New Dept of Justice Guidelines Will Stymie Whistleblowers

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.

Earlier this month, the Department of Justice (DoJ) quietly floated a new policy that will stymie  whistleblowers.

As reported by the Wall Street Journal in U.S. Looks Toward Gatekeeper’s Role on Whistleblower Claims:

The Justice Department urged its lawyers to weed out meritless cases from the hundreds of suits brought on its behalf under an anti-fraud law called the False Claims Act.

Justice Department attorneys should consider using a provision in the False Claims Act that lets the department ask a judge to dismiss claims, even if the whistleblower who brought the case wants to go ahead, according to an internal memo dated Jan. 10 from Michael D. Granston, director of the commercial litigation branch of the Civil Division.

“This is good both for the government and it’s good for private industry,” said Mitch Ettinger, a white-collar defense lawyer at Skadden, Arps, Slate, Meagher & Flom LLP.

Unfortunately, the new policy is neither good for whistleblowers, nor ultimately, the taxpayers who ultimately pay when the US government is defrauded.

History of US Whistleblower Recovery: False Claims Act Dates to Civil War 

To understand why, a bit of history is in order, which I discussed at length in an earlier post, SEC Takes Victory Lap for Pathetic Performance of Whistleblower Program:

Incentives for private parties to spill the beans are a hallowed component of the US legal system, dating back to the Civil War-era False Claims Act (FCA) and extended by Congress in 1986. This statute includes “qui tam” provisions permitting individuals to sue on behalf of the government– and to receive a bounty if they prevail. The phrase qui tam is an abbreviation for the Latin “qui tam pro domino rege quam pro se ipso in hac parte sequitur”, which means “[he] who sues in this matter for the king as well as for himself.”

No less than (irony alert) noted anti-business jurist Justice Antonin Scalia, writing in Vermont Agency of Natural Resources v United States ex rel Stevens, recognized that similar provisions date back to 1331 in England. Scalia also observed that numerous informer statutes were in place allowing such suits around the same time as the Constitution was adopted. These statutes authorized recovery of as much as half the fine, goods, or penalty, as appropriate, for failing to file a census return, or for illegal harbouring of runaway seamen, or unlicensed trading with Indian tribes, or for various other criminal, customs, bribery, or conflicts of interest violations (see footnotes 5 and 6 of the opinion linked to above).

Now, why does it matter that the DoJ can “weed out meritless cases from the hundreds of suits brought on its behalf” under the False Claims Act?

Well, as I wrote in my earlier post cited above:

As one of my cronies who practices in the qui tam area observes, he often floats arguments that various federal agencies consider to be unappealing on their face and will not pursue (perhaps for political reasons, e.g. the Air Force does not like suing Lockheed). But clever lawyering that ends up before the right judge can sometimes result in the success of some of these arguments, and eventually yield substantial recoveries– for both the government and the whistleblower– as well as have a deterrent effect.

A very effective cadre of privateer lawyers has evolved to bring qui tam cases, and these privateer lawyers are getting very adept at doing what privateers do. Some of this work is summarised at the website of Taxpayers Against Fraud, a bar association for lawyers who specialize in such cases. And in the process, they are sometimes successful at taking on the bespoke suit brigade. They also expand the resources that can be devoted to such cases. IIRC, the Department of Justice (DoJ) in DC has 60 lawyers who take on FCA cases, as compared to several hundred members of the private bar who bring these cases (and sometimes, both DoJ and private attorneys work in tandem). Private lawyers typically get contingency fees of up to one-third of any amounts that they recover on behalf of their clients; the FCA also allows fee shifting to the whistleblower meaning that if these cases go to trial and the whistleblower wins, the losing side pays the whistleblower’s legal fees.

So, it’s not uncommon for the DoJ to decide for whatever reasons of its own– politics, resource allocation– that it doesn’t want to purse a line of argument (and potential recovery).  Up ’til now, qui tam attorneys could march ahead, despite DoJ hostility.

Now, under the new policy, DoJ attorneys are encouraged to seek to dismiss meritless claims– and that ultimately leaves the DoJ with much greater control over which whistleblower claims proceed– and which don’t. And if you believe that the DoJ will only confine itself to thwarting “meritless” suits, well, I have a bridge that I’d like to sell you.

Bogus Argument: Plaintiffs’ Lawyers Make Too Many Meritless Claims

Plaintiffs’ attorneys typically get a bad rap from members of the white shoe bar.  Why? Well, because they’re effective in bringing cases against corporations.

According to the WSJ:

Jack Dodds, an FCA defense lawyer with Morgan Lewis & Bockius LLP, said the memo could make plaintiffs’ lawyers more cautious about what cases they handle, given the possibility that the Justice Department may now seek to dismiss them.

This is a bogus argument, however. Plaintiffs’ lawyers are typically cautions about the cases they take on, since these are usually compensated on a contingency fee basis– meaning the lawyer makes no money unless s/he wins a case (or secures a settlement). Since the lawyer is footing the upfront costs of pursuing a claim, that lawyer typically doesn’t take on claims unless the claims have some merit– otherwise, the lawyer is working for free, with no hope even of recouping costs or receiving payday.

As I wrote in another post, Business Groups Aim to Strong-Arm CFPB on Arbitration:

Class actions get a bad press, partly due to the extensive efforts that have been made by business interests to tout the defects of the US legal system, especially laws, regulations, and procedures that allow consumers to recover for harms they have suffered.  From the perspective of potential plaintiffs, class actions allow pooling of resources, making it economically viable  to bring claims that individually may be too small to pursue.  From the perspective of courts, class actions allow numerous similar claims to be combined and thus save court resources as claims are litigated together rather than separately. And from a systemic perspective, class actions allow private actors– entrepreneurial plaintiffs’ attorneys, incentivised by the large potential fees they can reap from contingent fee arrangements, to act as private attorneys general. In what can be called a regulation by litigation model, these lawsuits impose de facto constraints on dangerous, fraudulent, or predatory behaviour that in other national systems might be controlled by effective upfront regulation by the nation state (and at one time in the US, were addressed by some public regulators).

Gatekeeper Replaces Loose Symbiosis

Under the new False Claims Act policy, DoJ  attorneys will serve as gatekeepers, rather than act in loose symbiosis with members of the qui tam bar.  This policy shift will inevitably result in fewer qui tam cases being pursued. From the perspective of the public interest, that’s a bad outcome.

Neither the current DoJ under Attorney General (AG) Jeff Sessions nor the DoJ under former AGs Eric Holder and Loretta Lynch showed any particular appetite to ferret out and punish corporate crime– to say the least.  At the same time, federal courts have become a more hostile place to bring class action and other claims against corporations– and this atmosphere will only worsen, as the Trump administration has efficiently filled many open judgeships with like-minded, business-friendly jurists (as I discussed most recently in, Trump Sets Records for Seating Federal Judges).

This seemingly small, technical change will actually further stymie legitimate avenues for punishment and deterrence of fraudulent corporate behavior. That’s just what we need at this time.

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  1. Tomonthebeach

    Eventually, this regime, like those before it, will fall. However, the sabotage to federal regulation is unprecedented in its scale and scope. Is anybody keeping track of all this skulduggery so that once this faux-libertarian agenda concludes, Congress can build a better, less easily-neutered, set of laws to replace the tissue-paper laws which Trump uses to wipe his billionaire posterior?

  2. Altandmain

    I am wondering if the Trump Administration is afraid of a Snowden-like leak or if they are afraid that someone who is disgruntled will leak out the door something that would make the Trump administration look really bad.

    I suspect that there is a lot of dirt that would be very revealing.

    I think that they are trying to intimidate people into not leaking out the dirty truth. Perhaps that is also why they tortured Manning after she leaked to WikiLeaks the actions of the US government. They wanted to convey a clear message that if you are a leaker, this will happen to you.

    Agree with the above comment on the regime. I think that the parallels with the Soviet Union in the 1980s are growing. Oh and for all the talk of being libertarian, as the comments note, they don’t have any care for civil liberties.

  3. David

    A non-paywalled article.

    In fact, DOJ trial attorneys do not themselves have the authority to dismiss a case voluntarily. As the Granston Memo points out, under existing DOJ rules, dismissal requires the approval of the Assistant Attorney General for the Civil Division (for some lower-dollar cases, this authority has been delegated to the United States Attorney for the District where the action was filed).

    IIRC, the relator is also provided a hearing before dismissal.

    The Granston Memo also instructs DOJ attorneys to “consider advising relators of perceived deficiencies in their cases as well as the prospect of dismissal” so that relators can consider dismissing the action on their own. According to the memorandum, since January 1, 2012, relators have dismissed over 700 qui tam actions voluntarily after learning that the DOJ was declining to intervene.

    The memo also lists seven factors that can be used as a basis for dismissal.

    1. Meritless Qui Tam
    2. Duplicates Existing Effort
    3. Interferes with Agency Policies and Programs
    4. Protect the Department’s Litigation Perogatives
    5. Safeguard Classified Information
    6. Costs likely to exceed gain.
    7. Problem’s with the relator’s actions that frustrate the Government’s efforts to conduct a proper investigation.

    The Government has had this ability since 1986. Until now, there hasn’t been a standard of review for dismissal. The above guidelines can also be used to fight dismissal.

  4. EoH

    Plaintiffs’ attorneys typically get a bad rap from members of the white shoe bar. Why? Well, because they’re effective in bringing cases against corporations.

    You could say that again. As for the DoJ devoting its time to identifying and seeking to dismiss “meritless” cases, I assume that will be handled by the same crew that pushed “tort reform,” for the reason quoted above.

    The DoJ, not unusually for Trump and Sessions, stands on its head the normal priority. That is to look for cases with the most merit, for example, to clarify the law so as to encourage self-selection of less damaging corporate behavior and to make subsequent prosecutions easier by making illegality and the path to its punishment clearer. It is also to look for cases with the highest amount at stake and the most potential for embarrassing the government.

    By emphasizing dismissals, Jefferson Sessions and his president are trying to bolt the courthouse doors and keep out whistleblowers and, by extension, the American people. The page seems to have been taken from the same playbook used by the Republican governor of Wisconsin. Smart ALECs all.

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