Corporate Compliance Programs: Pretext or Panacea?

Proponents of corporate compliance programs loudly sing their praises while detractors point to ceaseless prosecutions and a parade of civil suits—often resulting in multi-billion dollar verdicts or settlements—as evidence that they are ineffective. So, are corporate compliance programs a panacea or a pretext? The truth lies somewhere in between.

As a threshold issue, corporations are for-profit institutions. Indeed, most corporations have a mandate to maximize profit for shareholders. This can encourage senior management to operate in grey areas, and regulators may later deem their actions (and board oversight of such actions) to violate a wide array of laws. Second, formalistic compliance programs are not enough to ensure internal reporting of potential fraud and are not enough to inspire companies to take appropriate corrective actions. Instead, as set forth below, companies must take steps to ensure effective implementation of compliance programs and foster a culture of corporate compliance.

The countervailing factors that motivate officers and directors to engage in or acquiesce to fraudulent conduct or, alternatively, devise and implement an effective compliance program warrant in-depth treatment in a standalone piece. Here, I turn to answering the specific questions posed with these general principles in mind.

Question 1: Do corporate compliance programs actually suppress information from regulatory oversight?

Response: Yes, often appropriately. But meritorious—and sometimes non-meritorious—allegations of misconduct tend to get reported externally where internal responses are inadequate or the company has not created a culture of compliance and reporting.

Recent reports, compiled through surveys of hundreds of senior executives from a broad range of industries, indicate that roughly two-thirds of United States companies are affected by fraud. 1 Costs to companies, including reputational damage, can be substantial as can costs associated with remediation and investigation of fraudulent practices.

Internal reporting programs such as corporate compliance hotlines represent a company’s first line of defense against corporate fraud. Internal whistleblower hotlines are a key component of a company’s anti-fraud program: where such hotlines are implemented, tips are typically the most common method of detecting fraud. 2 Moreover, the Sarbanes-Oxley Act (“SOX”), international guidelines from the European Union, and the U.S. Federal Sentencing Guidelines have deemed hotline reporting programs a good and necessary business practice. At the same time, internal compliance hotlines serve to screen out frivolous and baseless claims.

In my experience counseling and defending large corporations on employment matters and corporate compliance, reports to company ombudsman, managers, or human resources and compliance personnel often lack merit or do not implicate fraud. Employees often file malicious or fictitious complaints against fellow employees or the organization to ward off pending termination or to seek revenge for perceived slights. But treating employees with respect, even in these situations, can dissuade employees from unwarranted external reports.

Unfortunately, despite strong incentives to self-report credible evidence of wrongdoing, companies may conceal such evidence. Like companies, whistleblowers have incentives under various statutory regimes to report internally. For example, under the SEC whistleblower program established by the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010, a whistleblower’s participation in internal compliance systems will generally increase an award and interference with or bypass of those systems can decrease an award. 3A whistleblower who reports conduct to the SEC within 120 days of reporting internally will also receive credit for any information the company later self-reports to the SEC. 4

In our experience, external reporting typically follows internal reporting when an employee felt the company response was not adequate. As of 2014, 80% of company insiders who reported potential misconduct to the SEC first raised their concerns internally to compliance personnel or their supervisors. 5 Likewise, Guttman, Buschner & Brooks attorneys have represented countless whistleblowers bringing cases under the False Claims Act and have helped recover billions of dollars on behalf of federal and state governments. In our experience, these whistleblowers typically reported internally first and only sought representation after the company responded inadequately or dismissed concerns as “this is the way we do business.” Thus, while corporate compliance hotlines and related reporting mechanisms serve as the first line of defense against fraud, the False Claims Act, Dodd-Frank and other whistleblower protection statutes effectively incentive employees to report fraud externally when a company’s response has been ineffective or where a company has not created a culture where employees feel comfortable reporting misconduct internally.

Companies are most likely to dissuade external reporting by creating and implementing effective compliance programs as well as self-reporting credible allegations of misconduct. Such self-reporting may also result in cooperation credit. Indeed, on September 9, 2015, Deputy Attorney General Sally Yates issued a memo instructing the DOJ to seek individual accountability from individuals perpetrating wrongdoing in the course of fighting corporate fraud and misconduct. 6 The memo was sent to every United States Attorney, the Assistant Attorney General heading up each DOJ division, the Director of the Executive Office for United States Trustees, and the Director of the FBI.

Consistent with the Yates directives, we have seen renewed focus on individual accountability in the False Claims Act cases we have litigated alongside the government over the past year. This has manifested in the government’s decision to name individual executives as defendants in complaints in intervention, the structure of settlements, and a myriad of other ways.

In keeping with its renewed focus on individual liability, the Yates memo articulated several changes to DOJ policy regarding the definition of “cooperation credit” for corporations. These changes are applicable to criminal as well as civil enforcement matters. Corporations historically have received and continue to receive more favorable settlement terms when the government concludes they provided material cooperation with respect to a government investigation. But companies have struggled to understand what it means to “cooperate” in a post-Yates world.

In a September 27, 2016 speech, Principal Deputy Associate Attorney General Bill Baer provided some insight as to what such cooperation now entails, highlighting the importance of prompt and material assistance. 7 Merely responding to a subpoena or civil investigative demand (“CID”) will not qualify as cooperation. Rather, a company hoping to obtain cooperation credit is expected to provide specific information about any and all employees involved in wrongdoing that is unknown to DOJ and that materially assists in its investigations. Thus, while meritless claims not implicating fraud are properly vetted and disposed of through company screening without ever coming to the attention of government regulators and investigators, an effective compliance program will also develop mechanisms to affirmatively identify and provide material information to regulatory agencies investigating the company.

Question 2: Do corporate compliance programs create an environment where employees are led to believe that wrongdoing in the corporate environment is implausible because a compliance program exists?

Response: No. But implicit or explicit directives from management can lead to false beliefs that particular actions comport with the law.

A corporate compliance program should and generally does sensitize employees to the fact that wrongdoing isplausible. A strong compliance program often identifies the relevant laws applicable to an employees’ day-to-day activities and may include fact patterns the company has identified as violative of relevant laws. For example, compliance training for pharmaceutical sales representatives is likely to and should inform employees that promoting off-label uses of company drugs can be deemed to be a violation of the Federal Food, Drug, and Cosmetic Act and likewise expose the company to liability under the False Claims Act. 8

Having said that, we have represented relators in False Claims Act cases in which company management has been warned by its own third-party regulatory consultants that certain conduct and types of interactions with physicians is proscribed. These companies have nonetheless directed such conduct in business plans, training documents, and other written directives to sales representatives. Similarly, employee performance reviews may—in writing—encourage conduct that is deemed by the government to be unlawful. Managers may also encourage such conduct when accompanying employees on sales detailing visits.

Thus, the existence of written policies and a compliance program does not itself create an environment where employees believe wrongdoing is implausible. But written directives, communications, and training by management can cause employees to believe that particular conduct is appropriate and in conformity with stated company policies and cause them to ignore other signs or evidence that such conduct is—in fact—unlawful.

Question 3: From a practical viewpoint, what kind of corporate compliance programs work better than others?

Response: Corporate compliance programs that incorporate the principles of communication, responsiveness, and transparency

Above all, compliance programs should be transparent and comprehensible to employees (and management), and the goals of enforcement mechanisms should be clearly communicated. Measures also must be implemented to ensure prompt and efficient responses to allegations of corporate wrongdoing. How this manifests will vary from industry to industry and company to company. It largely depends on the service or product a company offers, specific rules and regulations that govern the company, the size and geographic breadth of a company, and a myriad of other factors.

In addition to general principles of communication, responsiveness, and transparency, certain key factors tend to underlie effective compliance programs:

1. Guidelines: companies should have explicit guidelines that instruct employees how to perform their jobs in a legal and ethical manner, including training programs, codes of conduct, and written performance standards.

2. Surveillance: companies should have official policies and procedures that detail the manner in which they will monitor employees and how (and to whom) employees can report wrongdoing.

3. Sticks and Carrots: companies should identify and implement sanctions for wrongdoing as well as rewards in the form of promotions and positive reviews for demonstrated competence and compliance with company guidelines. A program can be well-drafted on paper but useless in practice if a company does not punish misconduct or reward behavior it wishes to incentivize.

4. Leadership: it is not enough to have formal procedures in place to foster compliance. The “water cooler” conversation and conduct of top-level management are equally important. The “tone at the top” and informal communications as set by leadership behavior is critical, but it is equally critical for top management to monitor and instill the same behavioral norms in middle management.

5. Independence of compliance personnel. Local management are rarely trained as investigators, and may be part of the problem. Likewise, local human resources personnel may appear to employees to be aligned with management and unlikely to take employee concerns seriously, disincentivizing employees from raising concerns about potential misconduct. Accordingly, effective compliance programs often provide mechanisms for employees to report concerns to independent third parties (such as ombudsmen) specifically trained in addressing employee concerns. Depending on the nature of the complaint, legal personnel, compliance officers, or human resources personnel may need to become involved after the initial investigation has begun.

Corporate compliance programs play an important role in modern corporate governance. But they are only as good as management’s commitment to effective resolution of employee concerns and implementation of corrective action when credible misconduct has been identified. Companies have strong incentives to get it right.

Footnotes

Justin S. Brooks is a founding partner of Guttman, Buschner & Brooks PLLC. Mr. Brooks represents relators in qui tam litigation under the False Claims Act and other federal and state statutes and corporate clients in a wide variety of complex commercial and employment litigation. He also provides employment and compliance counseling to companies, represents institutional investors in shareholder derivative and corporate governance litigation, and represents employees in employment litigation of all types. He has represented clients in claims brought under the Federal False Claims Act, securities laws, the Worker Adjustment and Retraining Notification Act (WARN), Racketeer Influenced and Corrupt Organizations Act (RICO), and various employment discrimination, labor and environmental statutes.Prior to founding the firm, Mr. Brooks worked at Kirkland & Ellis LLP, Morgan, Lewis & Bockius LLP, and Grant & Eisenhofer P.A. He also served as law clerk for a federal judge. He has authored numerous articles on class action litigation and other topics.

1. Kroll, 2013/2014 Global Fraud Report, Who’s Got Something to Hide? 12 (2013), http://www.kroll.com/en-us/global-fraud-report.

2. See, e.g., Ass’n of Certified Fraud Exam’rs, Report to the Nations on Occupational Fraud and Abuse, 2014 Global Fraud Study 19 (2014), https://www.acfe.com/rttn/docs/2014-report-to-nations.pdf.

3. 17 C.F.R. § 240.21F-6(a)(4); 17 C.F.R. § 240.21F-6(b)(3).

4. 17 C.F.R. § 240.21F-4(b)(7).

5. U.S. Sec. & Exch. Comm’n, 2014 Annual Report to Congress on the Dodd-Frank Whistleblower Program 16 (2014), http://www.sec.gov/about/offices/owb/annual-report-2014.pdf.

6 .See Memorandum from the Office of the Deputy Attorney Gen. to the Assistant Attorney Gen., Antitrust Div., the Assistant Attorney Gen., Civil Div., the Assistant Attorney Gen., Criminal Div., the Assistant Attorney Gen., Envtl. and Nat. Res. Div., the Assistant Attorney Gen., Nat’l Sec. Div., the Assistant Attorney Gen., Tax Div., the Dir., Fed. Bureau of Investigation, the Dir., Exec. Office for U.S. Trs., & all U.S. Attorneys (Sept. 9, 2015) https://www.justice.gov/dag/file/769036/download.

7 .See Bill Baer, Principal Deputy Assoc. Attorney Gen., Remarks at Society of Corporate Compliance and Ethics Conference (Sept. 27, 2016) https://www.justice.gov/opa/speech/principal-deputy-associate-attorney-general-bill-baer-delivers-remarks-society-corporate.

8 .The type of conduct that qualifies as “promotion” and the degree to which certain activity may be protected by the First Amendment involve a nuanced assessment, is largely unsettled, and varies from jurisdiction to jurisdiction. Detailed discussion is beyond the scope of this article.

“Conscientious Objectors” to Arbitration Policies Can Proceed in Federal Court

The Third Circuit allows two employees to sue their employer in court even though the company’s dispute resolution policy requires binding arbitration because they objected to the policy at the time of adoption.

OVERVIEW
On October 18, 2016, the Third Circuit held that two employees could sue their employer in federal court even though the company’s dispute resolution policy required binding arbitration because these employees objected to the policy at the time of its adoption. The decision reverses the district court, which had dismissed plaintiffs’ ADEA and VII claims in light of their coverage by the policy.  The case is Scott v. Education Management Corporation, No. 15-2177.

FACTS AND REASONING 

Plaintiffs Scott and Jones worked as Assistant Directors of Admissions at the Art Institute of Pittsburgh, a subsidiary of Education Management Corporation (“EDMC”).  Plaintiffs filed virtually identical Charges with the EEOC, claiming they were subject to unfair performance evaluations on the basis of their age.  Additionally, Jones alleged discrimination on the basis of race.  After Scott and Jones filed their charges, EDMC instituted a company-wide alternative dispute resolution (“ADR”) policy, which included final binding arbitration.  The policy was designed to establish arbitration as the exclusive means by which all work-related disputes would be resolved, including disputes sounding in “discrimination, harassment, retaliation, wrongful termination or other alleged unlawful treatment under state, local, or federal law.”

Plaintiffs’ attorney emailed EDMC on behalf of Jones, suggesting the policy was “illegal” and violated Title VII.  Plaintiffs then amended their EEOC complaints to include a retaliation claim on the basis of institution of the ADR policy.  After requesting Right to Sue letters from the EEOC, plaintiffs filed complaints in federal court, alleging violations of the ADEA, Title VII as well as Pennsylvania common law.  The district court dismissed both cases with prejudice, holding that the claims fell within the scope of the ADR policy.  The district court further reasoned that plaintiffs manifested assent to the policy by continuing to work after it was instituted.

On appeal, the Third Circuit rejected the reasoning on mutual assent.  EDMC argued that an employee assents when the employee continues to work for the employer.  The court disagreed, reasoning that plaintiffs promptly voiced their specific objection to and rejection of the ADR policy, which precluded assent to the policy.  The court held that on these facts, the plaintiffs’ continuing to work did not manifest assent to the policy.  The court also stated that Pennsylvania law would dictate the same holding.

IMPLICATIONS 
Although the Third Circuit designated the decision as “not precedential,” employers can expert plaintiffs’ counsel to rely on the decision as persuasive authority.  The impact of the decision  will play out in the years to come, but the case indicates the Third Circuit may not be as deferential to agreements to resolve disputes through arbitration or mediation as other appellate courts.  On the other hand, the case is easily cabined on its facts and is likely only applicable to post-hoc changes meant to defeat judicial resolution of existing disputes.  There are parallels in other areas of law.  For example, then-Chancellor, now Chief Justice Leo Strine, has suggested that a company’s post-hoc enactment of forum selection clauses to defeat jurisdiction of actual or threatened shareholder litigation would be unenforceable because application would be unreasonable.  See Boilermakers Local 154 Ret. Fund v. Chevron Corp. (“Chevron”), 73 A.3d 934 (Del. Ch. 2013).

CONTACTS
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact Justin Brooks at jbrooks@gbblegal.com.

GBB’s experienced team of attorneys provide employment counseling and litigate employment matters on behalf of both employers and employees.

How a Civil War law forced a local medical group to pay $5.3M

In 1863, at the height of the Civil War, Congress passed legislation to ensure suppliers to the Union Army were not cheating the government.

More than 150 years later, that legislation — the False Claims Act — and its amended derivatives enabled a local worker to challenge the billing practices of her former employer, Hudson Valley Hematology Oncology Associates, resulting in a $5.3 million settlement announced Friday by Preet Bharara, U.S. Attorney for New York’s Southern District.

The medical practice, which treats cancer and blood disorders and has offices in Poughkeepsie and Fishkill, admitted it illegally waived Medicare co-pays for patients and then added those amounts to its bills to the taxpayer-funded health insurance program.

It also admitted it entered billing codes indicating doctors had overseen or administered a procedure, when only a nurse had done so, thereby inflating the bills to Medicare and Medicaid.

The following doctors were listed in the federal complaint and settlement agreement: Ram Kancherla, Ponciano Reyes, Michael Maresca, Lev Davidson, Julia Schaefer-Cutillo, Jeffrey Steward, Gerald Colvin, Tauseef Ahmed, John Nelson, Carmella Puccio, Karen Seiter, Delong Liu, Asim Aijaz and Sheetal Shrimanker.

How those revelations came to light is representative of the growing success of False Claims Act whistleblower lawsuits in health care cases.

Last December, the Department of Justice announced it had obtained more than $3.6 billion in settlements in fiscal year 2015. It marked the fourth year in a row the department had exceeded that total. Health care cases accounted for the largest share of those recoveries, $1.9 billion.

In the case of Hudson Valley Hematology Oncology Associates, the actions were initiated by Lucille Abrahamsen, a Highland resident who served as an accounts receivable representative and filed a lawsuit under the False Claims Act.

Abrahamsen did not return a phone message seeking comment. But her attorney, Reuben Guttman of Washington, D.C.-based firm of Guttman, Buschner & Brooks PLLC, said she contacted the law firm after she became aware of the improper billing practices.

“In this day and age, people who see wrongdoing in the workplace … know enough to see that there are red flags,” Guttman said.

Guttman said his office receives hundreds of calls a year but brings only a handful of cases. Sometimes there is not enough evidence to make a claim. Sometimes there is no wrongdoing. Sometimes there is a violation, but an action can only be brought directly by the government.

After conducting its own investigation, the law firm filed the lawsuit on Abrahamsen’s behalf on April 14, 2014.

“Once we file the complaint, the government processes the complaint and sends it to the appropriate agencies involved,” he said.

That led to a meeting at Bharara’s office, an investigation by the federal health and human services department and finally, Friday’s settlement.

“This is a terrific result,” Guttman said, “and it is an example of how efforts to combat Medicare and Medicaid fraud are now being carried out the provider level.”

Whistleblower Case Results In $28 Million Settlement; Case Is Reminder That Healthcare Fraud Is An Important Election Year Issue

Washington, D.C. — A whistleblower case alleging the payment of kickbacks by Abott Laboratories to induce prescriptions for the drug Depakote, for elderly patients in nursing homes, has resulted in a $28 million dollar settlement with one of the nation’s largest long term care pharmacies, Omnicare.

“This case is a reminder – especially in an election year with healthcare and the conduct of big pharma at issue – that healthcare fraud and waste continues to compromise patient care and drain valuable healthcare dollars,” said Reuben Guttman of Guttman, Buschner & Brooks (GBB) PLLC which represented lead whistleblower, Meredith MCcoyd. In addition to Guttman, the GBB team included Traci Buschner and Caroline Poplin, MD, JD, the firm’s Medical Director.

The case was filed and resolved under the Federal False Claims Act (FCA). That statute allows whistleblowers to bring suit in the name of the government.

According to the complaint in intervention filed by the United States Department of Justice (DOJ), “By knowingly and actively soliciting kickbacks to promote Depakote, Omnicare enhanced its profits at the expense of the elderly nursing home residents it purported to protect. . .”
The government’s complaint in intervention also alleged that “in exchange for Abbott’s kickbacks, Omnicare engaged in intensive efforts to convince nursing home physicians to prescribe Depakote. . .”

Guttman, Buschner & Brooks PLLC, www.GBBlegal.com, is one of the nation’s leading whistleblower law firms. Attorneys at the firm have represented whistleblowers in cases returning more than $5 billion to state and federal governments. For more information on the False Claims Act go to www.whistleblowerlaws.com

A National Education on Hostile Work Environment

The US presidential election campaign has created a national dialogue about what it takes to create a hostile work environment and could change judges’ perspectives on the issue, writes trial lawyer Reuben Guttman.

Title VII of the 1964 Civil Rights Act generally proscribes employment discrimination based on an individual’s “race, color, religion, sex, or national origin.” The breadth of the law’s proscriptions, the burdens of proof and the facts needed to prove a violation have, over the years, been the subject of much litigation.

Twenty two years after Title VII’s passage, the United States Supreme Court issued its opinion in Meritor Savings v. Vinson, 477 US 57 (1986). In Meritor, the Court established a cause of action under Title VII for gender discrimination where an employee has been subject to a “hostile work environment.” In issuing its Opinion, the Court quoted the decision of the United States Court of Appeals in Henson v. Dundee, 682 F.2d 897, 902 (11th Cir. 1982):“Sexual harassment which creates a hostile or offensive environment for members of one sex is every bit the arbitrary barrier to sexual equality in the workplace that racial harassment is to racial equality. Surely, a requirement that a man or a woman run a gauntlet of sexual abuse in return for the privilege of being allowed to work and make a living can be as demeaning and disconcerting as the harshest of racial epithets.” In Meritor, the Court noted that the alleged conduct was “not only pervasive but also criminal conduct of the most serious nature.”

While Meritor established the doctrine of “hostile work environment,” it failed to establish a bright line test for liability and even today’s guidance by the Equal Employment Opportunity Commission – the Agency charged with enforcing Title VII – is ambiguous. The guidance states that “petty slights, annoyances, and isolated incidents (unless extremely serious) will not rise to the level of illegality.” The guidance also says that “to be unlawful, the conduct must create a work environment that would be intimidating, hostile, or offensive to reasonable people.”

If this guidance is ambiguous, think about its application when juxtaposed against the pleading standards established by the Supreme Court in Bell Atlantic v. Twombly, 550 US 554 (2007) and Ashcroft v. Iqbal, 556 US 662 (2009). Those cases allow a trial court judge to look at the facts and determine whether a claim is “plausible.” In Iqbal, the Court explained that in determining plausibility, the “reviewing court” may draw upon its “judicial experience” and “common sense.” The Court also explained that “the plausibility standard is not akin to a “probability standard,” but it asks for more than a sheer possibility that a defendant has acted unlawfully.”

Common sense? The plausibility standard is subjective and undoubtedly may be influenced by a judge’s experiences and personal environment. And yet, as subjective as the standard is, it is the standard that allows judge’s to be the gatekeepers for the procession of claims of discrimination to proceed to discovery and perhaps trial.

Over the past several weeks neither the courts not Congress have issued an opinion or passed any law changing the way hostile work environment cases are viewed. Yet, it may be that events outside of the court room and the legislative arena have changed forever our perspective on these claims and perhaps – maybe perhaps – provided judges with a new perspective when evaluating the “plausibility” of a claim.

The release of a tape of presidential candidate Donald Trump extolling his sexual exploits, a dialogue about this same subject during a Presidential debate watched by 80 million people and news reports of women who were allegedly groped or kissed by Mr Trump has led to a national dialogue about sexual harassment. Weighing in on the subject, First Lady Michelle Obama captured the attention of the nation when she told New Hampshire voters: “And I have to tell you that I can’t stop thinking about this. It has shaken me to my core in a way that I couldn’t have predicted.”
Whether each allegation is true, the 2016 election will go down to the wire with a national dialogue about how much – or rather how little – it takes to poison an environment with hostile language or unwanted contact. It is a dialogue tantamount to an education campaign given by alleged victims, commentators and advocacy group leaders. For those judges who are tuned into their TV sets, perhaps their perspective on the plausibility of a claim of hostile work environment will forever be changed.

Reuben Guttman is a trial lawyer and one of the founding partners at Washington, DC-based firm Guttman, Buschner & Brooks PLLC.