Principal Deputy Assistant Attorney General Ethan P. Davis delivers remarks on the False Claims Act at the U.S. Chamber of Commerce’s Institute for Legal Reform

Speech to the Institute for Legal Reform, U.S. Chamber of Commerce

Thanks very much for that introduction, Harold.  It’s an honor to be here with you today at the U.S. Chamber of Commerce’s Institute for Legal Reform.  My name is Ethan Davis, and I serve as the Principal Deputy Assistant Attorney General for the Department of Justice’s Civil Division.  That’s a mouthful, I know, but it means I’m second in command of the Division.  I’m planning to say a few words today about what the Civil Division is doing to fight COVID-19, and what the enforcement landscape under the False Claims Act and the Food, Drug, and Cosmetic Act will look like over the next few years.  These are still early days, but it’s not too early to set forth some principles that will guide our enforcement efforts.

But first, a few words about the Civil Division.  We are the largest litigating division in the Department of Justice, with about a thousand lawyers across six different branches.  One of the sections that I oversee is the Civil Fraud Section, which leads the Justice Department’s enforcement of the False Claims Act throughout the United States.  The Fraud Section works with U.S. Attorneys, investigative agencies, and whistleblowers to protect the public fisc from fraud.  I also oversee the Consumer Protection Branch which, as its name suggests, has responsibility for protecting our nation’s consumers against various types of illegal and fraudulent conduct.  The Branch’s work includes enforcing the Food, Drug, and Cosmetic Act against pharmaceutical companies, dietary supplement manufacturers, pharmacies, and others.  The Consumer Protection Branch is up-and-coming these days; it has tripled in size since 2017 and it’s safe to say you’re going to be seeing the Branch on the enforcement stage for many years to come.

I

So how is the Civil Division thinking about corporate enforcement during the pandemic?  I’ll start with two general principles and then move into some specifics.  First, we will energetically use every enforcement tool available to prevent wrongdoers from exploiting the COVID-19 crisis.  In that effort, the False Claims Act is one of the most effective weapons in our arsenal.  As many of you know, Congress passed the False Claims Act during the Civil War to combat fraud perpetrated by government contractors on the Union Army.  Today, we will deploy the False Claims Act against those who commit fraud related to the various COVID-19 stimulus programs, like the Paycheck Protection Program and the Main Street Credit Facility.  We also will use our other available tools—both civil and criminal—to safeguard consumers from COVID-related scams and unsafe products.  More on those topics later.

Second, while we will vigorously pursue fraud and other illegal activity, we also respect the critical role that the private sector is playing in helping to bring an end to the pandemic and in restarting our economy.  Private enterprise again has risen to an urgent global challenge with drive and determination.  Companies all over the country are racing to develop vaccines, tests, and treatments.  Others are keeping Americans employed despite facing significant financial obstacles. 

This Administration is committed to encouraging these efforts.  In an Executive Order issued last month, the President directed federal agencies to give “businesses, especially small businesses, the confidence they need to re-open by providing guidance on what the law requires.”  The Executive Order also directed agencies to recognize “the efforts of businesses to comply with often-complex regulations in complicated and swiftly changing circumstances.”  Our agency partners at the FDA, HHS, and elsewhere have exercised enforcement discretion with respect to certain legal requirements that might otherwise slow down innovation.  In the Civil Division, we are also committed to ensuring that American businesses have the certainty and level playing field needed to respond to the pandemic and to make the economy roar back to life.

II

Let me turn now to how these principles apply to COVID-related stimulus programs.  One of those initiatives is the Paycheck Protection Program, which offers loans to provide incentives for small businesses to keep their workers on the payroll.  The Small Business Administration, which administers the program, will forgive the loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.  In the span of only a few months, the Paycheck Protection Program has provided crucial assistance to more than 4.5 million small businesses, issuing forgivable loans totaling more than $500 billion.

That’s a lot of money, and it creates a number of opportunities for fraud.  To get the money, a borrower has to certify that “current economic uncertainty” makes the “loan request necessary to support the ongoing operations of the” borrower.  The borrower also has to promise to use the funds solely “to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments.”  When the borrower is ready to seek forgiveness of the loan, it has to certify that the funds were in fact used to pay costs that are eligible for forgiveness. If an applicant knowingly answers any of these questions falsely, it may face False Claims Act liability.

In a time when the government is injecting vast amounts of federal funds into the U.S. economy, vigorous FCA enforcement is more important than ever to ensure that taxpayer dollars are spent as intended.  To that end, the Civil Division’s Fraud Section has implemented a number of initiatives to identify, monitor, and investigate potential violations of the FCA in this area.  Fraud Section attorneys are coordinating closely with the Office of the Inspector General at the Small Business Administration and other DOJ components to identify potential program vulnerabilities and safeguard PPP funds, as well as to identify any potential wrongdoing that warrants investigation.  Going forward, the Civil Division will make it a priority to use the False Claims Act to combat fraud in the Paycheck Protection Program.

The same is true of other assistance programs created by the CARES Act.  The Main Street Credit Facility, for example, is designed to provide loans to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 crisis, but that now need loans to help maintain their operations.  As with the PPP, borrowers and lenders are required to abide by the programs’ requirements, including various eligibility requirements.  We will use the False Claims Act to hold accountable those who knowingly attempt to skirt those requirements.

The CARES Act’s provider relief fund is another example.  Over the past several months, HHS has been distributing billions of dollars to health care providers, including those on the front lines of the COVID crisis.  Providers who receive funds must agree to a number of terms and conditions.  Providers must attest, for example, that they have provided or are providing care to individuals with actual or possible cases of COVID-19.  They must also agree to restrictions on balance billing actual or presumptive COVID-19 patients.  Where a provider knowingly violates these requirements, the False Claims Act may come into play.  

Our enforcement efforts may also include, in appropriate cases, private equity firms that sometimes invest in companies receiving CARES Act funds.  When a private equity firm invests in a company in a highly-regulated space like health care or the life sciences, the firm should be aware of laws and regulations designed to prevent fraud.  Where a private equity firm takes an active role in illegal conduct by the acquired company, it can expose itself to False Claims Act liability.  A pre-pandemic example is our recent case against the private equity firm Riordan, Lewis, and Haden, where we alleged that the defendants violated the False Claims Act through their involvement in a kickback scheme to generate referrals of prescriptions for expensive treatments, regardless of patient need.  Where a private equity firm knowingly engages in fraud related to the CARES Act, we will hold it accountable.

At the same time, however, we will be careful not to discourage businesses, health care providers, and other companies from accessing in good faith the important resources that Congress made available in the CARES Act.  While companies have an obligation to comply with federal law in submitting claims for payment, the Supreme Court has held that the “False Claims Act is not ‘an all-purpose antifraud statute,’” nor is it “a vehicle for punishing garden-variety breaches of contract or regulatory violations.”   Rather, the Act applies only to knowing violations of federal law that are material to the government’s payment decisions.  Complying with thousands of rules, terms and conditions, and complicated guidance can be a dizzying task under normal circumstances; it is significantly more difficult in times like today. 

With that point in mind, you can rest assured that the Civil Division will not pursue companies that made immaterial or inadvertent technical mistakes in processing paperwork, or that simply and honestly misunderstood the rules, terms and conditions, or certification requirements.  Consistent with the purposes of the False Claims Act and longstanding practice, the Civil Division will pursue cases only where the borrower knowingly failed to comply with material legal obligations and certifications.

When companies follow the law, they will have nothing to fear from us.  In the earliest days of the Paycheck Protection Program, as many of you will remember, some large companies that applied for loans were encouraged to give the money back because so many smaller businesses had been unable to obtain loans.  This Administration has recently committed to make public the list of companies that have received Paycheck Protection Program funds, and some have predicted more qui tams as a result.  Let me be clear.  If a company is eligible for a loan and submits certifications in good faith, that company will have nothing to fear from the Civil Division.  We are concerned only with actionable fraud.  In selecting enforcement targets, we will follow the law, and we will not pursue companies that access CARES Act programs in good faith and in compliance with the rules.

III

Let me say a few words now about our enforcement discretion with respect to qui tam lawsuits.  As you know, the Department brings its own enforcement actions under the False Claims Act, but a significant percentage of these cases come to our attention because of the statute’s qui tam provision, which allows whistleblowers to file lawsuits on behalf of the United States.  Since 1986, we have recovered more than $62 billion for the U.S. Treasury, of which more than $44 billion is attributable to qui tam actions filed by whistleblowers.  These whistleblowers, who are key partners in the Justice Department’s efforts to combat fraud, often come forward at significant personal risk to themselves.  We encourage whistleblowers who are aware of fraud against the federal government to report it to us, and we will vigorously support qui tam claims that appear credible. 

At the same time, not every qui tam case has merit or should proceed.  For that reason, the statute gives the Justice Department the authority to dismiss the action even over a relator’s objection.  For several decades, that authority was rarely used.  Beginning in early 2018, however, we provided our lawyers with tools to evaluate more consistently and transparently whether to dismiss qui tam cases that do not serve the interests of the United States.  In the so-called “Granston Memo,” named after our Deputy Assistant Attorney General Michael Granston, we outlined several considerations for deciding whether to move to dismiss, including curbing meritless or opportunistic qui tams, and preventing interference with agency policies and programs.  We have also told our litigators to consider advising relators of the possibility of dismissal so that they can choose to voluntarily dismiss cases instead. 

Our guidance has had a meaningful effect.  During the thirty years before the Granston Memo, the government moved to dismiss roughly 45 qui tam cases; in the two-plus years following the memo, the Department has moved to dismiss around 50 qui tams.  At the same time, it would be a mistake to view the Granston Memo as a “pro-defendant” change in practice.  By eliminating frivolous or unmeritorious qui tams, we use our dismissal authority to preserve our resources for cases of real fraud, and decrease the likelihood of bad case law that makes it more difficult for both the government and relators to pursue meritorious cases.  And while we have used the dismissal authority more often recently, it’s important to remember that the vast majority of qui tams are still allowed to proceed.

So how do we intend to use our dismissal authority during the pandemic and in the post-COVID world?  Like we do now, we will continue to use the authority judiciously, to weed out cases that involve regulatory overreach or are otherwise not in the interests of the United States.  So, for example, we will consider moving to dismiss qui tams that are based on technical mistakes with paperwork or honest misunderstandings of the rules.

We may also take a look at qui tams that try to hold companies liable for doing what the government said was okay to do.  Over the last few months, HHS, FDA, and other agencies have issued enforcement discretion policies and taken other actions designed to encourage private sector innovation.  HHS, for example, made telehealth services more available by exercising enforcement discretion with respect to HIPAA rules that would otherwise restrict the services health care providers could offer by video or audio.  As another example, HHS OIG decided to exercise its enforcement discretion not to impose administrative sanctions under the Federal anti-kickback statute for certain remuneration related to COVID-19.  If a business in good faith took advantage of the regulatory flexibility granted by federal agencies in time of crisis, it may not be appropriate to impose False Claims Act liability.  Indeed, where the agencies are exercising their discretion to waive or not enforce certain requirements, a qui tam case may fail as a matter of law for lack of materiality and knowledge. 

On a similar note, several agencies including HHS, CDC, and OSHA, have issued guidance recommending how to safely reopen companies or otherwise stem the transmission and spread of the virus. You might anticipate some qui tam actions based on alleged deviations from those non-binding guidance documents.  But as you know, it is the Department’s position that noncompliance with guidance documents cannot by itself form the basis of an FCA case.  And in any event, consistent with the President’s Executive Order that I mentioned earlier, we will consider dismissal if there was a reasonable attempt to comply with the guidance.

Our thinking along these lines finds a parallel in the Public Readiness and Emergency Preparedness Act of 2005.  Enacted in response to the Avian Flu, the so-called PREP Act immunizes businesses from liability under federal and state law in some circumstances.  In particular, if a business develops certain covered countermeasures to address an urgent public health threat, it generally can’t be sued in tort or contract.  The point of the PREP Act is to encourage companies to develop lifesaving tests, treatments, and other products in times of crisis without undue fear of liability.  To help address the current crisis, HHS has issued a declaration under the PREP Act providing immunity to certain entities and individuals who are producing countermeasures to fight COVID-19.  We likewise want to make sure that the risk of unwarranted False Claims Act liability does not discourage companies from helping to address the current health threat.  Stay tuned for more on this front.

While we’re on the subject of whistleblowers, I’d like to say a few words about third party litigation financing in qui tam actions.  As many of you know, the Civil Rules Advisory Committee’s MDL Subcommittee is considering a proposal for disclosure of third-party litigation funding agreements in civil litigation.  There is also a bill sponsored by Senator Grassley and other Members of the Judiciary Committee in the Senate that would accomplish the same end.

Those proposals involve third-party litigation finance disclosure in civil litigation generally, especially with respect to multi-district litigation and class action litigation.  As I understand it, the proponents argue that disclosure is appropriate for a number of reasons including revealing potential conflicts of interest, concerns about distortion in civil justice, fairness in litigation, and transparency and accountability.

As my colleague Steve Cox announced in a January speech, we have been actively evaluating the role that litigation funding plays in qui tam litigation.  As he noted, we don’t really know the extent to which third party litigation funders are behind the qui tam cases we are investigating, litigating, or monitoring.  We also don’t know whether relators are sharing information with third party funders, or whether and to what extent the funders are exercising control over relators’ litigation and settlement decisions.

Remember, these are cases brought in the name of the United States.  So the United States has an interest in knowing who is behind them.  For this reason, we have instructed our attorneys to begin asking a series of questions at each relator interview.  We will ask whether the relator or his or her counsel has any agreement with a third-party funder.  If the answer is yes, we will ask for the identity of the funder, whether the relator has shared information relating to the qui tam allegations with the funder, whether a written agreement exists, and whether the agreement entitles the funder to exercise any direct or indirect control over the relator’s litigation or settlement decisions.  We’ll also ask the relator to inform us if the answers to those questions change at any point over the course of the litigation. At this point, we are engaged in a purely information-gathering exercise for the purpose of studying the issues.  Credit is owed to our Deputy Attorney General, Jeff Rosen, and our acting Associate Attorney General, Claire Murray, for their leadership on this new initiative.

IV

I’d like to turn now to our Consumer Protection Branch’s COVID-19 enforcement efforts.  As I mentioned earlier, the Consumer Protection Branch has gotten a lot bigger over the past three years and is playing a much more significant role in the white collar space.  Although the Branch is in the Civil Division, it does both criminal and civil work.  In particular, the Branch works with the FDA and DEA to enforce the Food, Drug, and Cosmetic Act and Controlled Substances Act against pharmaceutical companies, medical device companies, and other entities in the life sciences space.  That is a big job.  The FDA alone is responsible for the oversight of more than $2.6 trillion in food, medical products, and tobacco, and the products it regulates account for about 20 cents of every dollar spent by U.S. consumers.

Under Director Gus Eyler’s leadership, the Civil Division’s Consumer Protection Branch is playing a key role in addressing fraudulent or otherwise illegal COVID tests, treatments, and purported cures.  Many unscrupulous actors view the pandemic as an opportunity to profit off people’s fear.  Peddling products they promise will prevent harm from the virus, these actors put consumers—especially those in vulnerable populations—at risk.  Attorney General Barr has made stopping these bad actors a Department priority, and the Consumer Protection Branch has been leading the charge.

In the early days of the pandemic, we got a temporary restraining order against a company that was selling a fraudulent COVID-19 vaccine.  In the weeks that followed, we also obtained injunctive relief against companies that were marketing industrial bleach, ozone therapy, and silver products as cures for the coronavirus.  Working with the FBI and industry partners, the Civil Division has also disrupted more than a hundred other schemes by shuttering websites selling fake or unapproved treatments.

In balance with these enforcement actions, we also have been working with the FDA and our U.S. Attorney partners to ensure that the Department’s efforts are consistent with the increased regulatory flexibility afforded to companies developing and distributing COVID-19 tests, treatments, and protective equipment.  When a company seeks in good faith to operate within this regulatory framework, it should not have to fear first learning of government disapproval through a civil or criminal action.

Looking forward, the Consumer Protection Branch also will play a key role in other pandemic-related areas.  First, we will vigorously pursue scammers who use the promise of the CARES Act’s stimulus programs or other government efforts to bilk American consumers out of their hard-earned savings.  We expect that the same criminals who have preyed on the elderly for years by posing as the IRS or the Social Security Administration will simply switch their scripts to take advantage of the pandemic.  In combatting that kind of fraud, we will target not only the fraudsters themselves, but also the infrastructure that they need to operate.  That includes facilitators in the telecommunications, financial, and marketing industries.

We have experience taking actions to dismantle the infrastructure that enables scammers to prey on the vulnerable.  In January, for instance, the Consumer Protection Branch and the U.S. Attorney’s Office for the Eastern District of New York brought landmark civil actions to shut down some of the largest carriers of fraudulent robocalls to seniors.  These actions stopped billions of robocalls.  The Branch also last year brought charges against four owners and managers of PacNet Services, a large payment-processing company that moved victim funds for numerous international fraud schemes.  And the Branch has charged and secured convictions against multiple executives who knowingly sold consumers’ data for use in schemes targeting the elderly.  Keeping with the Attorney General’s priorities, I am confident that you will see more actions of this nature in the coming months and years.

Second, the Branch will continue to play an important role in ensuring that new treatments for COVID-19 or related complications are safe and effective.  Among other things, the Branch will focus on ensuring that products—in particular, drugs and active pharmaceutical ingredients—comply with current safety regulations.  We will take action both here and abroad against companies that flout these requirements.

Finally, we will monitor potential clinical trial fraud in the development of drugs and medical devices.  As you know, many products designed to treat or prevent COVID-19 are currently in clinical trials, and more are in the pipeline.  As companies rightly push to bring their products to market as quickly as possible, they must also ensure the integrity and accuracy of their clinical trial data—regardless of whether they are conducting trials themselves or outsourcing those trials.  We will vigorously pursue claims against companies and executives that knowingly create or relay false or manipulated data in connection with clinical trials.

V

So I’ve spent a lot of time talking about our enforcement efforts related to COVID-19.  But that doesn’t mean we have stopped moving forward everywhere else.  In the few minutes that I have left, I want to share with you the Civil Division’s other priorities, and offer some predictions about where enforcement is headed over the next several years.

First, the opioid crisis continues to be a major priority.  Until the pandemic, opioid overdoses were the key public health challenge of our time.  For the past several years, we have been using all of the civil and criminal tools at our disposal—including the False Claims Act, the Food, Drug and Cosmetic Act, and the Controlled Substances Act—to stem the tide of opioid overdose deaths.  We have focused on entities at all levels of the distribution chain, including pharmaceutical companies, drug wholesalers, pharmacies, and doctors.

For example, we reached a $195 million global resolution with Insys to settle civil allegations that the company paid kickbacks—sham speaker events, jobs for the prescribers’ relatives and friends, and lavish meals and entertainment—to induce physicians and nurse practitioners to prescribe the opioid Subsys for their patients.

Through parallel criminal and civil actions advanced by both the Consumer Protection Branch and Civil Fraud Section, we also reached a $1.4 billion global resolution with Reckitt Benckiser to resolve allegations that the company’s subsidiary—now known as Indivior—fraudulently promoted the opioid Suboxone to physicians and patients.  The Consumer Protection Branch and the U.S. Attorney’s Office for the Western District of Virginia indicted Indivior last year and are preparing for trial in September.

Using the civil injunctive, forfeiture, and penalty provisions of the Controlled Substances Act, the Consumer Protection Branch also has taken actions against pharmacies, pharmacists, and doctors throughout the country.  Recognizing the success of these efforts, Attorney General Barr has identified civil opioid enforcement work as a Department priority.

A second area of focus is electronic health records.  Physicians rely on electronic health records software to obtain important patient data and to make treatment decisions.  We are using the False Claims Act to pursue electronic health records companies that allow the hunt for profit to corrupt the information that they provide to physicians. So, for example, we reached a $118.6 million resolution with Practice Fusion to resolve allegations that the company accepted kickbacks in return for using its software to promote opioid prescriptions to doctors. 

Third, Medicare Part C is an area where you can expect to see enforcement efforts in the years to come.  As you may know, almost a third of Medicare beneficiaries opt out of traditional fee for service Medicare under Parts A & B, and enroll in private Medicare Advantage Organization (or “MAOs”) plans instead.  In 2019, payments to MAOs totaled about $250 billion.  We’ve had several major False Claims Act resolutions in this area in the past few years, and we expect more to come.

A fourth area to keep an eye on is nursing homes and fraud on the elderly. This Administration is committed to protecting elderly Americans from fraud and exploitation.  In March, the Attorney General announced the National Nursing Home Initiative, which will coordinate and enhance civil and criminal efforts to pursue claims against nursing homes that provide grossly substandard care to their residents.  We have already begun investigations into dozens of nursing homes in multiple states as part of this effort.

A fifth area of focus is dietary supplements.  Three out of every four American consumers take a dietary supplement on a regular basis.  As a result, the dietary supplement industry is now worth more than $130 billion, with more than 50,000 different products available to consumers.  In just a few years, the industry will be worth hundreds of billions of dollars.  And unlike drugs, dietary supplements are not subject to pre-market approval by the FDA, and most of their ingredients are imported with little oversight from China and India.  Inevitably, there will be fraud involved in the combination of high profits, developing science, imported ingredients, and less regulation.  You can expect the Consumer Protection Branch to increase its resources devoted to investigating and litigating in this area. 

Finally, data privacy is another emerging area of emphasis.  As companies gather ever more data from consumers, the misuse of that data is a growing threat.  And this is a particular concern during the COVID-19 pandemic, when Americans are doing more than ever online.  With its authority to enforce the civil penalty provisions of the Federal Trade Commission Act and to use other tools, our Consumer Protection Branch is at the forefront of the Department’s effort to ensure data privacy and security.  The most notable recent action in this effort was the Branch’s role in negotiating and litigating the landmark case against Facebook.  In addition to securing a record-setting $5 billion penalty, that case gave the Branch monitoring and enforcement authorities over all current and future Facebook companies for years to come.  Moving forward, the Civil Division will coordinate closely with the FTC and the Department’s Antitrust Division to hold accountable those companies and individuals that break the law in acquiring, storing, or using consumer data.

*  *  *

As you can tell, the COVID-19 pandemic has been keeping us busy.  As we enforce the law now and in the future, we will do so in keeping with the principles and priorities that I have shared with you today.  Thank you for having me.