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By now, most organizations that do business with or are regulated by the government are well aware of the risk of liability under the civil False Claims Act (FCA), 31 U.S.C. 3729-3733. Many, particularly in the defense and health care industries, have implemented corporate compliance programs to help ensure that they operate within the bounds of the law. Few would anticipate, however, that their greatest whistleblower risk could be the very person entrusted with some of the corporation’s most sensitive information: the corporate compliance officer. In fact, a number of such whistleblower suits have been filed and are under seal while the government investigates the allegations. BUSINESSES HAVE A NEED FOR COMPLIANCE PROGRAMS Businesses develop compliance programs to meet the high standards of shareholders, the government and the public. The threat of personal liability to board members under In Re Caremark International Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996) — in which the court held that directors have a duty to make good-faith efforts to assure that a corporation has an adequate compliance system — and the possibility that an FCA suit could bankrupt an organization or result in shareholder suits have persuaded many businesses to invest the significant time and resources necessary to run effective compliance programs. The government has aggressively encouraged — and in some cases, mandated — the development of corporate compliance programs. Of health care organizations responding to a 1999 study commissioned by the Health Care Compliance Association, 96% reported that they have a corporate compliance officer, and 94% have formal compliance programs in varying stages of development. In implementing formal voluntary disclosure programs, Congress and various regulatory agencies have also determined that self-monitoring and, when necessary, voluntary disclosure of potential violations of the law are in the public interest. If the public interest in this type of self-critical analysis is to be promoted, businesses must have some assurance that their compliance officers cannot profit as double agents for the government. U.S. SHOULD STOP SUITS BY COMPLIANCE OFFICERS The federal government has the power to, and should, put a stop to FCA suits by compliance officers because these suits are not in the public interest. Compliance officers occupy a position of trust in relation to management that is analogous to that occupied by legal counsel. The compliance officer, like counsel, is entrusted with sensitive (and sometimes incriminating) information with the understanding that the information will be used only to assist the organization in resolving potential legal problems. That objective is thwarted if the compliance officer cannot be trusted to work for the benefit of the company. Under the FCA, some private individuals may litigate alleged violations of the act and receive a bounty of up to 30% of amounts recovered on behalf of the federal government. Whether qui tam plaintiffs, in the absence of suffering an injury, have standing under Art. III to litigate such claims is before the U.S. Supreme Court in Vermont Agency of Natural Resources v. U.S. ex rel. Stevens, 120 S. Ct. 523 (1999). However, the high court may resolve Stevens without reaching this fundamental question, and until it does, qui tam suits are a corporate fact of life. Qui tam suits are filed under seal to allow the government to investigate the allegations and determine whether to intervene in the suit. The government may join the suit, or it may decline intervention and allow the relator to continue litigating the claims. But the government also has the authority — seldom exercised — to move to dismiss even meritorious suits over the relator’s objection, under 31 U.S.C. 3730(c)(2)(A). The government did just that, after dozens of qui tam suits were filed in what was described by Judge Mary M. Schroeder as “a war in the citrus industry,” in U.S. ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1144 (9th Cir. 1998). In Sequoia, the 9th U.S. Circuit Court of Appeals affirmed that the government’s prosecutorial authority permits it to dismiss qui tam suits that are not in the public interest. The government should exercise this discretion to dismiss FCA suits by compliance officers to demonstrate that it will not punish businesses for good-faith compliance efforts. If the government lacks the political will to dismiss such suits, however, courts can look to suits by two other groups of unsuccessful qui tam relators — government employees and inside counsel — for guidance in dealing with suits by compliance officers. QUI TAM SUITS BY GOVERNMENT EMPLOYEES With some unfortunate exceptions, most qui tam suits by government employees have been dismissed. See U.S. ex rel. Fine v. Chevron, U.S.A., 72 F.3d 740 (9th Cir. 1995) (en banc); U.S. ex rel. LeBlanc v. Raytheon Co., 913 F.2d 17 (1st Cir. 1990). Many such suits have been dismissed for lack of subject-matter jurisdiction under 31 U.S.C. 3730(e)(4)(A). This complex provision precludes suits based on publicly disclosed information unless the relator proves, inter alia, that it “voluntarily” disclosed the allegations to the government. In analyzing the voluntariness requirement, courts consider whether the relator was required, under the terms of government employment, to gather the relevant information and disclose it to the government. These cases reveal an aversion to allowing government employees, who are paid to investigate and report potential fraud, to benefit from information they were already paid to disclose. Similarly, corporate compliance officers are hired to investigate and report potential fraud to their employers. The parallels diverge, of course, at this juncture: The compliance officer is employed by the corporation — a potential defrauder of the government — while the government employee is employed by the public — the potential victim of the fraud. But the comparison is valid to the extent that both employees have the task of investigating potential fraud, and both seek to deprive their employers of the value of information obtained on the job. To the government, the value of the information is the ability to investigate and prosecute the possible fraud under its own authority. To the corporation, the value is the ability to stop improper practices at the earliest possible opportunity, to perform a self-critical analysis without the immediate threat of adversarial proceedings by the government and, if necessary, to benefit from the reduced liability available under voluntary disclosure. If a compliance officer is permitted to bypass internal reporting procedures and file a qui tam suit, the corporation is deprived of the opportunity to stop ongoing abuses at the earliest possible time because many cases remain under seal for up to several years. Moreover, the benefits of voluntary disclosure can be significant. Under the FCA, damages can be reduced from treble to double, and the language of the FCA suggests that no penalties may be imposed if potential violations have been properly self-disclosed. QUI TAM SUITS BY COMPANY’S INSIDE COUNSEL In X Corp. v. John Doe, 805 F. Supp. 1298 (E.D. Va. 1992), a corporation’s former in-house counsel claimed that he was fired for actions taken in furtherance of a potential qui tam action. He filed a qui tam suit and a wrongful-termination action, but only after copying thousands of pages of confidential internal documents that he claimed revealed the corporation was violating the FCA. In the first decision arising from this dispute, the Eastern District of Virginia granted the corporation’s request for an injunction preventing the attorney from disclosing the contents of the documents. Judge T.S. Ellis III concluded that the attorney was subject to an ethical duty to preserve client confidences and secrets, under local ethics rules. Those “secrets” included “other information gained in the professional relationship that the client has requested be held inviolate or the disclosure of which would be embarrassing or would be likely to be detrimental to the client.” Id. at 1308. This duty was subject to an exception like the crime-fraud exception, but permitted an attorney to reveal only information clearly establishing that the client was perpetrating an ongoing fraud. Significantly, the court noted that some frauds may go unreported as a result, but that “neither mere suspicion of fraud, nor the mere risk of undiscovered fraud, justify abrogating the duty of attorney confidentiality.” The court expressly acknowledged that “if Doe’s ethical duty of secrecy results in the government’s inability to learn of . . . activities that Doe believes are fraudulent, potential claims by the government . . . may remain unasserted.” Id. at 1311 When the court applied this standard to the disputed documents in a subsequent decision, it concluded that they did not clearly establish an ongoing fraud. Rather, the documents demonstrated the corporation’s efforts to comply with applicable regulations. “While these efforts may have been too slow and too tentative to suit Doe, this does not amount to convincing evidence of fraud. . . . [F]ar from ignoring the compliance concerns, X Corp. acted to investigate the matter in order to ensure regulatory compliance.” X Corp. v. Doe, 816 F. Supp. 1086, 1093 (E.D. Va. 1993). The court prohibited disclosure by the attorney and ordered the return of the disputed documents. In a third decision in the case, U.S. ex rel. Doe v. X Corp., 862 F. Supp. 1502 (E.D. Va. 1994), Judge Ellis held that, although “lawyers are not per se barred” from bringing qui tam suits against their clients, the attorney in this case did not qualify as a relator. Under the injunction issued in the second X Corp. decision, the relator was required to withdraw the mandatory written disclosure of material facts that was served on the government. The court concluded that the attorney could not be a relator because he could not satisfy this requirement. COMPLIANCE OFFICER SHOULD NOT ABUSE TRUST Like government employees and in-house counsel, compliance officers hold a position of utmost trust and confidence, and they should not be allowed to abuse that status to profit from disclosure of confidential information. Corporate management and counsel, however, must do their part to demonstrate that the corporation is not obstructing good-faith efforts of its compliance personnel. The X Corp. decisions and other recent rulings strongly suggest that management should carefully document the varying interpretations of ambiguous regulations and should seek guidance when appropriate from the regulatory authority. See U.S. ex rel. Swafford v. Borgess Medical Center, No. 4:97-CV-116, 2000 U.S. Dist. Lexis 2172 (S.D. Mich. Feb. 18, 2000). Moreover, the compliance officer’s duty to preserve the confidentiality of information obtained on the job and to report suspected fraud to the employer must be made explicit in employment contracts, confidentiality agreements, job descriptions and employee evaluations. Some companies may believe that the X Corp. decisions favor the use of attorneys as compliance officers, but there is serious doubt regarding the validity of this assumption. Government agencies strongly discourage the integration of compliance functions with the general counsel’s office. Additionally, compliance is generally viewed as a management, rather than a legal, function. Employees who report to a compliance officer are not necessarily seeking legal advice, but generally are reporting wrongdoing in order to have it stopped. Therefore, companies that use inside counsel for compliance functions because they believe counsel’s work is privileged may be acting under a false sense of security. Ultimately, the preferable result is for courts and the Justice Department to determine that qui tam suits by compliance officers do not serve the public interest, and to deny such officers a share of any recovery. John Boese, a partner at Fried, Frank, Harris, Shriver & Jacobson, is the author ofCivil False Claims and Qui Tam Actions . Beth McClain, a staff attorney, also specializes in false claims matters.

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