Author Archives: Brandon Mark

Utah Lenders Agree to Multi-Million Dollar False Claims Act Settlements

avatar
  • LinkedIn

The DOJ announced earlier this month that a pair of Utah-based mortgage companies–Primary Residential Mortgage Inc. and Security National Mortgage Company–agreed to settlements of $5 million and $4.25 million, respectively, to settle separate false claims act suits relating to their originating and underwriting of mortgage loans insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) that did not meet applicable requirements.

Both lenders operated as Direct Endorsement Lenders (DELs) in the FHA insurance program. The lenders obtained HUD insurance by claiming that their underwriting showed that the borrowers met HUD standards for creditworthiness and eligibility even though they knew that the borrowers did not meet such standards. If an insured loan later defaults, the holder can “submit an insurance claim to HUD, FHA’s parent agency, for the losses resulting from the defaulted loan.” That apparently happened in this case.

It appears that neither suit involved a whistleblower, which means the government discovered the violations and brought the claims directly.

 

Can A Bad Patent = False Claims Act Violation?

avatar
  • LinkedIn

Hat tip to my favorite patent law blog, Patently-O, for unearthing this truly creative–and probably doomed-to-fail–use of the False Claims Act. In United States ex rel. Lower Drug Prices for Consumers (LDPFC) v. Allergan and Forest Labs., Case No. 16-cv-09 (E.D.Tex. 2016), the relator is alleging that the price of a particular drug is higher than it should be due to the defendant’s invalid patent. The complaint alleges that a variety of federally funded medical programs are therefore paying more for the drug than they otherwise ought to be.

Although there are myriad potential problems with the relator’s suit, perhaps the most obvious is that the patent was validly issued by the US Patent and Trademark Office after a review by an examiner. Although it is possible the relator has knowledge of fraud committed on the patent office by the patentee, that does not appear to be alleged in the complaint. It seems that the relator’s only evidence is that the patent is invalid as obvious–a complex factual and legal question.

Although the False Claims Act is intended to be flexible and “to reach all types of fraud, without qualification, that might result in financial loss to the Government,” United States v. Neifert-White Co., 390 U.S. 228, 232 (1968), this seems on its face to be a bridge too far.

4th Circuit: Violation of False Claims Act’s Seal Provision Does Not Require Dismissal

avatar
  • LinkedIn

In an issue of first impression for the Fourth Circuit Court of Appeals, the court was confronted with the question of the appropriate remedy for a relator’s violations of the automatic seal provision of the False Claims Act. In Smith v. Clark/Smoot/Russell, 796 F.3d 424, 429 (4th Cir. 2015), the relator’s counsel, after filing the FCA complaint under seal and in camera as required by the FCA, promptly called the defendant’s counsel to inform him of the existence of the complaint. Of course, such action was “undoubtedly [a] violat[ion of] the False Claims Act’s seal requirement.” Id. at 430.

After analyzing the tests that other circuit courts have adopted for whether such violations require the dismissal of the suit, see,e.g U.S. ex rel. Summers v. LHC Grp., Inc., 623 F.3d 287 (6th Cir.2010); Lujan, 67 F.3d 242 (9th Cir.1995); United States ex rel. Pilon v. Martin Marietta Corp., 60 F.3d 995, 998 (2d Cir.1995), the Fourth Circuit decided that “that a violation that results in an incurable and egregious frustration of the ‘statutory objectives underlying the filing and service requirements’ merits dismissal with prejudice under the False Claims Act.” Id. (internal citation omitted).

The court identified the statutory objectives of the seal provision as “(1) to permit the United States to determine whether it already was investigating the fraud allegations (either criminally or civilly); (2) to permit the United States to investigate the allegations to decide whether to intervene; (3) to prevent an alleged fraudster from being tipped off about an investigation; and, (4) to protect the reputation of a defendant in that the defendant is named in a fraud action brought in the name of the United States, but the United States has not yet decided whether to intervene.” Id. (internal marks omitted). 

In Smith, the court determined that the objectives of the seal provision had not been compromised because (1) the disclosure had not been made to the public, so there was no harm to the defendant’s reputation, and (2) the disclosure had actually facilitated the government’s investigation by allowing the defendant to better answer the government’s questions.

In sum, Smith stands for the rule that although a relator’s counsel should never violate the seal provision, where there is no actual harm from a violation, court’s will impose no penalties.

Defend Trade Secrets Act + Uniform Trade Secrets Act = Potent Defense for Whistleblowers

avatar
  • LinkedIn

Courts have reached nuanced decisions on the question of whether a whistleblower who takes protected employer documents can face liability under confidentiality agreements or common-law theories, like trade secret misappropriation, conversion, or breach of the loyalty duty.

Courts have generally rejected attempts to prevent whistleblower suits, including under the False Claims Act, based on such theories. X Corp. v. Doe, 805 F. Supp. 1298 (E.D. Va. 1992) (no injunction ordering return of documents possibly demonstrating fraud). They have also rejected counterclaims brought by employers against employees for taking documents that supported such claims. United States v. Cancer Treatment Centers of Am., 350 F. Supp. 2d 765, 773 (N.D. Ill. 2004) (rejecting various claims against relator); U.S. ex rel. Head v. Kane Co., 668 F. Supp. 2d 146, 152 (D.D.C. 2009)Lachman v. Sperry-Sun Well Surveying Co., 457 F.2d 850, 851 (10th Cir. 1972) (rejecting suit brought under confidentiality agreement for employee exposing company’s wrongdoing); Stephen M. Payne, Let’s be Reasonable: Controlling Self–Help Discovery in False Claims Act Suits, 81 U. Chi. L.Rev. 1297, 1298–99 (2014) (“The first and largest group of courts holds that public policy voids confidentiality agreements in the context of the FCA.”).

However, courts have also allowed claims against employees for abusing the right to use employer documents to support whistleblower suits, such as where the employee indiscriminately takes confidential documents, including some unrelated to possible fraud against the government. United States ex rel. Mossey v. Pal–Tech, Inc., 231 F. Supp. 2d 94 (D.D.C. 2002)United States ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc.,637 F.3d 1047, 1061–62 (9th Cir. 2011).

These cases show that courts carefully balance the need for whistleblowers to have access to the documents supporting their fraud-against-the-government claims against the legitimate need for businesses to protect their confidential information.

In a post on his blog, Jason Zuckerman writes about a recent order in a federal case in which the court rejected the defendant’s request to exclude documents allegedly taken in violation of a confidentiality agreement from the court’s review of a motion to dismiss. The court again reaffirmed the basic rule that such agreements cannot prevent a relator from using such documents to support a qui tam claim.

Into the fray steps the Defend Trade Secrets Act, which includes protections for whistleblowers from suits under state trade secrets acts. The Act provides immunity from civil or criminal liability under “any Federal or State trade secret law for the disclosure of a trade secret that” is

(A) is made (i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

But the kicker is how this immunity may interact with existing state trade secret laws. Forty-seven states have adopted some version of the Uniform Trade Secrets Act, which includes an important preemption provision. UTSA

displaces conflicting tort, restitutionary, and other law of this State providing civil remedies for misappropriation of a trade secret.

Although UTSA’s preemption provision has an exception for contractual obligations, UTSA provides that the sole tort remedy for taking confidential employer information is an action for misappropriation of trade secrets. Thus, it preempts claims for conversion, unfair business practices, and intentional and negligent misrepresentation, for example. Indeed, some courts have gone so far as to hold that UTSA “precludes common-law claims even where it is expressly alleged that the information taken does not meet the statutory definition of a trade secret.”

The combined effect of UTSA’s preemption and the Defend Trade Secrets Act’s immunity from liability under UTSA for whistleblowers is to effectively immunize whistleblowers from all tort-based countersuits. Thus, the last line of defense for employers are confidentiality agreements–the one remedy that UTSA does not preempt. Even then, as the discussion above demonstrates, courts have taken a very careful approach when considering the effect of confidentiality agreements on False Claims Act suits.