The Public-Private Enforcement Regime: Does the False Claims Act Work?

Pharmaceutical companies represent the poster-child defendant for whether public-private enforcement works. While subject to FDA prosecution for violation of the Food Drug Cosmetic Act, they more often face qui tam suits by private relators, usually but not exclusively for off-label promotion. DOJ may or may not choose to intervene, but if it does jump in, the Department operates with the advantage of a 90% success rate (frequently as a result of settlement because the companies can’t risk debarment). Before the case is concluded, it may have been joined by some combination of the Veterans Administration, state Medicaid Fraud Units or relators under mirror state-law False Claims Acts for recovery of Medicaid dollars, as well as by private insurance companies under RICO, and states’ attorneys general under consumer protection laws. The Department of Health and Human Services Office of Inspector General (HHS OIG) will likely be at any settlement negotiations to hammer out a 100-page Corporate Integrity Agreement (CIA). If the company’s activities are really offensive, DOJ may throw in a mail or wire fraud charge. When the fines are announced, and the CIA is signed, shareholders will file a derivative suit against the directors seeking reimbursement, claiming that if they weren’t asleep on the job the company would have avoided what often exceed billion dollar fines. And that’s just for off-label activity. The enforcement regime currently policing the life sciences industry is mind-bogglingly complex, representing a new and clearly unimagined era in “public-private enforcement.”

A must-read for health academics is David Freeman Engstrom’s trilogy of articles about public-private enforcement, focusing specifically on the False Claims Act (FCA), the “gold standard” of hybrid enforcement: Harnessing the Private Attorney General: Evidence from Qui Tam Litigation, found in Columbia Law Review, Public Regulation of Private Enforcement: Empirical Analysis of DOJ Oversight of Qui Tam Litigation Under the False Claims Act, appearing in Northwestern Law Review, and Agencies as Gatekeepers, published in Yale Law Journal. Unsurprisingly, healthcare cases comprise a disproportionate share of FCA cases, thereby making Engstrom’s work extremely important to the health law academy. These articles represent a breath-taking amount of work, providing a theoretical framework from which to analyze the balance and effectiveness of a public-private enforcement regime as well as empirical data to assess both fans’ and critics’ perspectives of FCA prosecution as well as relators’ and DOJ’s roles.

Readers lacking familiarity with the False Claims Act would do well to start with Harnessing the Private Attorney General, which provides an accessible summary of how the FCA is structured, and how the cases proceed. Engstrom’s ultimate question is whether the Act’s combination of reward and procedural barriers achieves the right balance in incentivizing efficient deployment of DOJ’s resources in prosecuting fraud cases reflecting the right priorities, while avoiding socially undesirable enforcement efforts. More specifically, he seeks to test the most common claims of FCA critics and proponents in order to determine which if any of the on-going calls for further amendments to the FCA are empirically supportable. Engstrom’s findings upend most of the claims of FCA critics, including those directed at repeat relators and law firms that specialize in FCA cases. He finds that “former DOJ prosecutors turned private sector relator counsel…are far more likely to persuade the DOJ to exercise its powerful authority under the FCA to intervene in qui tam cases and push them to resolution.” “And yet,” he writes, “when they win, former DOJ insiders achieve impositions that are $10.6 million and $3.4 million smaller on a per-win and per-filing bases, respectively, than those achieved by their non-insider counterparts.” These findings, says Engstrom, “strengthen concern about ‘revolving door’ dynamics.”

Public Regulation of Private Enforcement is a bigger article essentially comprising two parts. Part one presents a theoretical framework for thinking about whether agencies are effective gatekeepers of private litigation, factoring an agency’s ability to avoid inefficient enforcement activity, police collusive settlements, and leverage deficient but socially desirable enforcement. Engstrom creates a taxonomy by which to consider agency behavior: welfare maximizer (optimize deterrence), rent-seeker (maximize recoveries), politicker (maximize public recoveries), and belt-notcher (win-loss ratio). Part two offers Engstrom’s empirical analysis of FCA cases, from which he 1) concludes that DOJ too rarely uses its termination authority (4% of qui tam cases); 2) rejects claims that the DOJ’s intervention decisions are politically motivated; 3) decides that DOJ’s interventions (in about one-quarter of cases) do not appear arbitrary but evidence an ability to screen cases on the merits, although DOJ also appears to factor in its resource constraints and the power of the defendant. Engstrom’s research confirms that DOJ intervention results in recoveries 90% of the time while declined cases more frequently result in no recovery. However, he rejects what he identifies as a too-frequent assumption by judges that declined cases are meritless. This latter conclusion rebuts calls for amending the FCA to preclude relators from going forward with cases declined by DOJ. On the other hand, Engstrom concludes that DOJ should affirmatively act to terminate relator cases more frequently.

The Yale article, Agencies as Litigation Gatekeepers, drives home the point that the public-private enforcement balance is not about choosing between the two models, but determining how optimally “to coordinate multiple, overlapping, and interdependent enforcement mechanisms”. Engstrom analyzes whether the rise of private enforcement is good or bad, as well as whether administrative agencies are effective litigation gatekeepers, using zealousness, coordination, and legislative fidelity as his criteria. Engstrom uses this taxonomy to assess the effectiveness of the tools embedded in, inter alia, the FCA to reach the optimal balance between public and private enforcement, ultimately suggesting that the FCA is a comparatively well-constructed statute to achieve this end.

Professor Engstrom has made a significant contribution to our understanding of the FCA enforcement regime, suggesting that it mostly works. However, his analysis focuses on all FCA cases, and it is not clear whether it would yield the same results had it looked exclusively at FCA cases in the healthcare sector. In this arena, a public-private enforcement regime is even more complicated, not the least because of the ever-present threat of debarment.

It is impossible to do justice to Engstrom’s work in a jot. Hopefully, this review has convinced you of the importance of his work, and its contribution to our understanding of the FCA landscape, so that you will be enticed to read his work yourself.