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ABA Section of Business Law


Business Law Today

Keeping Current: government enforcement
By Thomas F. O'Neil III and Melinda H. Waterhouse
Chief compliance and legal counsel caught by False Claims Act
As enforcement authorities pursue companies and corporate officers with ever-increasing fervor, they are developing novel theories of liability to expand their roster of targets. Over the past decade, chief legal and compliance officers have found themselves in the spotlight previously beamed on colleagues in accounting and finance. A recent case in the health care sector highlights the potential exposure.

In September 2007, the United States Department of Justice (DOJ) filed a lawsuit against Christi Sulzbach (Sulzbach), former general counsel to Tenet Healthcare Corp. (Tenet or the Company), seeking tens of millions of dollars under the False Claims Act (FCA or the Act). The complaint alleges that Sulzbach submitted false compliance declarations required by a corporate integrity agreement imposed on Tenet's predecessor, National Medical Enterprises, Inc. (NME), thereby causing the government to pay claims erroneously.

Sulzbach was not involved in any of the claims at issue, so the lawsuit highlights the zeal of current recovery initiatives. It also raises important questions regarding internal investigations, settlement agreements, and voluntary disclosures.

The Corporate Integrity Agreement
In June 1994, NME settled an investigation of alleged kickbacks and entered into a corporate integrity agreement (CIA) with the Office of Inspector General of the Department of Health and Human Services (HHS). Sulzbach executed the settlement agreement and the CIA on behalf of NME.

The CIA required NME to submit to HHS annual compliance reports, which would include certifications regarding the company's compliance with federal program requirements and the status of any relevant ongoing investigations. The CIA remained in effect after NME and American Medical Holdings, Inc. merged in 1995 to form Tenet. Sulzbach became Tenet's associate general counsel and corporate integrity program director.

The Internal Investigation
According to the complaint, in February 1997 an executive at Tenet drafted a memorandum on the legality of certain contracts with physicians. The executive met with Sulzbach, and she retained outside counsel to conduct an internal investigation.

In or about June 1997, the law firm submitted its report, determining that the contracts had violated the Stark Law, a federal statute which prohibits kickbacks and payments for physician referrals. Tenet did not disclose those findings to authorities.

The CIA Compliance Reports
The DOJ contends that after receiving the report from outside counsel, Sulzbach submitted declarations under the CIA in 1997 and 1998, in which she certified that Tenet was in compliance with the CIA and federal program requirements. Sulzbach filed the 1997 compliance report four days after receiving outside counsel's findings on Stark Law violations.

Notably, the complaint also details an effort by Sulzbach to correct the situation. A month after she submitted to HHS the 1997 compliance report, Sulzbach issued an internal memorandum to a colleague whom the executive had originally contacted, directing him to implement corrective action, advising him that failure to do so could trigger the CIA's disclosure provisions, and requesting that he send her a written status report. The complaint suggests that Sulzbach failed to follow up and that violations then continued.

The Qui Tam Litigation
A former Tenet employee filed a qui tam action against the Company in May 1997, claiming that it had violated the FCA by billing Medicare for referrals from the physicians who had been identified by the executive several months earlier. Tenet denied the allegations and, during discovery, asserted evidentiary privileges for over 15,000 documents, including the outside counsel's report and Sulzbach's internal memorandum to her colleague.

The government intervened and filed a motion to compel production of documents identified on the privilege logs; this motion was pending when the litigants settled in 2004.

The 2006 Settlement
In 2006, the Company settled a Medicare fraud inquiry by the government. Tenet agreed to pay $920 million and to produce certain documents that had been withheld as privileged, including some materials from the qui tam action. That concession resulted in the disclosure of two versions of the 1997 report from outside counsel and the internal memorandum thereafter authored by Sulzbach.

The following year, the DOJ sued Sulzbach under the FCA in a three-count complaint seeking treble damages and civil penalties.

The Act
Congress enacted the FCA during the Civil War so that citizens could pursue fraud claims against contractors, usually in situations where contractors had made false claims or falsified records to receive payment from the government. By the late 1990s, the Act had become a significant weapon for federal enforcement officials and private-sector whistleblowers.

The FCA prohibits:

1. knowingly presenting or causing to be presented to the government a false or fraudulent claim for payment or approval;

2. knowingly making, using, or causing to be made or used a false record or statement to receive payment or approval for a false claim from the government;

3. conspiring to defraud the government by obtaining approval or payment from the government for a false or fraudulent claim;

4. intending to defraud the government or conceal property from the government by delivering less property than the receipt indicates;

5. intending to defraud the government by certifying a receipt for property used by the government without knowing the truth of the information in that receipt;

6. knowingly buying or receiving public property from the government when this acquisition is unlawful; or

7. knowingly making, using, or causing to be made or used a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit property to the government.

Under the FCA, the United States can recover civil penalties of $5,000 to $10,000 per violation and, in certain circumstances, is entitled to recover treble damages.

Ramifications
The DOJ essentially claims that Sulzbach, as associate general counsel and corporate integrity program director, was personally responsible for investigating alleged violations of any federal program requirements and for reporting to HHS the existence and status of any internal inquiry.

That factual assertion has given rise to a new theory of liability under the FCA. The DOJ's ardor in this case quite clearly was fueled by the alleged failure to follow through on the corrective measures and by the vigorous defense of the qui tam action.

Given this aggressive pursuit of Sulzbach under the Act, compliance and legal officers operating in regulated industries should review this case carefully. The imposition of a CIA is a serious matter, as is the subsequent submission of contractually mandated compliance reports. And the potential consequences of a privilege waiver in a settlement agreement must be analyzed comprehensively before negotiations are concluded.
O'Neil, a partner, and Waterhouse, an associate, are both based in the New York office of DLA Piper. Their respective e-mails are thomas.oneil@dlapiper.com and melinda.waterhouse@dlapiper.com.

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