Employee Secrecy Pacts Don’t End Whistleblower Threat

Law360, New York (August 15, 2014, 6:54 PM EDT) — Although some regulators and lawmakers have expressed concerns about companies attempting to silence potential relators with nondisclosure agreements, attorneys on the defense side say that such employee agreements can rarely inoculate a company from False Claims Act allegations.

Contractors’ nondisclosure agreements have been the subject of recent discussion by lawmakers, regulators and advocacy groups, and the Washington Post has run recent stories on agreements used by KBR Inc. and International Relief & Development.

Recent debate on the topic has focused on the potential suppression of whistleblowers and False Claims Act relators, obscuring some of the legitimate and legal reasons why companies use such agreements — such as the protection of a company’s trade secrets, confidential information and reputation — according to Marcia Madsen of Mayer Brown LLP, who moderated a discussion on the topic at the American Bar Association’s annual meeting in Boston.

“You can’t prevent someone from disclosing fraud to a regulator, but there are very legitimate reasons that companies would ask employees for confidentiality agreements,” Madsen told Law360 after the ABA discussion. “Recently, whenever the subject’s come up, people have tried to treat it as all or nothing.”

Some of the recently debated agreements require employees to get permission from their company’s lawyers before discussing their allegations outside of a company, or forbid employees and former employees from making any disparaging statements about the company, or waive their right to file a qui tam suit under the False Claims Act, all of which could limit whistleblowers’ rights under federal law, according to the nonprofit Project on Government Oversight.

POGO recently asked Attorney General Eric Holder to investigate contractor confidentiality practices, saying that contractors “have no incentive to identify, report and remedy misconduct if they know their employees are afraid to step forward and report their allegations to the government.”

KBR’s nondisclosure agreements also came up during recent litigation in U.S. ex rel. Barko v. KBR, a False Claims Act suit accusing the company of defrauding the government by overcharging for substandard work performed by an Iraq War subcontractor. KBR argued that documents related to its internal investigation of the claims were protected both by attorney-client privilege and by employee confidentiality agreements.

The most expansive confidentiality agreements should be challenged, or else they run the risk of discouraging oversight of federal spending, according to POGO General Counsel Scott Amey.

“If companies force employees to sign nondisclosure and confidentiality statements, and the employee or the government never challenges them, the companies are in control and able to conceal the subject of the report,” Amey said. “These agreements are a new attempt to silence people who want to step forward when they see questionable activities. I think these agreements are ripe for a challenge, and we’ll see balancing between the rights of the company and the rights of the whistleblowers.”

But balance doesn’t mean that confidentiality agreements will go away entirely, according to the ABA panelists.

The key question when examining confidentiality agreements is whether they get in the way of the government’s ability to investigate fraud, according to Kelley Hauser, a trial attorney with the Department of Justice. Hauser said at the ABA meeting that the DOJ would generally challenge overly broad confidentiality agreements that discourage an employee from reporting fraud or agreements that require relators to waive their standing as qui tam relators after a suit has already been filed.

“Conceptually trade secret protection, noncompetes, we don’t have problems with those clauses,” Hauser said. “The clauses that we have problems with are the clauses that would eliminate an incentive for a whistleblower to come forward. Filing a qui tam is a powerful incentive to come forward with allegations of fraud, and if you’re going to try to get a relator to release that, we may have a problem with that and we may challenge that, and we’ve been successful in that area.”

And in cases where legitimate confidentiality agreements are in place, the DOJ has tools to compel necessary testimony despite those agreements, Hauser said.

Scott MacKay, vice president and general counsel at Lockheed Martin Information Systems & Global Solutions, said that companies should look to craft confidentiality agreements that can legally protect a company from the release of damaging information and that contractors could try to get employees to waive their standing in future qui tam suits as part of a severance agreement.

“It’s probably not a great practice to try to gag people, because it’s going to be unsuccessful, but I do think there are parameters that you can very legitimately seek from a departing employee, in consideration of a payment, to limit your potential exposure, consistent with the case law,” McKay said.

Under recent case law, it’s harder to get confidentiality agreements to stand up if they’re signed before an employee leaves. But if an employee takes money and waives his or her right to file a qui tam suit as part of a severance package, courts have upheld the waiver.

The Fourth Circuit decided against an employee who took such a severance package and later filed a quit tam suit in its 2010 decision in U.S. ex rel. Radcliffe v. Purdue Pharma LP. In that case, plaintiff Mark Radcliffe alleged that Purdue defrauded the government by selling the more expensive Oxycontin when a cheaper generic would have served just as well. When Purdue brought up the waiver in the severance agreement, Radcliffe argued that the agreement only covered lawsuits related to Purdue’s liability to him, personally, not claims on behalf of the government, but the Fourth Circuit sided with Purdue.

Courts have also taken the approach of separating the question of standing in qui tam suits from the question of damages related to breaches of confidentiality agreements. The Eastern District of Pennsylvania recently allowed a False Claims Act defendant, AmerisouceBergen Corp., to countersue a relator who breached his confidentiality agreement by including Amerisource’s confidential and proprietary information in his complaint, which eventually became public.

Simply getting a defensible confidentiality agreement or litigation waiver in place isn’t always enough for companies looking to protect themselves, according to Angela Styles, co-chair of Crowell & Moring LLP’s government contracts group.

Employees may sign documents but not fully understand their responsibilities or what information they need to protect from disclosure, so it’s important for a company to clearly communicate with employees and former employees about the agreements, Styles said.

“It’s not the agreement that’s critical, it’s the employee’s understanding of what’s confidential and proprietary,” Styles said.

Published by Law360

5 Tips For Internal False Claims Act Investigations

Contractors are required to report credible evidence of fraud or significant overpayments on their contracts, but sometimes they struggle with ways to protect themselves during internal FCA investigations. The topic was the subject of a panel discussion involving representatives from law firms, in-house counsel and the government, moderated by Marcia Madsen of Mayer Brown LLP, at the American Bar Association‘s recent meeting in Boston.

Here are some tips that emerged for balancing the competing interests in such investigations and minimizing potential liability:

Take Care When Interviewing Employees

Interviewing employees can require a delicate touch, as it’s easy for an internal investigation to scare employees and disrupt their work. The right approach requires careful coordination between in-house attorneys and outside counsel on a range of issues, from explaining the purpose of interviews to employees to agreeing on who should keep interview notes, attorneys say.

Angela Styles, co-chair of Crowell & Moring LLP’s government contracts group, said that outside attorneys like her often have to overcome a poor first impression with the employees they’re interviewing.

“I don’t think I’m scary, but apparently lots of employees do, and I think outside counsel has that problem a lot,” Styles said. “It’s so important to realize that when you’re outside counsel and you’re coming in and you’re talking to employees, you are a really scary individual to a lot of men and women.”

Employees can freeze up as soon as outside lawyers give them an “Upjohn warning,” reminding them that they represent only the corporation and not the individual, Styles said. It’s crucial to quickly develop a rapport and deliver the warning in a way that is is both gentle and clear, allowing the interview to proceed smoothly, Styles said.

“I’ve got to say, it’s very, very difficult because you don’t have that long-term relationship [that inside counsel has with employees], but it really affects the entire tenor of the interview, as to how gently you are able to give the Upjohn warning and make this person feel comfortable but get out everything that you need to get out there,” she said.

It’s part of in-house counsel’s job to clearly explain the need for interviews by outside counsel, said Scott MacKay, vice president and general counsel at Lockheed Martin Information Systems & Global Solutions. Generally, employees are willing to cooperate if they understand what’s happening, he said.

“It shouldn’t be just the outside counsel parachuting in and meeting these people out of the blue,” MacKay said. “You need to work these people. You need to work the organization so they’re ready, so they know who Angela is, so they know that she’s really a good lawyer and a nice person, and not scary, and they hear that from someone they know.”

Outside counsel should also resist the urge to “travel in packs,” which can make employees uneasy, and generally try to minimize disruption in the workplace, Styles said.

“These people have work to do,” Styles said. “They’re operating under a lot of stress, and you’re bringing in a completely new unknown factor to them, and they also have to walk out the door and continue to do their job.”

In the relatively rare event that a False Claims Act relator still works at the company and is interviewed during an internal investigation, MacKay said, the interview could represent a “free shot” at the relator.

“To the extent that you know you have a whistleblower, it would strike me as prudent to interview that person as quickly as possible and reduce to writing what that person tells you,” MacKay said.

Preserve Attorney-Client Privilege …

In the recent case U.S. ex rel. Barko v. KBR, the D.C. District Court heightened the attention paid to questions about attorney-client privilege for internal FCA investigations by finding that internal investigations were performed to comply with regulatory responsibilities and not for the purpose of legal advice. Although Barko was recently overturned by the D.C. Circuit, it serves as a warning to companies that they should be as clear as possible that they are seeking legal advice if they want to preserve privilege later on, attorneys said.

If companies do not have attorneys do the employee interview, they should make it very clear that the investigation is being performed at the direction of their legal department, according to Brian Miller of Navigant. Miller, who helped write the mandatory-disclosure rule while serving as inspector general of the General Services Administration, said that the initial Barko decision tried to enforce an artificial separation between internal investigations performed for legal purposes and those performed for business purposes.

“If you’re doing an internal investigation to comply with the mandatory-disclosure rule, one of the issues is: Do you have credible evidence of an FCA violation? How is that not a legal issue?” Miller said. “When we did the mandatory-disclosure rule, we wanted to take privilege off the table and encourage companies to do these compliance reviews and investigations. The harder you make things to do, the less likely it is that companies will do it.”

… But Don’t Be Too Cagey With the Feds, Either

For Styles, there is some tension between protecting attorney-client privilege and the mandatory-disclosure rule, but companies shouldn’t obsess about protecting privilege at the expense of compliance with the rule.

“If you’re making a disclosure and you’re too worried about privilege, I can tell you that the disclosure isn’t going to go well,” Styles said. “If you or your client errs too far on the side of privilege, [the government is] not going to have enough information.”

MacKay said that companies will get themselves in even more trouble if they try to be too cagey when making a disclosure to the government.

“You really can’t slice the bologna thinly in disclosures,” MacKay said. “The fact is that you’re going in and making a disclosure. … OK, that’s given. You’ve said there’s credible evidence, so you don’t need to spend a lot of time discussing the legal niceties of whether it is implied certification or whether it’s something else under the False Claims Act.”

Kelley Hauser, a trial attorney in the U.S. Department of Justice‘s Civil Fraud Division, said that incomplete disclosures can encourage whistleblowers to come in after a disclosure, expanding on the original disclosure or finding things that aren’t included in the original disclosure.

DOJ attorneys are generally skeptical of overly broad claims of privilege, especially for lawyers who primarily act in a business role for a company or act in a hybrid capacity, Hauser said. The DOJ will look for relevant documents and facts underlying a company’s legal opinions, not the opinions themselves, he added.

“On the one hand, I’m not interested in knowing what an in-house attorney or … outside counsel thinks about an FCA case or your exposure,” Hauser said. “I don’t care, and I’m not going to agree anyway. That’s clearly privileged and we don’t want to see that and that’s fine.

“On the other hand, documents that are pre-existing and just happen to have been swept up in an internal investigation are not necessarily privileged and they should be produced, and everything in between is a more difficult call.”

Don’t Go Broke Fighting Over Document Requests

Companies should resist the urge to fight back against apparently overbroad subpoenas and discovery requests, MacKay said.

“The case law is replete with the carnage of companies that have sought to litigate the scope of discovery requests, and they always lose,” MacKay said. “At the end of the day, you’re going to have to produce the documents because the government does have a right to get it, and if you narrow it and work cooperatively with the agency attorney, you really are advancing your client’s interest. As distasteful as you may find it sometimes, the point is, it really advances the ball toward a faster, cheaper, quicker resolution — even if the resolution isn’t one that you are particularly enamored with.”

Instead of arguing with the government, a company can make more headway in narrowing a request if it just talks to the agency or trial attorneys and figures out what they really are looking for, Miller said.

“Contact the attorney right away and work with the attorney from the government to try to narrow the scope down or have a rolling production,” Miller said. “I think there’s a lot you can do, and I think you’ll find that government attorneys are cooperative and easy to work with these on these issues.”

Without that cooperative interchange, the only ones that benefit, really, are the outside counsel, because the legal fees can rack up quickly during scorched-earth fights over document production, MacKay said.

Work to Shape the Investigation

Cooperating with a trial attorney or the agency can also give a company insight into the case against them and can give the company an opportunity to help shape the investigation as it progresses, MacKay said.

“The key to cooperating with a trial attorney or the agency is that you learn about their case, what it is that they’re focused on, so that you can then start working with that investigator or regulator to formulate your defenses,” MacKay said.

Cooperating proactively can also help a company navigate potential suspension and debarment risks related to FCA allegations, according to Wayne Wisniewski, director of the U.S. Navy‘s civil recovery division. Good attorneys can play a key role in getting that cooperation off to the right start, Wisniewski said.

“There’s a real distinction between those that are represented by counsel and those, maybe a small or midsized business, that come in and think that he or she can do everything by themselves,” Wisniewski said. “They don’t shape the case, they’re all over the place, and it’s very unwieldy. It puts us in an awkward position as well, we have to assist them and its an ethical dilemma on our side.”

Published by Law360

Gov’t, Private Space Industries Becoming More Intertwined

By Dietrich Knauth

Law360, New York (August 7, 2014, 9:40 PM EDT) — U.S. funding and support for commercial space companies, often with the goal of graduating those companies into more typical government contracts, have increasingly blurred divisions between commercial and public projects in the space industry, a panel of attorneys at the American Bar Association’s annual public meeting said Thursday.

The panel in Boston noted that the mixing of Space Act agreements with more typical contracts governed by the Federal Acquisition Regulation has created more opportunities for the growing space industry, while also creating new regulatory challenges for the agencies involved in regulating space launches.

“What you’re seeing here, with FAR contracts and Space Act agreements more broadly, is a new blurring of the lines between government and commercial programs,” Chuck Dickey, general counsel for Lockheed Martin Space Systems Co.

A recent example of that blurring is NASA’s Orion program, which aims to build a next-generation space shuttle that can take astronauts to Mars and beyond, according to Dickey. Test launches for the program began with indemnity provisions governed by the FAR contract and the company’s NASA contract, but later launches have involved the Federal Aviation Administration’s requirements for indemnifications and waivers of liability, which are more often used in commercial space launches, Dickey said.

Space Act Agreements are not subject to the competition or pricing rules in FAR and allow NASA to pursue a wider variety of partnerships in its quest to support America’s nascent commercial space industry.

Agreements under the act are generally classified as funded agreements, in which NASA pays contractors who are working in support of a NASA mission; non-reimburseable agreements, in which NASA and its partners bear their own costs for joint projects; and reimburseable agreements, in which contractors pay NASA to borrow NASA facilities or expertise to support a commercial project.

Julie Jiru, a contracts officer with Space Exploration Technologies Inc., said that NASA support in Space Act projects like the Commercial Orbital Transportation Services and Commercial Crew Development program have helped SpaceX win contracts for a NASA commercial launch market that didn’t exist until recently. The law allows companies to turn the tables on the normal government contracting by hiring out NASA expertise to support commercial goals that line up with NASA’s mission.

“When we talk about government contracts in general, it’s usually thinking of what does the government want from you — what do you do for the government, what are the requirements, etc.,” Jiru said. “The reimbursable space act agreement is fantastic, because it’s finally about us and what we want. We get to choose the technology and expertise we want from the government in order to advance and improve our own space technology.”

The agreements share one thing with typical government contracts though, Jiru said. They allow the government to leverage its weight to get favorable terms; namely insisting on upfront payment for its services.

“It wouldn’t be government contracting if it wasn’t a little contradictory,” Jiru said. “By ‘reimbursable’ Space Act agreement, what the government means is ‘prepaid’ Space Act agreement.”

The increasing mixture of NASA contracts and NASA-supported commercial launches makes it more difficult for the FAA to handle cross-waivers, which essentially prevent any of the parties involved in a space launch from suing each other for damage or liability during a launch or reentry, according to FAA attorney Sabrina Jawed.

It is not uncommon for NASA to contract with a company like SpaceX or Orbital Sciences Corp. to send “a black box of stuff” into space, but NASA’s secrecy about some of its payloads makes it difficult for the contractors to obtain necessary waivers, Jawed said.

“This causes a big issue because we at the FAA have a regulatory requirement that SpaceX or Orbital Sciences gets the signature of every customer on the cross waiver, and they have to do this prior to launch,” Jawed said. “They’re required to do this by law, but how are they going to do this if have no idea what’s in the black box?”

Thus far, the FAA has been issuing waivers to the regulatory requirement since NASA has a similar cross-waiver and can typically assure FAA that it has appropriate waivers in place with the party that is unknown to the launch contractor, Jawed said.

The FAA and NASA must also coordinate with the Air Force, since commercial launches can use Air Force facilities, or the Air Force could put payload on a commercial launch vehicle or possibly share a payload with a commercial launch company. For those launches, the FAA coordinates with the Air Force to ensure that safety is being upheld through a formal Memorandum of Understanding between the agencies.

“Our rules trump, but we defer to the Air Force” as long as any deviations from shared procedures can be looked at and approved by the FAA, Jawed said.

Both NASA and the Air Force use contracts to push companies into the space launch market. NASA has used the COTS program to help develop vehicles that it now hires to deliver cargo to the International Space Station, and the Air Force uses its Orbital/Suborbital Program-3 (OSP-3) to fund less challenging launches while testing companies for riskier work under its Evolved Expendable Launch Vehicle program.

“There’s a real statutory framework and policy framework for supporting the commercial space industry,” said Patricia Ewing, senior counsel for Orbital, which has transitioned to ISS supply contracts along with SpaceX. “Both NASA and DOD have certain contract vehicles that they use that are structured in a way to help support the commercial space industry. The prime example of that is the space station resupply contracts.”

Both Orbital and SpaceX spent a lot of money in getting their space vehicles off the ground, but NASA’s support made the current commercialization possible, Jiru said.

“It’s great to see how the reimbursable Space Act agreements basically work in concert with the government FAR contracts in order to make out industrial base stronger, and that in turn makes the U.S. as a whole stronger in space,” Jiru said. “There was no marketplace or business case for going into ISS resupply, so in order to demonstrate and get that capability, funding from the government was needed in order to help companies start that because that ‘s a very, very expensive endeavor, especially if you didn’t have a client for it.”

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