Last month, we discussed some of the most recent actions by the Trump administration. Since then, however, there have been several additional actions of note for nonprofit grant recipients. Perhaps the most notable from a regulatory standpoint was the President's Executive Order regarding the federal regulatory process. There have also been strong indications that enforcement actions may continue to rise in 2017. Finally, we also want to take the opportunity to remind nonprofits of important changes to the federal government's Freedom of Information Act that may impact the disclosure of trade secret information.
Enforcement Outlook for 2017: Don't Expect a Pro-Business Government to Lighten Up on Nonprofit Grant Recipients
In years past, many believed a transition from a Democrat-controlled to a Republican-controlled government would mean an easing of compliance standards and a shift away from enforcement actions. However, rooting out fraud has long been a bipartisan effort, and while the Trump administration signals some relief in the form of a regulatory rollback, there have been several signals indicating that the federal government may continue its recent year-over-year trend of record federal False Claims Act (FCA) recoveries.
FCA Enforcement Is No Longer Solely within the Government's Discretion
With respect to the FCA, while the government certainly has the ability to swing this stick, a closer look at the data suggests that relators are truly behind the record FCA recoveries. In fact, under the Obama administration, relators' cases increased by approximately 66% as compared to the eight years prior under the Bush administration. During the same eight-year comparison, the number of DOJ-initiated cases remained nearly the same. What this means is that while a new administration can certainly shape DOJ's focus, unless relators are limited in a meaningful manner, FCA enforcement actions are likely to occur, regardless of administration.
|DOJ Statistics||Bush Administration
|Qui Tam Cases||2,930||4,404|
Trump's Cabinet Nominees' Comments Indicate No Let-up in Enforcement
As has been well publicized, President Trump's various cabinet nominees are working their way at varying speeds through their confirmation hearings. During the course of this process, several have given their thoughts on enforcement issues, which do not suggest reigning in qui tam relators or a de-emphasis of enforcement. In fact, the opposite may be the case.
Perhaps the most important view is that of U.S. Attorney General Jeff Sessions. In his opening remarks at his confirmation hearing, he addressed the need to curb "waste, fraud, and abuse":
[T]is government must improve its ability to protect the United States Treasury from waste, fraud, and abuse. This is a federal responsibility. We cannot afford to lose a single dollar to corruption and you can be sure that if I am confirmed, I will make it a high priority of the Department to root out and prosecute fraud in federal programs and to recover any monies lost due to fraud or false claims
Furthermore, in response to Senate Judiciary Committee Chairman Charles Grassley's (R-IA) question of whether he would "pledge to vigorously enforce the False Claims Act," then-Sen. Sessions stated:
I think [the qui tam provisions of the False Claims Act] are valid and an effective method of rooting out fraud and abuse… It has saved this country lots of money and probably has caused companies to be more cautious because they can have a whistleblower that would blow the whistle on them if they try to do something that's improper.
Then-Sen. Sessions also suggested that should he be confirmed, his U.S. Department of Justice would likely follow the principles of the September 2015 Yates Memo, which renewed the government's effort to hold culpable corporate executives individually accountable in False Claims Act cases.
In addition to the new Attorney General, then-Rep. Tom Price (R-GA), now U.S. Secretary of Health and Human Services (HHS), underscored his own intentions to root out fraud. Responding to a question posed by Sen. Orrin Hatch (R-UT), then-Rep. Price stated that HHS could be more focused on "bad actors," using real-time information to do a "much better job of not just identifying the fraud … but ending fraud." Last year, more than half of the $4.7 billion recovered in 2016 in civil settlements and judgments stemmed from healthcare fraud recoveries ($2.5 billion).
Pre-Freeze Hiring of Investigators and Auditors
Finally, although a hiring freeze was put in place across the federal government on January 23, prior to that freeze, and even before the inauguration (dating back to December 2016), several federal agencies hired hundreds of veterans under a special veteran hiring preference. It is our understanding that these hires were largely for investigative and auditing positions with the IRS and various U.S. Offices of Inspectors General. Such a large hiring move of investigators and auditors seems to suggest an intention to increase the review and audit efforts of those particular agencies, and of those that do business with them, such as federal grant recipients.
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Given the foregoing, nonprofit grant recipients should remain mindful of their compliance obligations and vigilant regarding their operations and the conduct of their subcontractors and subawardees. Nonprofits also may want to begin considering opportunities that may exist for regulatory reform that could ease some of the compliance burdens. The Trump administration has made clear its intention to roll back regulations pursuant to its executive order, and thus there may be an opening to ease compliance burdens or improve clarity to reduce costs and/or mitigate compliance risk.
Trade Secrets and the 2016 FOIA Improvement Act
Last summer, Congress passed and President Obama signed into law the FOIA Improvement Act of 2016 (Public Law No. 114-185), which adds to and amends the federal Freedom of Information Act (FOIA). The purpose of the Act is to create a "presumption of openness" limiting the federal government's discretionary power to withhold requested information only when disclosure would result in "foreseeable harm." For those that transact business with or even simply communicate with the government (referred to as "submitters" in FOIA parlance), these FOIA changes mean that submitters such as nonprofit grant recipients must proactively respond when a FOIA request potentially targets confidential and/or proprietary data that has been shared with the federal government.
Among other measures, the Act now imposes a penalty (i.e., the waiver of the statutory FOIA fees) on the agency for failing to provide a timely FOIA response. The Act also requires that the FOIA response segregate exempt information from releasable information in the same document, as an agency can no longer simply refuse to produce any document containing exempt information. In addition, the Act requires the agency to produce electronic copies of documents/data, which can be instantly disseminated by the requesting party. Furthermore, the Act requires the creation of a federal government FOIA portal that allows the same FOIA request to be simultaneously submitted to multiple agencies. As a result, submitters must be poised to respond immediately as soon as the federal government provides notice that a FOIA request targets the submitter's data and/or documents.
As an initial step, whenever sharing information/data with the federal government that the submitter does not want disclosed to a third party, the title page and each subsequent page of the confidential document or data should be marked as containing "confidential and proprietary information which is exempt from disclosure under the FOIA." Next, when the federal agency contacts the submitter (as the FOIA requires) to advise that a FOIA request targets the disclosure of their information, the submitter should promptly respond by identifying: 1) the specific information within each responsive document that is exempt from disclosure, 2) the particular FOIA exemption that prohibits disclosure (e.g., Exemption 4 protects trade secrets and confidential/proprietary data), and 3) why that exemption applies to each identified section of data/information that the submitter seeks to protect. Also, the submitter should maintain an open dialogue with the assigned agency FOIA official throughout the FOIA process to address and resolve disclosure issues before the agency takes a final disclosure position, which is often difficult to unwind. Finally, the submitter must be ready to assert a "reverse FOIA" action to prevent the disclosure of trade secrets or other confidential/proprietary information in the event that the agency disregards the submitter's exemption recommendations before the agency publicly releases the submitter's trade secrets or other confidential information in response to a FOIA request.