E. In order to avoid the delay, uncertainty, inconvenience, and expense of protracted litigation of these disputed claims, and as a result of a mutual desire to settle their disputes, the Parties have reached a full and final settlement as set forth in this Agreement.

F. This Agreement is the result of a compromise of disputed issues of law and fact, and the execution and delivery of this Agreement shall not constitute or be construed as an admission of fault, liability, or wrongdoing by any of the Released Parties (as hereinafter defined), nor does it constitute evidence of any liability or unlawful conduct on the part of the Released Parties, and the Plaintiffs will not urge or seek to admit this Agreement as evidence of any fault or liability of the Released Parties in any investigation, administrative claim, action, suit, or proceeding, or federal or state court or arbitration proceeding. The parties agree that this Agreement is not punitive in purpose or effect.

With language like this, the severe impact of the settlement – the deterrent effect on any further wrongdoing – is diminished, and all the public is left with is the Press Conference with the Attorney General  (when it’s megabucks) or at the press release from a United States Attorney (when it’s a lesser amount) announcing the settlement.

From the Government’s perspective, the Attorney General seems to draw his satisfaction in announcing the payment of the ‘fine.’ He or she describes what the defendant is accused of doing, along with the amount of money that is being paid, but there’s never anything in the press release or in the AG’s announcement where the defendant admits to doing anything wrong. And the confidentiality agreement that accompanies the settlement further diminishes the impact, so that the deterrent effect the framers of the 1986 amendments hoped for – “If the qui tam lawsuit is successful, it not only stops the dishonest conduct, but also deters similar conduct by others…” is diluted further. With no real admission of guilt, all the general public is left with is a guessing game, that has them “reading between the lines” in the amounts being paid (“If they didn’t do anything wrong, why are they paying $11.2 million?”) in order to determine just how much responsibility the defendant is willing to take for the fraud that’s been alleged and is now (sort of) being admitted to.

What follows is an actual, typical Justice Department press release announcing a False Claims settlement, with the portions having any real meaning in boldface and the meaningless sections (that one can skip right by) italicized.

 

Office of Public Affairs

FOR IMMEDIATE RELEASE

Thursday, June 13, 2013

Science Applications International Corporation Pays $11.75 Million 

to Settle False Claims Allegations

 

The Justice Department and U.S. Attorney Kenneth J. Gonzales of the District of New Mexico announced today that Science Applications International Corporation (SAIC) has paid $11.75 million to settle allegations filed in the U.S. District Court for the District of New Mexico that it violated the False Claims Act by charging inflated prices under grants to train first responder personnel to prevent and respond to terrorism attacks.

SAIC provides scientific, engineering, and technical services to commercial and government customers and is headquartered in Northern Virginia.

Between 2002 and 2012, the New Mexico Institute of Mining and Technology (New Mexico Tech) received six federal grants from the Department of Justice, the Department of Homeland Security, and the Federal Emergency Management Agency to train first responder personnel to prevent and respond to terrorism events involving explosive devices.  New Mexico Tech awarded subgrants to SAIC to provide course management, development, and instruction.  The United States alleged that SAIC’s cost proposals falsely represented that SAIC would use far more expensive personnel to carry out its efforts than it intended to use and actually did use, resulting in inflated charges to the United States.

“To ensure that federal tax dollars are properly spent, federal grant recipients and contractors must provide cost proposals and estimates that reflect their honest judgment about project costs,” said Stuart F. Delery, Acting Assistant Attorney General for the Civil Division of the Department of Justice.  “We will continue to ensure that funds designated for vital programs such as this one are properly used for their intended purpose.”

The False Claims Act is sometimes referred to as “Lincoln’s Law” because it was enacted at the urging of President Lincoln to combat widespread fraud which was being perpetrated on the Union Army by Civil War defense contractors.  While originally enacted to combat defense contractor fraud, the False Claims Act has long been successfully employed to combat false claims against the United States in many other contexts, including healthcare fraud.  The Act prohibits the submission of false claims for government money or property and allows the United States to recover up to three times the actual damages and penalties for a violation. 

The lawsuit against SAIC was originally filed under the whistleblower provisions of the False Claims Act by Richard Priem, SAIC’s former project manager for the first responder training program.  Under the Act’s whistleblower provisions, a private party may file suit on behalf of the United States and share in any recovery, and the United States may elect to intervene and take over the case, as it did here.  Mr. Priem’s share has not yet been determined.

“The False Claims Act is a critical tool for weeding out fraud and protecting taxpayers,” said U.S. Attorney Kenneth J. Gonzales of the District of New Mexico. “The Act provides an incentive for individuals with knowledge of fraud against the government to disclose that information.  When whistleblowers bring fraud allegations to the government’s attention and assist us in this public-private partnership to fight fraud, the public benefits and potential fraudsters are deterred.”

The case was jointly handled by Trial Attorneys Don Williamson and Daniel Hugo Fruchter of the Commercial Litigation Branch of the Justice Department’s Civil Division and Assistant U.S. Attorney Howard R. Thomas and Auditor Julie A. Ford of the U.S. Attorney’s Office for the District of New Mexico.

The claims resolved by this settlement are allegations only and there has been no determination of liabilityThe case is United States ex rel. Priem v. SAIC, No-12-cv-148 (D.N.M.).

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It’s difficult to see anything in the above announcement (other than the $11.75 million) that might deter anyone from falsifying a claim to the United States Government.

The next blog will discuss the nature of confidentiality agreements and confidentiality clauses that accompany settlement agreements, and how they too bring about a diminishing impact on deterring cheaters from submitting False Claims to the United States Government.