FCA Alert : Lawyers & Attorneys for Whistleblower, False Claims Act & Qui Tam Defense : Kelley Drye & Warren LLP

The Facts

In 2007, the United States intervened in a qui tam suit against Lockheed Martin Corporation ("Lockheed") and Tools & Metal, Inc. (“TMI”). The government alleged that TMI, a perishable tool supplier, engaged in an illegal pricing scheme and submitted inflated subcontractor invoices to general contractor Lockheed Martin, which in turn, submitted the invoices to the United States for payment pursuant to a government contract. In late 2005, TMI filed for bankruptcy and TMI’s CEO Todd Loftis pled guilty to conspiracy to defraud the United States based on his role in submitting inflated subcontractor invoices to Lockheed.

In its civil complaint against Lockheed, the government alleged that Lockheed received “credible evidence” of TMI’s fraud in 2000. In May 2000, the qui tam relator, a former TMI national account executive, sent a short email to a procurement manager at Lockheed Martin warning about allegedly excessive prices charged by TMI. The government alleged that Lockheed ignored this warning and continued to submit TMI’s inflated costs to the United States and, despite Lockheed’s allegedly broad contractual audit rights, did not conduct a “proper” audit of TMI until late 2004 after Lockheed learned that a federal prosecutor was investigating TMI. The government claimed that Lockheed’s lack of oversight of TMI demonstrates that Lockheed knowingly created false records and presented false claims to the United States for payment or approval and sought to hold Lockheed liable for claims submitted from October 2000 to May 2006.

The Motion to Compel

Lockheed moved to compel the government to provide factual information regarding its criminal investigation of TMI and Loftis. Lockheed asserted that it needed the information to show Lockheed’s absence of scienter. The government opposed the motion to compel, arguing that the investigative material sought by Lockheed was irrelevant to Lockheed’s defense and, in any event, was protected from disclosure by the investigatory law enforcement and work product privileges.

Holding #1:  An FCA defendant may use circumstantial evidence to establish lack of scienter.

According to Lockheed, the government’s central allegation in the lawsuit is that Lockheed should have investigated TMI and learned of the illegal pricing scheme shortly after receiving a “tip” from the relator in May 2000 regarding possible fraud. Lockheed contended that it could not have been aware of TMI’s fraud as quickly as the government alleges because it took the government several years to substantiate the relator’s allegations of fraud even though the government had at its disposal broad investigatory powers not available to a private corporation.

The government argued that information concerning its investigation was irrelevant to the issue of scienter because the only facts that could establish scienter (or its absence) are those that were known to Lockheed during the time of the government’s investigation. The government further argued that events outside of Lockheed’s knowledge could not be relevant to the question of Lockheed’s scienter.

The court disagreed with the government’s assertion that only “direct” evidence of Lockheed’s state of mind is relevant and held that circumstantial evidence has a place in establishing an actor’s scienter in a civil FCA action:

Establishing a requisite state of mind in any case, such as the scienter at issue here, necessarily involves an analysis and consideration of at least some circumstantial evidence….If discovery pertaining to the government’s criminal investigation of Loftis can reveal facts about Lockheed Martin’s dealings with TMI that were unknown to Lockheed Martin at the time and could not reasonably have been known to Lockheed Martin, the court is at a loss to see why those facts would not constitute relevant circumstantial evidence as to Lockheed Martin’s absence of scienter.

The court therefore held that Lockheed's discovery requests seeking facts concerning the government's investigation of TMI and Loftis were relevant for discovery purposes.

Holding #2.  The investigatory law enforcement privilege does not apply to a closed criminal investigation.

After determining that Lockheed's discovery requests were relevant, the court considered whether the requested information was shielded from discovery by the investigatory law enforcement privilege. In its opposition to Lockheed’s motion to compel, the government asserted an extremely broad interpretation of the investigatory law enforcement privilege. Specifically, the government claimed that the privilege protects not just criminal investigations but also investigative files prepared for civil law enforcement purposes; and that the privilege should extend beyond Loftis’s criminal prosecution because the civil case is simply a continuation of the criminal case.

The district court disagreed with the government’s assertion that a sweeping investigatory law enforcement privilege exists in the Fifth Circuit. Rather, the district court noted that the Fifth Circuit recognizes a qualified law enforcement privilege that protects only government files related to an “ongoing criminal investigation”:

The Fifth Circuit Court of Appeals has made clear that “the law enforcement privilege is bounded by relevance and time constraints.”…In this case, it is clear that the information Lockheed Martin seeks in discovery pertains to the criminal investigation of Loftis, who, in light of his December 2005 conviction, is no longer under investigation. Moreover, despite the government’s attempt to eliminate a distinction between civil cases and criminal cases with respect to the application of the investigatory law enforcement privilege, the court declines to adopt the government’s sweeping view. The Fifth Circuit has made no statement that suggests that this privilege was intended to protect government files for any purpose other than insofar as they relate to an ongoing and criminal investigation.

Accordingly, the district court held that the investigatory law enforcement privilege no longer affords protection to government information related to its criminal investigation of Loftis.

Holding #3.  The work product doctrine does not apply because Lockheed sought only the facts obtained from the government’s investigation.

The government argued that its criminal investigation was work product because it constitutes notes and memoranda that contain attorneys’ mental impressions. Lockheed contended that the work product doctrine does not shield the government from Lockheed’s discovery requests because Lockheed seeks only the facts related to the criminal investigation of Loftis.

The court was not persuaded by the government’s assertion that such facts were inseparable from mental impressions, and directed the government to provide the facts sought from its criminal investigation “stated as answers to interrogatories, requests for admission, and depositions of witnesses,” as requested by Lockheed.
 

According to the second amended complaint, the relator, the owner of Professional Healthcare, Resources Inc. (“Professional Healthcare”), a home health care agency, attended a meeting regarding the formation of a referral network from the Virginia Hospital Center (“VHC”). Also present at the meeting were representatives from Americare, another home health care agency. During the meeting, a representative from VHC stated that the agencies at the meeting could expect to split 100 Medicare referrals per month, with each referral leading to a $3,000 Medicare reimbursement to each agency. In exchange, the referral network was to receive a 7% fee from the volume of referrals. The relator objected to the proposal at the meeting and declined to pay for referrals, but alleged that home health care agencies MedStar and Americare subsequently participated in the referral process. After Professional Healthcare was later denied participation in the referral process, the Chief Operating Officer of Professional Healthcare sent a letter to the participants of the referral network, including MedStar and Americare. The letter set forth Professional Healthcare’s position that the recipients were allegedly violating the law, and also responded to an alleged argument made by the referral network that it was operating under the “referral service” safe harbor. The referral network’s attorney sent a response to the letter, and copied MedStar and Americare on its response.

In its motion to dismiss the second amended complaint, MedStar argued that the relator failed to present facts supporting the necessary elements of scienter and that the relator also failed to present facts supporting an improper agreement involving MedStar necessary for the relator’s conspiracy claim. The court denied MedStar’s motion. The court focused on the second amended complaint’s allegations that Professional Healthcare sent three of MedStar’s executives a letter explaining how MedStar’s participation in the referral process may have been a violation of the Anti-Kickback statute. The court found that the letter plausibly supported MedStar’s reckless disregard for the possibility that its subsequent certifications were false. The court held that these facts were sufficient to survive the motion to dismiss. In addition, the court found that these facts, taken as true, also showed MedStar’s knowledge that it may have been participating in an illegal referral network, such that its continuing to do so afterwards constituted its assent to the other parties’ allegedly illegal agreement. The court therefore held that the relator’s conspiracy count survived dismissal and denied MedStar’s motion.

In its decision, the court also ruled on defendants Kathleen Ammirati and Mary Tatum’s motion to dismiss. Ammirati was CEO of Americare, one of the home health care agencies alleged to be participating in the referral process, and Tatum was Americare’s Director of Nursing. The second amended complaint contained no allegations of any actions by Ammirati or Tatum besides attending a meeting in which referrals were discussed, and no allegations regarding their control over Americare’s actions. The court noted that simply alleging that a person was the CEO of a company that acted illegally is insufficient to support liability. Therefore, the court granted dismissal as to defendants Ammirati and Tatum.