The dark side of the boom: the peculiar dilemma of government spoliation in modern False Claims Act litigation.

• Author: Torborg, David S.

1. INTRODUCTION II. CAPTAINING THE FALSE CLAIMS ACT INTO UNCHARTED WATERS A. The Explosion of the False Claims Act B. Novel and Expansive Legal Theories Continue to Emerge III. THE HEIGHTENED IMPORTANCE OF EVIDENCE FROM GOVERNMENT ENTITIES A. Average Wholesale Price Litigation B. Off-Label Marketing of Pharmaceuticals Litigation C. Federal Funding Challenges IV. UNIQUE ISSUES OF SPOLIATION IN FALSE CLAIMS ACT LITIGATION A. An Unregulated Seal Period and Generous Statute of Limitations Can Delay False Claims Act Cases Indeterminately B. The Lack of a Clear "Trigger Date " Can Delay Preservation Efforts C. The Scope of the Government's Duty to Preserve Evidence in False Claims Act Cases Can Be Unclear D. The Government's Outdated Position on the Relevance of "Government Knowledge " Evidence Can Contribute to Spoliation V. RECOMMENDATIONS A. Increased Court Attention to Spoliation Issues in FCA Actions B. Improved Guidance for Government Attorneys C. Defendants Should Actively Seek to Protect The Preservation of Evidence Spurred by treble damages, substantial penalties, and lucrative relator awards, litigation under federal and state False Claims Act ("FCA ") statutes has exploded in recent years. Much of that explosion stems from aggressive and creative legal theories that challenge controversial industry practices or even well-known loopholes or waste in government policy. Evidence from governmental entities can be critically important in litigating these FCA claims. Unique aspects of False Claims Act actions, however, can aggravate the risk of losing this important evidence, leaving the parties, judges, and juries without the evidentiary record necessary to equitably adjudicate these disputes. Defendants can face the risk of treble damages, substantial penalties, or worse without the opportunity to build their defense before evidence is destroyed. Calling on his first-hand experience litigating FCA cases, the author highlights the risk of government spoliation in FCA cases and provides recommendations for courts and counsel to address this escalating problem.

1. INTRODUCTION

   On a near-daily basis, the legal press brings word of a new, novel theory of liability under the False Claims Act ("FCA"), a federal law imposing liability on persons and companies who defraud the government. In this environment, alleged malfeasance with any feasible connection to government funds could invite exposure to treble damages, substantial statutory penalties, or worse under the FCA and its state law companions. Government contractors face potential FCA liability on all matters of contractual disputes, including those related to the costs of shipping, feeding overseas troops, the pricing for computer software, and providing nonconforming parts to the military. (1) Banks face FCA claims ranging from alleged failures to follow mortgage approval standards to assertions that inflated foreign exchange rates defrauded pension funds. (2) Pharmaceutical and medical device manufacturers face myriad FcA allegations, from promoting the "off-label" use of drugs and misreporting drug prices to alleged violations of FDA regulations in connection with securing drug approvals and misrepresenting the efficacy of drugs. (3) Even alleged recruiting violations and misstatements in accreditation certifications by educational institutions can give rise to FcA claims. (4) And these are just a handful of seemingly endless possibilities.

   The FcA promotes new targets and theories with substantial financial awards for those who formulate them. FcA actions are typically filed in the first instance by private citizen "relators"--often former corporate employees or other "industry insiders"--who stand to recover 15 to 30% of any recovery. (5) The risks posed by treble damages, substantial penalties, and threats of exclusion from government programs or criminal liability has led to breathtaking settlements in recent years that run into the hundreds of millions and even billions of dollars. with these monetary incentives, recent pro-plaintiff amendments to the FCA, and an increased willingness by many courts to expand the FCA's reach, there is little reason to expect a recession in what some have called the "fastest growing area of federal litigation." (6)

   The FCA's rampant expansion has been well chronicled. But unique challenges presented by this expansion in the actual litigation setting--including the preservation of evidence--have been largely underappreciated and unresolved. Many of today's largest FCA cases involve established industry practices or controversial government reimbursement policies. other cases turn on the interpretation of rules and regulations drafted by government agencies or contracts negotiated with government officials. Nearly all involve a fact-intensive inquiry into the monetary impact of allegedly false or fraudulent claims, statements, or conduct on government expenditures. It should come as no surprise, then, that data, documents, and testimonial evidence from government entities could be very relevant in these types of FCA actions. Unique aspects of FCA cases, however, aggravate the risk that this evidence may be lost, creating an unbalanced playing field where the government and relators can gather fresh evidence while defendants are left, often years later, to pick through stale evidentiary scraps.

   This Article explores the peculiar dilemma of spoliation in FcA cases. Section I traces the FcA's evolution from the relatively unused "Informer's Law" to the powerful force that it and state law FcA statutes have become today. Section II highlights the growing importance of evidence from government entities in the types of FcA cases being litigated today. Section III discusses the particular challenges faced in FcA cases to preserving an adequate factual record. Section IV concludes with recommendations to courts and practitioners to help mitigate these challenges.

2. CAPTAINING THE FALSE CLAIMS ACT INTO UNCHARTED WATERS

   1. The Explosion of the False Claims Act

      Originally known as the "Informer's Law," the FCA was enacted during the Civil war as a vehicle for prosecuting suppliers of shoddy war supplies, such as passing sand for gun powder. (7) Under the original law, defendants were subjected to double damages, as well as civil and criminal penalties, and whistleblower "relators" could receive up to half of any damages or penalties awarded in the action. (8) Partially because of legal amendments enacted in 1943 to limit parasitic suits and decrease the monetary awards to relators, however, the FCA fell into relative obscurity over the next century. (9)

      This began to change in 1986, when congress repealed certain of the earlier amendments and increased the relator's award and statutory penalties available under the False Claims Act. (10) Over the last two decades, the FCA has become the government's primary weapon of combating fraud against the government. The numbers tell a remarkable story. In 1987, only 30 new qui tam suits were initiated under the FCA. (11) By 1997, that number had increased to 547. (12) In 2011, 638 new qui tam suits were filed and nearly $3 billion was collected through settlements and judgments; two-thirds of the recoveries related to the healthcare industry alone. (13) All told, since 1987, over $30 billion has been collected through FCA settlements or judgments. (14) Actions are proliferating rapidly under state FCA statute, as well. Spurred by federal incentives, twenty-nine states and eleven municipalities, including the District of Columbia, have now enacted state False Claims Act statutes. (15)

      In short, state and federal FCA claims have become big business for state and local governments, relators, and their attorneys. Recent amendments to the FCA, further strengthening the plaintiff's hand, promise only to expand their use.16

   2. Novel and Expansive Legal Theories Continue to Emerge

      FCA actions have traditionally focused on allegations like "double-billing," billing for services or products never provided or delivered, "upcoding" healthcare services to gain a higher reimbursement rate, performing inappropriate or unnecessary medical care, "unbundling" of services required by program rules to be "bundled" into one reimbursement rate, and billing at doctor rates for services provided by nurses or interns. (17) Such claims continue in full force today.

      In recent years, however, relators and government prosecutors have looked to expand the FCA's reach, often beyond the entities or individuals who actually submitted claims to those who allegedly "caused" others to submit "false or fraudulent" claims. (18) In many cases, these efforts involve employing the FCA to correct perceived, yet politically sensitive, imperfections in government reimbursement policies. For example, one commentator observed:

      [H]ealth care fraud enforcement offers significant advantages to the government. [E]nforcement may achieve a quicker "fix" to a problem than would be possible in the legislative or regulatory arenas. If those processes have failed to resolve the issue--as with Medicare drug reimbursement, for example--prosecutors may regard enforcement as the only practical method of achieving the "right" result. when politics and inertia stymie the development of necessary regulations, litigation provides an alternative. (19) Another commentator stated that FCA "[l]itigation may also reflect the government's desire to recapture 'overpayments' that, because of the political bargains that underlie Medicare and Medicaid, are not available through ex ante regulation." (20) The FCA can even allow the government to have its cake and eat it too, permitting it to recoup "overpayments" from parties who neither submitted nor received payments on claims, while maintaining the allegedly "false"--yet politically sensitive--level of payment to those who submitted the claims.

      Some would argue that the practices or payments being...