Source: https://www.crowell.com/NewsEvents/Publications/Articles/False-Claims-Act-Settlement-Agreements-Crowell-Moring-Business-Crimes-Update-Issue-No-5
Timestamp: 2020-08-03 09:11:45
Document Index: 704794284

Matched Legal Cases: ['§ 3729', '§ 3801', '§ 1320', '§ 601', '§ 2306', '§ 23996', '§ 3729', '§ 145', '§ 31', '§ 31', '§ 3730', '§ 3730']

"False Claims Act Settlement Agreements" | Publications | Crowell & Moring LLP
False Claims Act Settlement Agreements
The rapidly increasing number of False Claims Act claims, both qui tam and brought by the Department of Justice ("DOJ"), has focused the attention of the DOJ and the defendants on the terms and conditions of settlement agreements. The Civil Division of DOJ is attempting to standardize the terms of these agreements. There are, to our knowledge, no publicly available materials setting forth the DOJ's position on settlement agreements. The "issues" and "positions" set forth below have been developed from the experience of Crowell & Moring as well as a review of other recent settlement agreements that we have collected over the past two years.
A. The DOJ generally attempts to obtain a narrow release. Thus, it often contends that the release must be limited to
Certain specified common law theories - usually unjust enrichment and payment under mistake of fact;
Certain specified statutes - including, of course, the False Claims Act, 31 U.S.C. §§ 3729, et seq. The DOJ is usually willing to include other statutes on request, e.g.,
Program Fraud Civil Remedies Act, 31 U.S.C. §§ 3801, et seq.
Civil Monetary Penalties Act, 42 U.S.C. § 1320a-7a
Contract Disputes Act, 41 U.S.C. §§ 601-613
Truth In Negotiations Act, 10 U.S.C. § 2306
Foreign Assistance Act, 22 U.S.C. § 23996, but resists use of a general phrase such as "any other statutes"
Allegations made in a complaint or claim or matter which were the specific subject of an investigation. DOJ resists language which provides a release for a contract, or a specific area such as progress billings during a certain period.
B. The defendant seeks the broadest release reasonably possible, i.e., the release should cover
All common law theories. It makes no sense from the defendant's standpoint to limit the release to specified common law theories. At the least, the agreement should also cover common law fraud and breach of contract. The DOJ is generally willing to accede to this view.
All statutes which could give rise to a monetary claim. Again, from the defendant's standpoint, it makes no sense to accept a release of monetary claims only under certain statutes. Here, however, the DOJ has proved more adamant; it was argued, for example, that it has no authority to release claims under the Securities Exchange Act. Since the DOJ standard agreement excludes certain areas of liability in another clause (e.g., tax, product warranty; see III below) the issue boils down to who should have to be explicit - the defendant in identifying all statutes which could conceivably give rise to liability, or DOJ in identifying all statutes which could impose monetary liability that it does not intend to release.
All liability under specified contracts or in a specified area, e.g., progress billings during a specified time period, payments to a specified agent. The government usually insists on releasing only specified allegations that are the basis for its damages calculation, but, as evidenced by one recent settlement, it may be willing to expand the release to other areas that have been investigated but where no Civil False Claims Act damages have been identified. The latter is often potentially broader but more ambiguous; however, a release in such cases may be important to preclude further government investigation or even a subsequent qui tam action. In cases where there has been a broad, lengthy investigation, the defendant may seek a release of all claims arising from a specified contract or area, but is unlikely to be successful. In some cases, the DOJ is willing to expand the release in a side letter which broadly defines the scope of the investigation.
C. Examples of agreements that contain reasonably satisfactory releases:
Teledyne - July 27, 1993
. . . or any other statute creating causes of action for civil damages or civil penalties. . . .
General Electric - July 22, 1992
. . . from any civil monetary liability to the United States (or any instrumentality thereof) for or based on any and all claims of any nature whatsoever (including without limitation, liability under the Civil False Claims Act, 31 U.S.C. § 3729, et seq., as amended, other statutory authority, common law principles, regulations, contract or otherwise) . . . (Emphasis added.)
First Data - March 4, 1993
. . . will never assert any civil claim, adjustment, or set off, nor will it institute civil proceedings against. . . .
BiCoastal (Singer) - July 13, 1992
. . . or any other statute. . . .
Honeywell - December 31, 1991
. . . has or may have at common law, under the False Claims Act . . . or any other civil statutes, regulations or contract clauses. . . .
. . . releases and will never assert any civil claim, adjustment, set off, or demand, whether actual, constructive, legal, equitable, administrative, or contractual, against Westinghouse. . . .
D. In some cases, the DOJ will investigate a number of issues, determine that some should be settled under the FCA, and suggest that the remaining issues be returned to the agency for resolution under the normal contract disputes process. The defendant should consider whether it is appropriate to settle all of the issues simultaneously - involving contracting officials in the process if that is necessary. Such an approach might only be financially advantageous, but also may preclude costly administrative litigation.
II. RELEASE OF INDIVIDUALS
A. The DOJ sometimes resists the release of individual present or former employees. This is especially true where there is a continuing criminal investigation or proceeding.
B. It is in the defendant company's interest to obtain a release of all of its present and former directors, officers, employees and agents. Most important, if DOJ subsequently brings suit against an individual, the defending company may be required to indemnify the employee, see e.g., Delaware Corporation Law, § 145, thus resulting in a greater monetary cost to the company. In addition, actions against individuals prolong the company's exposure to the problem and continue to divert corporate resources.
C. In at least one case involving BiCoastal (formerly Singer), the parties adopted a convoluted provision that first excepted individuals who received a target letter or were charged in the criminal case and then agreed to release such employees if they had a right to be indemnified by the company:
Reservation of Claims. (a) It is expressly agreed that the release set forth in paragraph 5 above shall not include . . . (vi) claims against individuals including agents, officers, directors and employees of CAE-Link, Singer-Link, LFSC and BiCoastal, who are criminally indicted or receive written notification that they are a target of a criminal investigation, if such claims are based on the conduct alleged in the False Claims Action, provided, however, that if such individuals are entitled to repayment from CAE-Link or BiCoastal, by claim for indemnification, contribution, reimbursement or otherwise, the releases provided in paragraph 5(a)(i) above shall apply to such individuals; . . .
In some cases, the DOJ has been willing to release all individuals save for certain named individuals (for example, former employees whom the company has fired for wrongdoing). In other cases, the DOJ has been willing to release certain classes of individuals, e.g., directors. This may provide the company with a limited advantage in defending against subsequent derivative actions. (The settlement of False Claims Act claims, like criminal convictions, may result in derivative actions by shareholders. While these are frequently without merit, they are often settled by payments from the company's officer and director liability insurance carrier. The insurance carrier recovers its costs through increased insurance premiums in the future. The net cost to the company is the amount of the plaintiff's attorney's fees, cost of the defense and related costs such as the notice to shareholders.)
D. In cases where there is no ongoing criminal investigation, DOJ is often willing to release all individuals, see e.g.:
Martin Marietta - September 24, 1993
First Data Corporation - March 4, 1993
Ungermann-Bass - August 31, 1992
General Electric (directors only) - July 22, 1992
Westinghouse - June 27, 1991
Tracor - May 10, 1991
Magnavox - May 14, 1991
III. STANDARD EXCLUSIONS
The government's release generally excludes matters relating to taxes, suspension/debarment and claims for defective products, e.g.,
National Airmotive - July 2, 1993
Notwithstanding Paragraph 2 above, the United States does not release NAC from (i) any criminal, administrative, or civil claims arising under Title 26, U.S. Code (Internal Revenue Code); (ii) any liability to the United States (or any agencies thereof) for any conduct other than the conduct identified in the Criminal Case and in Paragraph I of the Preamble above; (iii) any obligations created by this Settlement Agreement; (iv) any claims the United States has or may have for suspension or debarment; and (v) any claims which may arise for delivery of any deficient or defective products or any claims under express or implied warranties.
IV. ALLOWABILITY OF COSTS
A. During the past year or two, DOJ has been insistent upon including the following clause in settlement agreements:
Costs. The Corporation agrees that all costs, as defined by Federal Acquisition Regulation 31.205-47, incurred by or on behalf of the Corporation, its officers, directors, agents and employees in connection with (a) the matters covered by this Settlement Agreement, (b) the government's audit and investigation of the matters covered by this Settlement Agreement, (c) the Corporation's investigation, defense and corrective actions related to the matters covered by the Settlement Agreement, (d) the negotiation of this Settlement Agreement, and (e) payment made to the United States pursuant to this Settlement Agreement shall be unallowable costs for government contract accounting purposes. These amounts shall be separately accounted for by the Corporation.
B. This clause raises a problem for the defendant company. First, it is not at all clear whether the clause has the same effect as the applicable provision of the Federal Acquisition Regulation ("FAR") or whether it is broader. See FAR § 31.205-47; see also FAR § 31-105.15. DOJ personnel have been both unresponsive and inconsistent on this point. Of particular concern is the phrase "corrective action" which is ambiguous and potentially far-reaching. If the clause is identical to the FAR, it would appear unnecessary. If it is broader than the FAR, it would (i) appear to infringe on the authority of the government agencies to set the price they pay for goods and services in the future, and (ii) complicate the audit process from the standpoint of both the contractor and government auditors and contracting officials.
In any event, such a provision is available to the DOJ only in a settlement context. If it were to litigate and win, the contractor would only have to comply with FAR.
C. In insisting upon the clause set forth above, the DOJ has also been willing to review certain costs, particularly those possibly covered by the phrase "corrective action," and deal with their allowability in a side letter. This approach is worth considering in a situation where the DOJ has investigated a number of issues, but only a portion of those issues was determined by DOJ to be the subject of a FCA claim. In those circumstances, steps should be taken to insure that only those costs related to the issues involving a potential violation of the Act are unallowable.
V. HALPER WAIVER
A. In certain circumstances, usually where there is an ongoing criminal investigation, the government has sought a clause whereby the company waives its right to claim that payments made in settling the False Claims Act claims would result in double jeopardy if it is later charged in a criminal case. See United States v. Halper, 490 U.S. 435 (1989). A sample of such a provision follows:
MetPath and MetWest hereby each agree that it will waive and will not assert any defense, which may be based in whole or in part on the Double Jeopardy Clause of the Constitution or the holding or principles set forth in United States v. Halper, 490 U.S. 435 (1989), in any criminal prosecution.
MetPath, September 13, 1993
In one case involving a C&M client, the DOJ attorney requested such a waiver before he was willing to discuss settlement of the matter. (His request was refused; a declination in the criminal case made the issue moot.)
B. From the company's standpoint, it appears extraordinary to require a company to waive a Constitutional right and subject itself to being punished, in a criminal sense, twice for the same offense. Like the cost allowability clause, the government could not obtain a Halper waiver through litigation.
VI. RECITAL OF ALLEGATION
A. The DOJ generally includes a recital of at least the basic allegations relating to its claim.
B. The company can sometimes negotiate the wording of these allegations to minimize any especially inflammatory language. In cases where a complaint has already been filed, a recital of the allegation in the settlement agreement is unnecessary. The agreement should include a denial of any such allegations or, at least, a statement that the settlement is not an admission of liability. This may be of assistance in defending subsequent derivative actions.
VII. PRESS RELEASE
A. The government will usually issue a press release and will resist any attempt to negotiate the language of its release or even show it to the defendant company in advance of its release. DOJ attorneys will contend that the release is prepared by DOJ's Office of Public Affairs (albeit on facts provided by the attorney), and thus it is not within their control.
B. In some cases, DOJ is willing to exchange releases with the defendant company shortly before they are publicly released. This is of assistance to the company in providing additional time to prepare for press inquiries.
A. DOJ is more resistant to including language reflecting a defendant's cooperation than are most United States Attorney's Offices.
B. From the defendant company's standpoint, it may be useful to have language reflecting its cooperation with the government's investigation. Such an acknowledgment may be helpful in dealings with the suspension/debarment authorities, the press and in substantiating the company's compliance programs with its employees.
C. An example of "cooperation" language (note the use of the word "offered"):
Whereas, General Electric offered its complete cooperation to the United States with respect to its disclosure to the United States of information related to this matter before General Electric became aware of Civil Action C-1-90-792 (which at the time was under seal) or of any investigation into this matter by the United States;
Whereas, General Electric has disclosed to the United States the factual information uncovered in its investigation into this matter and responded to inquiries of the United States concerning this matter;
General Electric Agreement - July 22, 1992
IX. TAX DEDUCTIBILITY OF COSTS
A. The DOJ generally refuses to characterize payments made pursuant to a settlement agreement in any way that would enhance their deductibility for tax purposes. Indeed a standard provision provides that the agreement does not release any claims "arising under Title 26, United States Code, or regulations promulgated thereunder." (Title 26 contains the Internal Revenue Code.) (See paragraph III above.)
B. Generally, the company should insist that the agreement be neutral with respect to issues of deductibility. This will usually provide the company with the greatest opportunity to deduct some or all of the payments. In some cases, it might be desirable to quantify the "penalties" under the Act. (Note: Crowell & Moring has a memorandum available to clients on the deductibility for tax purposes of settlements under the FCA.)
X. SUSPENSION/DEBARMENT ISSUES
A. The government agreement will generally exclude from its terms the question of whether the company may be suspended or debarred for the actions in question. A contractor may be suspended if it is "suspected, upon adequate evidence, of - (i) Commission of fraud . . . in connection with (i) obtaining, (ii) attempting to obtain, or (iii) performing a public contract or subcontract. . . ."
B. The company may wish, depending on the circumstances, to take steps to assure that it will not be suspended or debarred based on the settlement or the allegations on which it was based. Where this is desirable, the company should consider reaching a tentative settlement with DOJ as to the amount, allegations, etc., and then contacting the appropriate suspension/debarment authority prior to signing the agreement.
C. In some circumstances, DOJ has been willing to enter an agreement which releases the defendant from any suspension or debarment, e.g.,
Lawyers Title Insurance Company - March 9, 1993
In full settlement, release and compromise of all claims and causes of action, including administrative actions by the Department of Housing and Urban Development for withdrawal or approval, suspension or debarment. . . .
XI. CRIMINAL INVESTIGATIONS
Where there has been a criminal investigation, a company may wish to obtain a formal declination from the prosecutor before entering into the settlement agreement. While some prosecutors refuse to provide a written letter of declination, it is usually possible to obtain some assurance either directly or through the Civil Division. In some instances, DOJ has entered into a civil settlement a condition of which is a declination of criminal charges, e.g.,
This agreement is contingent upon the United States, Central District of California, declining criminal prosecution of Teledyne, its present or former officers, directors, and/or agents for those matters set forth in paragraph D above.
In other instances, a civil settlement agreement has been conditioned upon a court accepting a plea agreement, e.g.,
In the event the Court does not accept the Plea Agreement in the Criminal Case, this Settlement Agreement is null and void.
XII. RELATORS
Where the action being settled involves a relator, the agreement often includes the relator as a party and provides that, in his view, the settlement is fair and specifies the portion of the recovery that will go to him. Examples:
The Relator asserts that the settlement of claims in the Civil Action is fair, adequate and reasonable under all the circumstances, pursuant to 31 U.S.C. § 3730(c)(2)(B). The United States agrees to pay C. Jack Dowden the sum of five million nine hundred seventy thousand dollars ($5,970,000) from the payment described in Paragraph 1 above within a reasonable time after receipt by the United States of such payment. On receipt of this payment, C. Jack Dowden, for himself, his heirs, successors, and assigns, will release and will be deemed to have released and forever discharged the United States from any claims pursuant to 31 U.S.C. § 3730(d)(1) for a share of the proceeds of the Civil Action and settlement of claims under this Agreement. This Agreement does not resolve or in any manner affect any claims the United States has or may have against the Relator arising under Title 26, U.S. Code (Internal Revenue Code), or any claims arising under this Agreement.
XIII. FOREIGN ENTITIES
One interesting settlement agreement involved a foreign entity, Bilfinger & Berger Bauaktiengesellschaft, that wanted to make sure that its entering into a settlement agreement would not prejudice its claim that it was not subject to U.S. jurisdiction. It included the following clause:
Nothing in this Settlement Agreement, nor in the payments agreed to herein, shall be construed as an appearance by B&B or an admission by Fru-Con and/or B&B: (a) that B&B is subject to in personam jurisdiction in any federal or state court within the United States or its territories; (b) that B&B has conducted or is conducting business or other activities in the United States; (c) that B&B is present in, has maintained, or is maintaining jurisdictional contacts in the United States; (d) that Fru-Con ever has acted as agent for, or in concert with, B&B to conduct business or other activities in the United States; or (e) that there exists any other act or omission which would imply that B&B is present in, or subject to, in personam jurisdiction in any federal or state court within the United States or its territories.
Fru-Con Construction, April 27, 1993
Where a defendant can demonstrate that it will be difficult for it to make the agreed payment in a lump sum, the DOJ has entered into agreements that provide for installment payments, with interest, e.g.,
SPS Technologies - May 14, 1993
On or before the first anniversary of the date that SPS signs this Settlement Agreement, SPS shall pay the installment balance of the principal settlement sum ($1,250,000), together with interest on that amount at 3.25% calculated from the date SPS signs this Settlement Agreement until the date of full payment. The installment balance and interest shall be paid by SPS in two equal amounts by wire transfer or by check.
First American Heritage Title Ins. - May 11, 1993
Alternatively, Heritage's monetary obligations under this Agreement will be fully satisfied if Heritage either: (i) pays the United States the settlement amount of three hundred sixty thousand dollars ($360,000) within one year of the date of execution of the Note; or (ii) pays the United States the settlement amount of three hundred eighty thousand dollars ($380,000), plus one year of interest in the amount of $14,880 within two years of the date of execution of the Note.
Since the Civil Division seems to be continuously evolving its position concerning various issues that are important components of False Claims Act settlements, we have tried to maintain and update a current set of all such settlement agreements as a service to clients.