United States: How The New FCA Cooperation Credit Guidelines Fall Short

Last Updated: May 14 2019
Article by Craig D. Margolis and Christian D. Sheehan

The thing about a grab bag or the proverbial box of chocolates is that you never know what you are going to get. On May 7, 2019, the U.S. Department of Justice's published formal guidelines presaged by Deputy Attorney General Rod Rosenstein in a November 2018 speech on cooperation credit in False Claims Act cases.1 And while we applaud the department's putting pen to paper on FCA enforcement guidance, we are left scratching our collective heads on what's in the offing.

White collar criminal defense practitioners will find nothing remarkable about the prospect of cooperation credit for voluntary self-disclosure. Indeed, for many years the principles of corporate prosecution2 have laid out what constitutes cooperation and some programs – such as the Foreign Corrupt Practices Act corporate enforcement policy3 – suggest corporations that come forward may obtain a complete "pass" from prosecution.

Even though doubts remain as to whether self-disclosure yields real and tangible benefits, these Criminal Division policies provide the strongest possible incentives for companies to make the hard choice of effectively turning themselves in – as well as potentially their most senior executives.

In comparison, the new FCA guidelines fall somewhat short. Yes, the policy hints that "[e]ntities or individuals that make proactive, timely, and voluntary self-disclosure to the department about misconduct will receive credit during the resolution of a FCA case." The guidelines also provide some detail as to what constitutes cooperation in the DOJ's eyes, including among other factors, identifying culpable individuals, disclosing facts and making documents and information available – perhaps beyond what the DOJ could already obtain by subpoena or CID, making personnel available for interviews, sharing results of internal investigations – without requiring a privilege waiver, and of course "admitting liability or accepting responsibility for the wrongdoing or relevant conduct."

While there is much discussion of what constitutes cooperation, there is little mention of the benefit of the bargain. The DOJ does not outline precisely what "credit" companies might receive, but at the same time carefully stakes out what cooperation will not obtain. For example, the guidelines provide that 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)."

The guidelines similarly make it clear that the decision whether to reward cooperation is entirely within the DOJ's discretion, so there are no promises made. There is no "entitlement" to credit when the cooperation factors are met and the DOJ reserves the right to deny any credit whatsoever in undefined "egregious circumstances."

Equally oblique is the discussion of what cooperation does not encompass. "Cooperation does not include disclosure of information required by law," nor does it "include the disclosure of information that is under an imminent threat of discovery or investigation." This leaves much open to interpretation.

For example, if a defense contractor must self-disclose pursuant to the Federal Acquisition Regulation, or FAR, does that mean it receives no credit from the DOJ for doing so? What does "imminent threat of discovery or investigation" mean? If there is an internal whistleblower who makes a hotline report and threatens to go to law enforcement – not an entirely unrealistic scenario – would that crop the cooperation carrot? Whether there is an "imminent threat" is awfully amorphous and open to infinite second-guessing by the DOJ when exercising its "discretion" whether to provide a reward.

The most obvious difference between the criminal and civil cooperation programs is what is most clearly not in the cards – a full declination. The policy's word choice of "defendant" is hardly unintentional, as is the fact that the government's taking a "pass" on FCA liability appears nowhere in the list of potential benefits from cooperation – such as notifying relevant agencies of cooperation for suspension and debarment considerations, publicly acknowledging a company's cooperation and assisting the entity in resolving qui tam litigation with relators. Clearly, as is the case in the criminal cooperation programs, a company may make the government whole without settling FCA liability, for example, by fully crediting affected government health care programs or defense contracts and by taking real and measurable remedial steps. It is not clear what a FCA settlement adds to this mix except a press release.

Indeed, the accepted wisdom currently among FCA defense practitioners is that a prefiling settlement – or a preintervention qui tam resolution – will yield reduced exposure of anywhere from 1.5 to 2 times "single damages," which themselves are open to negotiation. After all, there's not much incentive for a company to settle if the DOJ insists on treble damages and penalties.

These guidelines appear to contemplate a cooperating "defendant" must self-disclose, fully cooperate, and still sign a FCA settlement with the DOJ – and potentially relators – with the risk that the DOJ still might find the circumstances sufficiently "egregious" to deny any credit whatsoever or to reduce the potential reward. We do know that the "maximum" reward is no less than single damages.

The question arises then, what does the "grab bag" truly offer? Are self-disclosure and the attendant risks worth the purported "promise" of an undefined reward that may, in any event, be no more than what a company could currently receive in the give-and-take of presuit resolution negotiations?

For the newly-defined cooperation credit to be real and valuable – to companies, the government and the public at large – we believe the DOJ will have to answer these difficult questions. Otherwise, the risk of plucking a truly terrible chocolate from this particular box may be far too great to run.

Originally published in Law360

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