The "New" Civil Investigative Demand: Congress Pushes for More Aggressive False Claims Act Investigations

In 1986, Congress, for the first time in over 40 years, enacted large-scale amendments to the Civil False Claims Act (FCA). The 1986 amendments, among other things, conferred authority on the Attorney General of the United States to issue Civil Investigative Demands (CID) in furtherance of false claims investigations. This powerful tool for investigating suspected violations of the FCA permitted investigators to demand production of relevant documents and records, to require written answers to interrogatories, and to compel depositions.

In early 2009, Congress again amended the FCA. In the 2009 legislation, Congress strengthened the CID by making it more accessible to front-line prosecutors and specifically authorized the sharing of CID information with whistleblowers. As a result, government contractors and their employees are likely to face increased and intensified exposure to FCA investigations. This update offers background regarding the new CID and a discussion of its potentially significant impact on government contractors.

Congress Lifts Important Restrictions on CIDs

Recognizing the intrusiveness and potential abuses of CIDs, Congress placed important restrictions on their use in 1986. Congress required the Attorney General to personally approve the issuance of all CIDs and limited the dissemination of the acquired information to a relatively small group of government officials. The 1986 CID was powerful and effective, but it also was tempered by procedural safeguards that protected companies and employees from invasive and unnecessary investigations. As a consequence, the 1986 CIDs were used infrequently and with great caution. The 1986 CIDs were viewed as special powers reserved for special cases.

That all changed in 2009. On May 20, 2009, Congress enacted the Fraud Enforcement and Recovery Act of 2009, P.L.111-21 (FERA). With the stroke of a pen, Congress dramatically enhanced the government’s investigative powers for FCA cases, and, in the view of many, exposed government contractors and their employees to lengthy and costly FCA investigations. It is clear that Congress intends to reinvigorate the use of CIDs and boost their impact on FCA investigations. Armed with a 2009 CID, government investigators now are free to issue CIDs in more routine FCA investigations without the important safeguards implemented in 1986.

The new law made several important changes to the CID provisions. First, FERA rescinded the requirement that the Attorney General personally approve all CIDs and authorized him to delegate his authority to a subordinate.¹ Second, it removed the requirement that a federal judge authorize the release of CID information to parties outside the Department of Justice (DOJ) or Congress. Third, FERA explicitly authorized federal investigators to share CID information with qui tam relators.² Fourth, FERA authorized that CID information could be shared with other agencies, including federal prosecutors who are conducting criminal investigations.

In addition, there were at least two glaring omissions from the 2009 legislation. Foremost, Congress failed to establish clear guidelines for the use of CIDs. Also, FERA did little to protect the confidentiality of proprietary data or trade secret information disclosed in response to a CID.³ These changes and omissions to Section 3733 – and the Department’s interpretation of those changes and omissions – could dramatically alter the number, conduct and outcome of FCA investigations.

Delegation of the Attorney General’s Authorization

Prior to FERA, the Attorney General was required to personally approve the issuance of a CID. This meant that a DOJ trial attorney or assistant U.S. attorney was required to obtain the approval of several DOJ officials, tucked away in multiple layers of DOJ’s bureaucracy, before the CID request was brought before the Attorney General. Like any bureaucracy, the CID process was slow and time consuming, and many trial attorneys elected not to use the CID because of the lengthy review process and delays involved. The 1986 CID was used primarily for the more important FCA investigations.

FERA removed those delays, and lower-level DOJ officials will soon be empowered to authorize CIDs in more FCA cases. In July 2009, the U.S. Chamber of Commerce wrote Attorney General Holder and informed him of its concern about “consistency, coordination, institutional memory, and a variety of other issues that overbroad delegation [of the CID] would raise.”⁴ The Chamber recommended that the Department limit “delegation of authority to a single individual – such as the Assistant Attorney General for the Civil Division.”⁵ The Chamber noted that the Antitrust Division had not delegated its CID authority below the level of Assistant Attorney General (AAG).⁶

Tony West, the Assistant Attorney General for the Civil Division, responded to the Chamber’s concern about delegated authority by noting, “although FERA expended the category of officials within the Department that may issue CIDs in False Claims Acts cases, FERA did not alter the scope of the department’s authority to use CIDs in such cases.”⁷ AAG West further noted, “while FERA may very well increase the frequency of CIDs in False Claims Act cases, it does not fundamentally change the way in which such CIDs may be used.”⁸ Significantly, Mr. West did not commit to limiting the CID authority to the AAG level, and acknowledged that CIDs will be used with more frequency in FCA cases. Mr. West’s apparent reluctance to support limiting DOJ’s new CID authority could be a troubling sign for government contractors and sub-contractors and other companies that provide goods and services to the government.

Removal of District Court Approval for Dissemination of CID Information

Before FERA, CID information only could be shared with DOJ employees, Congress, and “any other agency” of the United States.⁹ In order to share CID information with “any other agency,” the Attorney General was required to obtain permission from a “United States district court” and show a “substantial need for the use of the information.”¹⁰ FERA stripped away the “substantial need” standard and eliminated the requirement to obtain approval from a federal judge before sharing the CID information. The removal of these important restrictions will lead to greater dissemination of CID information within the government and may increase the number of inquiries and investigations initiated by other government agencies.

Sharing CID Information With Qui Tam Relators

Section 3733(a)(1) of FERA includes a new section that authorizes DOJ investigators to share information obtained through a CID “with any qui tam relator if the Attorney General or designee determine(s) it is necessary as part of any false claims act investigation.”¹¹

To put this critical change in its proper context, it is important to note that a CID can be used by government investigators against the target of a FCA investigation – and against innocent third parties – before the government initiates a lawsuit or agrees to intervene in a pending qui tam action, which in most instances is under seal. FERA essentially creates a public/private partnership between government investigators and relators in which these two forces, together and with limited judicial oversight, review sensitive corporate information, prepare for depositions of high ranking corporate officials, and collaborate on a legal strategy – all while the corporate entity is unaware of the realtors allegations and the intent of government investigators.

An additional concern regarding this expanded authority is the increased legal costs to government contractors. Due to the anticipated increase in the number of CIDs issued in FCA investigations, government contractors will incur substantial legal expenses associated with responding to CIDs.

Sharing of CID Information With Government Prosecutors

The new federal legislation permits CID information to be shared “in furtherance of a Department of Justice investigation or prosecution of a case.”¹² In its legislation, Congress offered no guidance to the Department of Justice on the use of CIDs when there is a parallel criminal investigation.

In its letter dated July 13, 2009, the Chamber of Commerce noted its concerns about the potential for “misuse of the CID provisions” when there is a parallel criminal proceeding or investigation. The Chamber requested DOJ to issue guidelines to “ensure that CID information is not improperly employed to aid a criminal investigation.”¹³ The Chamber also warned that “CIDs seeking depositions or interrogatory answers in the face of pending criminal proceedings pose particularly important problems, because they can undermine Fifth Amendment rights and prejudice a defendant’s ability to defend, among other concerns.”¹⁴ The Department of Justice has not responded to the Chamber’s concerns regarding parallel criminal proceedings.

Additional Considerations

Section 3733 allows the Attorney General or his designee to issue a CID to obtain any information “relevant to a false claims law investigation.”¹⁵ The statute offers no additional guidance to DOJ counsel regarding the appropriate circumstances in which the CID should be used.

The Chamber noted that “[g]iven the significant burdens that a CID can impose on a recipient, the DOJ should adopt general criteria to be employed in considering the issuance of a CID.”¹⁶ One suggestion was to limit the use of CIDs only after government investigators have developed “the theory of the violation” and limit the scope of the CID to that theory.¹⁷ Another was to require the government to file a request to unseal the complaint before a CID is issued.

An additional and important point concerns the protection of proprietary data or trade secret information disclosed in response to a CID. Corporations are rightfully concerned that proprietary data or trade secret information disclosed to government investigators in response to a CID – and later disclosed to other government agencies and the relator – will land in the possession of its competitors. Assistant Attorney General West, in his letter to the Chamber, attempted to calm those concerns by noting “the Civil Division typically requires the execution of a confidentiality agreement limiting the use of [CID] information.”¹⁸

It is fair to say that more could be done to protect the confidentiality of proprietary data or trade secret information. First, DOJ should mandate that Non-Disclosure Agreements (NDA) be used in all cases. Next, the NDAs should be executed by all parties and filed with the court – making the release of proprietary data or trade secret information a violation of a court order. DOJ also should provide for a process in which contested documents can be submitted to the court for an in camera review prior to disclosure.

FERA has been in effect for approximately six months, so the statute’s full effect on FCA cases is not yet known. The legal landscape for FCA cases will become more clear only after the Attorney General decides how he will delegate his authority and the Civil Division develops new procedures for CIDs. That being said, Congress intends to expand the scope of FCA investigations and empower investigators with more invasive investigatory tools – such as the CID.

Final Thoughts

Despite this new and potentially aggressive investigative tool, companies are not defenseless when faced with a CID; there are important steps companies can take to defend themselves against this method of federal investigation.

First, companies can challenge a CID in federal court.¹⁹ Although such challenges are often unsuccessful, a well-pleaded challenge could force the government to limit its demands.²⁰

Next, in an effort to provide protection against the growing set of compliance risks, companies should develop and/or enhance comprehensive compliance and ethics programs that meet the criteria for effectiveness set forth in the United States Sentencing Commission’s guidance on such programs.²¹ It is recommended that companies involved in government programs have robust compliance and ethics programs. In many instances, the government is now requiring such programs as a condition of participation.²² If a company has a program already in place, it may need to perform a current risk assessment or gap analysis and make certain the company is appropriately addressing its compliance and enforcement risks. Establishing pro-active, comprehensive and effective compliance policies and procedures to ensure that federal funds are appropriately used and distributed in accordance with the terms and conditions of grants, contracts, or other programs is the best “defense” to FCA allegations that the company “knowingly” or “recklessly” mishandled those funds.

Finally, companies faced with a CID can seek review of their case with the United States Attorney or officials from the Department of Justice. On occasion, investigators and federal prosecutors, when presented with facts that were previously unknown, have rethought investigative strategies. In some instances, government counsel have decided to resolve cases that started as Grand Jury investigations with a civil disposition. United States Attorneys and DOJ trial counsel also reserve the right to decline prosecutions.

¹ Title 31, U.S. Code, Section 3733.

² Qui tam is short for the Latin phrase qui tam pro domino rege quam pro se ipso in hac parte sequitur, which means “who pursues this action on our Lord the King’s behalf as well as his own.” The phrase dates from at least the time of Blackstone. See Vermont Agency of Natural Resources v. United States, 529 U.S. 765, n.1 (2000).

³ Although FERA does not spell out limits on the government’s right to share CID information with the relator, the FERA amendments do limit the authority to share to instances where “the Attorney General or designee determine it is necessary as part of any false claims act investigation.” Almost certainly, FERA’s authorization to disclose would immunize DOJ officials from criminal exposure that might otherwise flow from disclosing a contractor’s proprietary or trade secret information. But the fact that there is a criminal statute for unlawful disclosure by government officials of proprietary information owned and protected by a contractor suggests: (a) DOJ will be very careful to make the appropriate findings to ensure that the disclosure is authorized by FERA’s amendments to 3733(a); (b) if DOJ has been careless or if its finding of necessity is not documented or well grounded, defendants would have much to complain about and sanctions could result; and (c) a defendant working with DOJ in response to a CID should negotiate seeking to limit DOJ’s sharing of certain information with relators (on the theory that it is not necessary), and failing that to ensure that there is a protective order binding the relator and its counsel who receive proprietary or trade secret information.

⁴ Letter from U.S. Chamber of Commerce, July 13, 2009.

⁵ Id.

⁶ The CID used in antitrust matters is an investigatory subpoena issued by the Attorney General in charge of the Antitrust Division of the Department of Justice pursuant to the authority conferred by the Antitrust Civil Process Act, as amended, 15 U.S.C. §§1311 et seq. (1994). Courts have consistently recognized the summary nature of administrative subpoena enforcement proceedings, which “are designed to secure quick judicial review of administrative activities.” Burlington Northern R.R. v. Office of Inspector General, 983 F.2d 631, 637 (5th Cir. 1993); In re Office of Inspector General, 933 F.2d 276, 277 (5th Cir. 1993). Courts have noted that judicial inquiry “is limited to two questions: (1) whether the investigation is for a proper statutory purpose and (2) whether the documents the agency seeks are relevant to the investigation.” Sansend Financial Consultants, Ltd. v. Federal Home Loan Bank Board, 878 F.2d 875, 879 (5th Cir. 1989).

⁷ Letter from Honorable Tony West, Assistant Attorney General, Civil Division, August 25, 2009.

⁸ Id.

⁹ Section 3733(i)(2)(C)(2008).

¹⁰ Id.

¹¹ Section 3733(l)(8).

¹² Id. (emphasis added).

¹³ Letter from U.S. Chamber of Commerce, July 13, 2009.

¹⁴ Id.

¹⁵ Title 31, U.S. Code, Section 3733.

¹⁶ Letter from U.S. Chamber of Commerce, July 13, 2009.

¹⁷ Id.

¹⁸ Letter from Honorable Tony West, Assistant Attorney General, Civil Division, August 25, 2009.

¹⁹ Title 31, U.S. code, Section 3733(j)(2)

²⁰ See United States v. Markwood, 48 F.3d 969 (6th Cir. 1995).

²¹ United States Sentencing Commission, Guidelines Manual, §8B2.1.

²² Federal Acquisition Regulation, Sub Part 3.10 and Clauses 52.203-13 and 52.203-14.