United States: CIVIL FALSE CLAIMS ACT: District Court Says Government Cannot Use Civil Investigative Demands To Cure Its Own Pleading Deficiencies

United States District Judge Richard Bennett, a former U.S. Attorney, rejected attempts by his former Justice Department colleagues to use a Civil Investigative Demand ("CID") to attempt to gather the information necessary to overcome a Rule 9(b) dismissal of the government's False Claims Act ("FCA") complaint. Through his ruling in United States v. Kernan Hospital, No. RDB-11-2961, 2012 WL 5879133 (D. Md. Nov. 20, 2012), Judge Bennett made clear what should have already been obvious—namely, that the pleading rules applicable to other civil litigants apply equally to the government in FCA cases. Just as a normal plaintiff typically is not permitted to take discovery to learn particulars of a fraud claim for pleading purposes, once the government files an FCA case, it cannot use its extraordinary CID authority to gather facts necessary to file an amended complaint that can pass muster under Rule 9(b). Indeed, the decision reinforces the key role played by Rule 9(b) in FCA litigation—even where the action is commenced by the United States rather than a qui tam relator.

The FCA's Civil Investigative Demand Provision

FCA Section 3733(a)(1) provides in part:

[T]he Attorney General, or a designee, may, before commencing a civil proceeding under section 3730(a) or other false claims law, or making an election under section 3730(b), issue in writing and cause to be served upon such person, a civil investigative demand....

31 U.S.C. § 3733(a)(1) (emphasis supplied).

The 1986 amendments to the FCA authorized the Justice Department to issue CIDs in FCA investigations and to require a person who may possess information relevant to the investigation to produce documentary evidence, answer written interrogatories, give oral testimony, or provide any combination of the above. Recent amendments to the FCA made it easier for the Justice Department to obtain CIDs, but did not alter this fundamental limitation on the timing of when CIDs could be employed in cases brought by the United States. See John T. Boese, Civil False Claims and Qui Tam Actions § 5.07[A][1] (Wolters Kluwer Law & Business) (4th ed. & Supp. 2012-2) ("BOESE").

The Investigation and Complaint in Kernan Hospital

The underlying allegations in Kernan Hospital stemmed from a government investigation into a possible "upcoding" scheme by which the hospital sought to increase its reimbursements under federal health care programs. In the course of the investigation, the government issued a series of CIDs seeking documents concerning the supposed scheme, and the hospital produced almost 20,000 documents. The government also deposed the hospital's director of health information management. Armed with this CID discovery, the government filed its FCA action against the hospital, which promptly moved to dismiss the action on the grounds that it failed to meet the pleading requirements under Rule 9(b). In an initial ruling that demonstrated that Rule 9(b) also applies to the government in FCA cases (a position that should be obvious but is sometimes discounted by the Justice Department), Judge Bennett dismissed the complaint, without prejudice, due to its lack of specificity and its failure to identify a false claim submitted to the United States. After the dismissal, the government issued another CID, this time expanding the time period from its initial CIDs and also seeking additional documents.

The CID Issue

Faced with this new CID, the hospital petitioned the Court to set aside the latest CID, arguing that the government had no CID authority under Section 3733 because CIDs could only be issued "before commencing a civil proceeding." Not surprisingly, the government took a different position, arguing that since the complaint had been dismissed, its CID authority had effectively been renewed. The government claimed that (1) there is an inherent limitation in Section 3733 such that it deprives the Attorney General of CID power only if a suit is pending, and (2) as a matter of policy, the government should be given the opportunity to exercise its power to demand the information under Section 3733 because it was necessary to amend its initial complaint. Judge Bennett rejected both arguments.

The Plain Meaning and Legislative History of Section 3733

First, the Court said there is no "inherent limitation" on Section 3733 that would give the government the power to issue a CID at this stage of the proceeding, nor is there a basis for interpreting "before commencing a civil proceeding" to include the period after commencement of the proceeding when no suit is pending. Second, the court concluded from Section 3733's legislative history that the CID power was for the purpose of the government's pre-suit investigation. See Id. at *5 (citing S. Rep. No. 99-345, at 4 (1986); H.R. Rep. No. 99-660, at 26 (1986)). Indeed, the legislative history to the 1986 amendments indicates that Congress gave the Department of Justice the authority to issue CIDs in order to offset the Supreme Court's decision in United States v. Sells Engineering, Inc., 463 U.S. 418 (1983), which sharply reduced its access to grand jury materials, and to remedy the fact that its civil attorneys lacked authority to compel production of documents or depositions prior to filing suit. See BOESE at § 5.07[A].

In 2009, Congress amended Section 3733 to clarify that the government may issue a CID in a qui tam suit "before...making an election under section 3730(b)," i.e., the time period after the filing of a qui tam suit by a relator but before the government's intervention decision pursuant to Section 3730(b)(4). Prior to the 2009 amendments, in Avco Corp. v. United States Department of Justice, 884 F.2d 621, 624 (D.C. Cir. 1989), the D.C. Circuit had ruled that in the context of a qui tam suit, prior to the intervention decision, the CID is a "pre-litigation" tool, and that the Attorney General "commences" an already initiated qui tam proceeding only upon intervention. The 2009 amendments to Section 3733 essentially

codified the D.C. Circuit's ruling in Avco, making clear that the government may issue CIDs in qui tam suits during the pre-intervention period. Judge Bennett's decision in Kernan Hospital is fully consistent with the D.C. Circuit's ruling in Avco and the 2009 amendments. In both the qui tam and affirmative FCA case scenarios, the government's power to issue CIDs ends once the intervention decision is made.

The Court's Rule 9(b) Analysis

The Court notably rejected the government's second argument—that it needed the CID power in order to amend its complaint and overcome the Rule 9(b) deficit that prompted the initial dismissal. The Court also re-emphasized that the government's complaints must comply with Rule 9(b)'s directive that the crucial circumstances of the fraud must be alleged with particularity. Relying on the Fourth Circuit's decision in United States ex rel. Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999), Judge Bennett also made clear that Rule 9(b) serves an important purpose in protecting against damage to a defendant's reputation and goodwill.

The lessons of the Kernan Hospital decision are two-fold: (1) once an FCA action "commences," either through the filing of an affirmative FCA case by the government or the government's intervention in a qui tam case, the government's CID authority is over; and (2) just as it does to other civil litigants, Rule 9(b) applies to the government in FCA cases. While these lessons should have been obvious all along, this decision serves as a useful reminder and authority.

A Final Note

After the 2009 amendments expanded the government's ability to issue and use CIDs in FCA cases, their use by both DOJ and U.S. Attorneys' Offices has increased tremendously. See Statement of Assistant Att'y Gen. for the Civil Division, Tony West, Before the S. Comm. on the Judiciary (Jan. 26, 2011) (noting that, in the last quarter of 2010, DOJ attorneys requested authority to issue over 500 CIDs, which is more than six times the number requested throughout the previous two years). It is important to recognize that the power to issue CIDs is a unique, ex parte investigatory tool possessed by the government alone, that the 2009 amendments provide the government with broad power to issue CIDs and to share CID responses with others, including relators, and that defendants under investigation are not permitted any reciprocal discovery at the pre-filing, investigatory stage of an FCA case. Section 3733 serves an important purpose in ensuring that once active litigation commences, the government's tremendous discovery advantages are curtailed for the remainder of the action.

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