Resolving FCA Investigations and Qui Tam Actions: Cooperation Credit and Settlement Considerations

Consider Cooperating with the Government

To incentivize companies to voluntarily disclose misconduct and cooperate with government investigations into FCA violations, in May 2019, the Department of Justice (DOJ) announced guidelines for companies to earn “cooperation credit.” Cooperation credit can be earned by voluntarily disclosing misconduct to the government, cooperating with the government during an ongoing investigation, or taking steps to remedy the violation. U.S. Dep’t of Justice, Justice Manual § 4-4.000 (2018).

Where the conduct of the entity or individual warrants credit, the [DOJ] has discretion in FCA cases to reward such credit. Most often, this discretion will be exercised by reducing the penalties or damages multiple sought by the [DOJ]. 

The maximum credit that a defendant may earn may not exceed an amount that would result in the government receiving less than full compensation for the losses caused by the defendant’s misconduct (including the government’s damages, lost interest, costs of investigation, and relator share) [i.e., single damages with no multiplier]. 

The [DOJ] may consider, in appropriate circumstances, additional avenues that would permit an entity or individual to claim credit in FCA cases, including:

• Notifying a relevant agency about an entity’s or individual’s disclosure, other cooperation, or remediation, so that the agency in its discretion may consider such factors in evaluating its administrative options, such as suspension, debarment, exclusion, or civil monetary penalty decisions;
• Publicly acknowledging the entity’s or individual’s disclosure, other cooperation, or remediation; and
• Assisting the entity or individual in resolving qui tam litigation with a relator or relators.

Id. § 4-4.112.

Be Smart and Realistic About Settlement

Like civil cases, the vast majority of FCA claims settle before reaching trial. Thus, it is imperative for practitioners and companies alike to understand the unique issues surrounding FCA settlements.

Characterization of the settlement amount determines tax treatment. Under 26 U.S.C. § 162, settlement amounts characterized as restitution or paid to achieve compliance with the law are tax-deductible. By contrast, multiples and civil monetary penalties, as well as investigation or litigation costs, are not deductible.

In a significant and recent development in October 2021, a court in the Northern District of Illinois held that an FCA settlement qualified as insurable compensatory damages, not uninsurable disgorgement. Astellas v. Starr Indemnity, No. 17-cv-8220 (N.D. Ill. Oct. 8, 2021). There, the court held that labeling a settlement payment as “restitution to the United States,” as required to qualify for tax deductibility under section 162(f), did not alter the compensatory nature of the payment because those damages are intended to “compensate the United States” to make it “completely whole” and thus are insurable. Id.

Settlement amounts include single damages plus a multiplier. In any FCA settlement negotiation with the government, there are two principal components that must be addressed to determine the actual amount that a defendant must pay to the government to resolve the case:

1. Single damages, i.e., the actual amount of the government’s loss
2. The multiplier

Because the government would be entitled to treble damages if it were to prevail at trial, the government will most often demand that a multiplier between 1.5 and two times single damages be applied to reach a final settlement number. The amount of the multiplier will most often depend upon the government’s perception of the value of the defendant’s cooperation and candor, as well as the evidence of mitigating factors or egregiousness of the alleged fraud on the government. In most settlements, the government will waive civil monetary penalties.

Defense counsel should consider negotiating a final number that the government will accept—and then seek to have as great a percentage as possible characterized as restitution, rendering that portion of the settlement tax-deductible. This can be effective where the government is satisfied with the overall settlement amount and a strong case can be made as to the quality of the defendant’s candor and cooperation.

Legal standards guide evaluation of relators’ counsel fees petitions. In any FCA action where there is a relator, the relator is entitled to “reasonable attorneys’ fees and costs” with respect to successful claims. 31 U.S.C. 3730(d)(1). Various factors have been developed via case law, however, that may limit a relator’s attorney fees award.

To determine the appropriate award, the court first calculates the lodestar figure: “the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate.” Hensley v. Eckerhart, 461 U.S. 424, 433 (1983). The party making the fee request has the burden of proof to produce documentation of the hours worked and to establish the reasonableness of the time expenditure. The court must subtract from the lodestar calculation hours that are “excessive, redundant, or otherwise unnecessary.” Id. at 434. “Hours that are not properly billed to one’s client also are not properly billed to one’s adversary pursuant to statutory authority.” Id. (emphasis in original).

After arriving at the lodestar figure, the court may further adjust the award based on factors approved in Hensley. People Who Care v. Rockford Bd. of Educ., 90 F.3d 1307, 1310 (7th Cir. 1996). The Hensley factors include

(1) the time and labor required; (2) the novelty and difficulty of the questions; (3) the skill requisite to perform the legal service properly; (4) the preclusion of employment by the attorney due to acceptance of the case; (5) the customary fee; (6) whether the fee is fixed or contingent; (7) time limitations imposed by the client or the circumstances; (8) the amount involved and the results obtained; (9) the experience, reputation, and ability of the attorneys; (10) the “undesirability” of the case; (11) the nature and length of the professional relationship with the client; and (12) awards in similar cases.

Hensley, 461 U.S. at 457 n.3 (quoting Johnson v. Ga. Highway Express, Inc., 488 F.2d 714, 717–19 (5th Cir. 1974)).

Notably, in Hensley, the Supreme Court cautioned that attorneys requesting statutory fees should themselves reduce the fees in their fee request. “Bill judgment consists of winnowing the hours actually expended down to the hours reasonably expended.” Spegon v. Catholic Bishop of Chi., 175 F.3d 544, 552 (7th Cir. 1999).

Further, courts do not hesitate to reduce the relator’s attorney fees where counsel spends excessive time after a qui tam complaint is filed. E.g., United States ex rel. Kirchgessner v. James River Air Conditioning Co., 2019 WL 413547, at *2–3 (E.D. Va. 2019) (citing United States ex rel. Tommasino v. Guida, 2017 WL 878587, at *5 (E.D.N.Y. 2017) (noting that an FCA case “required limited commitment from relator’s counsel once the government intervened)).

Relatedly, “[t]he greater weight of authority disallows compensation for attorneys’ fees and costs incurred in connection with the relator’s share negotiation/litigation.” United States ex rel. Thompson v. Walgreen Co., 621 F. Supp. 2d 710, 727 (D. Minn. 2009); see also United States ex rel. Taxpayers Against Fraud v. Gen. Elec. Co., 41 F.3d 1032, 1046 (8th Cir. 1994) (relator’s share attorney fees not compensable because defendant not involved); Miller v. Holzmann, 575 F. Supp. 2d 2, 26–27 (D.D.C. 2008) (same).

That being said, defense counsel must be practical when considering how vigorously to contest the relator’s attorney fees as the relator is entitled to recover fees associated with the battle over the amount of the fees. Given the need for expert testimony and discovery, proceedings contesting the relator’s attorney fees can be costly and may only be practical in higher-dollar cases.

The release includes various elements. Any FCA settlement will be accompanied by a release. Ideally, the release should be as broad as possible, but not unnecessarily specific. The “covered conduct,” released individuals and entities, relevant contracts, and relevant time period need to be unambiguous and comprehensive.

Other considerations in terms of the release include the following:

• “Cold comfort” letters. Sometimes the government balks at including certain conduct, individuals, and/or entities in the release. In these circumstances, the DOJ may issue “cold comfort” letters indicating that agencies do not intend to pursue further enforcement actions arising from the same or related transactions/occurrences.
• Denial of liability. Always insist upon language making it clear that settlement reflects compromise and that defendants deny all liability.
• Debarment and program exclusion. FCA violations typically carry debarment from federal contracting or exclusion from programs funded by the federal government, for a period of time. To the extent possible, endeavor to eliminate or limit debarment/exclusion. The ability to do so depends on the seriousness of the alleged violations and the defendant’s level of cooperation (among other factors).
• Dismissal with prejudice of qui tam claims in which the government has not intervened. Settlement agreements and releases are only going to cover claims in which the government is intervening, so you need to ask the government to separately dismiss any claims in the qui tam action in which it is not intervening so that the relator cannot continue to pursue them.
• Corporate integrity agreements. Corporate integrity agreements (CIAs) require defendants to submit to ongoing monitoring by the government and/or an independent third party that must make periodic reports to the government. Such monitoring can be costly and invasive for settling defendants, so it is best to avoid it if possible. That said, in some circumstances, submitting to CIAs may contribute to avoiding criminal charges or to achieving a favorable deferred prosecution agreement.
• Global settlement. Where there are parallel criminal investigations, or multiple agency investigations, try to coordinate settlements.

Some issues are lost causes. To be sure, there are certain items that the government will not negotiate away. This includes the DOJ’s ability to issue a press release, certain claims, and certain boilerplate provisions.

For example, the civil enforcement division does not have the authority to release tax and criminal liability or liability to the government arising from conduct other than the “covered conduct.” Similarly, the DOJ will not release any administrative liability that includes mandatory or permissive exclusion from federal health-care programs.

Likewise, the government will insist on the following boilerplate provisions to any settlement agreement:

• The settling party waives and shall not assert any defenses it may have to any criminal prosecution or administrative action relating to the covered conduct that may be based on the Double Jeopardy Clause in the Fifth Amendment. (This is all the more reason why it is important to obtain a cold comfort letter.)
• The settling party will not assert any defense that the allowable costs are impermissible under the Excessive Fines Clause of the Eighth Amendment.
• The settling party must provide full and truthful cooperation in a government investigation of anyone not released.

Being Realistic Helps Ensure the Best Result

For individuals and entities settling FCA claims against them, being mindful of these realities will help ensure the best possible result.