By Thomas F. O’Neil III and Melinda H. Waterhouse
As federal and state enforcement authorities pursue companies and corporate officers with ever-increasing fervor, they are developing novel theories of liability to expand dramatically the targets of their investigations. Over the past decade, both chief legal and compliance officers have found themselves in the spotlight previously beamed on their colleagues in accounting and finance. A recent case in the health care sector highlights the potential exposure.

In September 2007, the United States Department of Justice (DOJ), through DOJ’s Civil Division and the United States Attorney’s Office for the Southern District of Florida, filed a lawsuit against Christi Sulzbach (Sulzbach), former general counsel to Tenet Healthcare Corp. (Tenet or the Company), seeking tens of millions of dollars under the False Claims Act (the FCA or the Act). In a novel application of the FCA, the complaint (filed in federal court in Miami) alleges that Sulzbach submitted one or more false sworn compliance declarations required by a corporate integrity agreement imposed on Tenet’s predecessor, National Medical Enterprises, Inc. (NME), thereby causing the government to pay claims erroneously.

Sulzbach was not involved in any facet of the claims at issue, so the lawsuit epitomizes the zeal of current recovery initiatives. It also raises important questions regarding internal investigations, settlement agreements, and voluntary disclosures.

The Corporate Integrity Agreement
In June 1994, NME settled an investigation of, among other things, alleged kickbacks, and the Company agreed to pay a then unprecedented fine of over $350 million. The Company also entered into a corporate integrity agreement (CIA) with the Office of Inspector General of the Department of Health and Human Services (HHS). Sulzbach executed the settlement agreement and the CIA on behalf of NME.

The CIA required NME to submit to HHS annual compliance reports, which would include certifications regarding the company’s compliance or non-compliance with federal program legal requirements and the status of any relevant ongoing investigations. The CIA remained in effect after NME and American Medical Holdings, Inc. merged in 1995 to form Tenet. Sulzbach became Tenet’s associate general counsel and corporate integrity program director.

The Internal Investigation
According to the complaint, in February 1997 an executive at Tenet drafted a memorandum expressing concerns regarding the legality of certain contracts with physicians. The executive later met with Sulzbach, and she retained outside counsel to conduct an internal investigation.

In or about June 1997, the law firm submitted the final version of its report, determining, in essence, that the contracts at issue had in fact violated a federal statute known as the Stark Law which prohibits kickbacks and payments for physician referrals. Those findings and conclusions were not disclosed to enforcement officers.

The CIA Compliance Reports
After receiving the report from outside counsel, Sulzbach submitted reports under the CIA in 1997 and 1998; in each instance, she certified that, to the best of her knowledge and belief, Tenet was in material compliance with the terms of the CIA and federal program legal requirements. Sulzbach filed the 1997 compliance report four days after receiving outside counsel’s findings concerning violations of the
Stark Law.

Notably, the DOJ complaint also details an apparent effort by Sulzbach to correct the situation. Roughly a month after she submitted to HHS the 1997 compliance report, Sulzbach issued an internal memorandum to a colleague whom the executive had originally contacted, directing him to implement corrective action recommended by outside counsel, advising him that failure to do so could trigger the disclosure provisions of the CIA, and requesting that he send her a written status report within 30 days. The complaint suggests that Sulzbach failed to follow up on this memorandum and that as a result, the violations continued.

The Qui Tam Litigation
A former Tenet employee filed a qui tam action against the Company in May 1997, claiming that it had violated the FCA by, among other things, billing Medicare for referrals from the physicians who had been identified by the executive several months earlier. Tenet denied the allegations in that case and, during discovery, asserted evidentiary privileges with respect to over 15,000 documents, including the report from outside counsel and the internal memorandum from Sulzbach to her colleague.

The government intervened in that case and filed a motion to compel production of documents identified on the privilege logs; this motion was pending when the litigants settled in 2004.

The 2006 Settlement
In 2006, the Company resolved a Medicare fraud inquiry by the government. Under the settlement agreement, Tenet agreed to pay $920 million and to produce certain documents that had been withheld as privileged, including some materials from the long-settled qui tam action. That concession resulted in the disclosure of two versions of the 1997 report from outside counsel and the internal memorandum thereafter authored by Sulzbach.

The following year, the DOJ sued Sulzbach under the FCA in a
three-count complaint seeking treble damages and civil penalties.

The Act
Congress enacted the FCA during the Civil War to empower citizens to pursue fraud claims against contractors, usually in situations where contractors had made false claims or falsified records to receive payment from the government. By the late 1990s, the Act had become a significant weapon in the arsenal of federal enforcement officials and private-sector whistleblowers, primarily in the defense and health care sectors.

The FCA prohibits:

knowingly presenting or causing to be presented to the government a false or fraudulent claim for payment or approval;
knowingly making, using, or causing to be made or used a false record or statement to receive payment or approval for a false claim from the government;
conspiring to defraud the government by obtaining approval or payment from the government for a false or fraudulent claim;
intending to defraud the government or conceal property from the government by delivering less property than the receipt indicates;
intending to defraud the government by certifying a receipt for property used by the government without knowing the truth of the information in that receipt;
knowingly buying or receiving public property from the government when this acquisition is unlawful; or
knowingly making, using, or causing to be made or used a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit property to the government.
Under the FCA, the United States can recover civil penalties of $5,000 to $10,000 per violation. The government is also entitled to recover treble damages, except when the target has provided the government information about the violation within 30 days of obtaining the information; the violator has cooperated fully with the government; and no criminal prosecution, civil action, or administrative action had previously commenced regarding the violation. Finally, the government can recover the costs of any civil action brought under the Act.

Ramifications for Legal and Compliance Officers
The heart of the DOJ’s case against Sulzbach is the notion that, as associate general counsel and corporate integrity program director, she was personally responsible for investigating alleged violations of any federal program legal requirements and for reporting to HHS the existence and status of any such internal inquiry.

That factual assertion hardly seems debatable. It has, however, given rise to a new theory of liability under the FCA. DOJ’s ardor in this case quite clearly was fueled by the alleged failure to follow through on the corrective measures and by the vigorous defense of the qui tam action.

Perhaps this aggressive pursuit of compliance and legal officers under the Act will be confined to exceptional circumstances involving a confluence of aggravating factors. Case-specific facts notwithstanding, all compliance and legal officers operating in regulated industries should review this decision carefully. The imposition of a CIA is a serious matter, as is the subsequent submission of contractually mandated compliance reports. Furthermore, the potential consequences of a privilege waiver in a settlement agreement must be analyzed comprehensively before negotiations are concluded.

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