2023 was another record year for False Claims Act enforcement. On February 22, 2024, the U.S. Department of Justice (DOJ) announced that the federal government and whistleblowers were party to a record number of FCA settlements and judgments in Fiscal Year 2023. Of the $2.68 billion recovered, more than $1.8 billion related to matters involving the healthcare industry.
Principal Deputy Assistant Attorney General Brian Boynton, who oversees DOJ’s Civil Division, touted DOJ’s record year in remarks that he delivered at the 2024 Federal Bar Association’s Qui Tam Conference. Speaking to relators’ counsel and the defense bar, Boynton observed that DOJ had been incredibly busy in 2023. The Department had begun investigating 712 qui tam lawsuits, and it had set another record by opening more than 500 new non-qui tam investigations.
After touting DOJ’s recent successes, Boynton previewed the Department’s enforcement priorities for 2024: (1) cybersecurity, (2) pandemic-related fraud, and (3) healthcare fraud. Boynton noted that “since the early 2000s, healthcare has consistently been the largest area of enforcement and recovery under the False Claims Act.”
Boynton noted four areas of focus for the Department within healthcare. The first three were the “the use of financial inducements to generate referrals,” “schemes involving nursing homes,” and “protecting the Medicare Advantage Program, also known as Medicare Part C.”
Continuing a years-long trend, Boynton ended by “emphasiz[ing] the department’s commitment to holding accountable third parties that cause the submission of false claims,” including “private equity firms.” Boynton acknowledged that “[t]hird-party actors . . . can play positive roles in the healthcare industry.” But he noted that DOJ has observed that private equity and venture capital firms can “influence patient care by providing express direction for how a provider should conduct their business, or more indirectly by providing revenue targets or other indirect benchmarks intended to prioritize reimbursement.” He warned that “an investor” who “knowingly engages in conduct that causes the submission of false claims” can “subject themselves to liability.” And he warned that DOJ “will not hesitate to pursue” third-party actors who “undermine medical judgment, inappropriately influence the doctor/patient relationship, and cause the submission of false claims to federal healthcare programs.” Boynton noted that while DOJ has “already had a few cases involving private equity firms,” the Department expects that private equity’s “impact on healthcare billings will continue to grow” given “the significant role that private equity is increasingly playing in the healthcare field.”
DOJ’s explicit focus on private equity firms is not a surprise to companies working in today’s healthcare and life sciences sectors. As private equity’s role in healthcare has increased dramatically over the last several years, the number of FCA qui tam suits and government enforcement actions targeting private equity firms has grown as well. In a 2020 speech discussing FCA enforcement, Principal Deputy Assistant Attorney General Ethan P. Davis warned that “a private equity firm” that “invests in a company in a highly-regulated space like health care or the life sciences” can expose itself, as well as the company, to FCA liability if the firm “takes an active role in illegal conduct by the acquired company.” As Goodwin Partners Kirk Ogrosky and Matt Wetzel detailed in a 2022 article, true to its word DOJ has increasingly pursued private equity investors for alleged FCA violations committed by their portfolio companies.
DOJ’s private equity cases have tested novel theories of FCA liability, pushing the boundaries of what it means to “cause” a false claim to be presented to the government. For example, DOJ and whistleblowers have taken the position that an investor can be liable under the FCA for failing to identify or remediate illegal conduct during due diligence, raising questions about whether private equity investors can be held liable for conduct that predates their investment.
As DOJ continues its focus on private equity firms, it also aims to further employ artificial intelligence (AI) in its enforcement efforts. In a February 14, 2024 address, Deputy Attorney General Lisa Monaco announced “Justice AI,” a DOJ initiative that will bring together cross-industry experts to assess AI’s impact on DOJ’s work as a whole. Given this initiative, stakeholders can expect DOJ’s civil and criminal enforcement authorities to work closely together in the coming months in their efforts to leverage data to identify potential fraud threats.
Given DOJ’s interest in harnessing AI and its continued focus on private equity firms, investors should proactively assess their relationships with portfolio companies to minimize FCA exposure. Specifically, private equity investors should conduct comprehensive due diligence before investment to ensure target portfolio companies have compliance protocols in place. If an issue is identified, investors should consider requiring corrective actions such as self-disclosure and including indemnification provisions in their investment agreements. Investors should note DOJ’s Mergers and Acquisitions (M&A) Safe Harbor Policy, announced in October 2023, which incentivizes acquiring companies who discover criminal conduct during the M&A process to voluntarily self-disclose. Under this policy, acquiring companies who voluntarily self-disclose criminal conduct discovered at the acquired entity within six months of closing, cooperate with DOJ’s investigation, and engage in timely remedial efforts will receive a presumption of a declination. While this policy only applies to criminal conduct discovered in the M&A process, corporate merger enforcement remains a focus of both the Civil and Criminal Divisions of DOJ.
In addition to conducting due diligence, private equity investors should respect the corporate independence of portfolio companies by avoiding involvement in company management. Finally, private equity investors should exercise caution in the language that they use—both externally and internally—to describe their relationship with portfolio companies. Courts have cited an investor’s failure to maintain appropriate distance from its portfolio company in public statements as one more sign that the investor caused the portfolio company’s alleged misconduct.
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