Two years ago, the U.S. Department of Justice announced a focus on enforcing the False Claims Act against private equity firms based on their portfolio companies’ conduct.[1] That government focus remains strong: Private equity firms, and particularly those invested in health care and pharmaceutical businesses, continue to face exposure simply for knowing about — or recklessly disregarding — their portfolio company’s potential False Claims Act violations. Three recent cases illustrate the risks to private equity firms and demonstrate why they should engage in careful diligence — both at the time of acquisition and afterward — of any portfolio companies that do business with the government.
The False Claims Act is a civil statute that imposes liability for knowingly or recklessly submitting, or causing or conspiring in the submission of, materially false claims for payment, or making false statements material to a false claim. See 31 U.S.C. § 3729(a)(1). Claims for payment can be made directly to the federal government or its agents, or to entities that receive federal funds, such as states. Many states also have their own false claims statutes.
False Claims Act suits can be brought by the government directly or, more commonly, by whistleblowers, called “relators,” on behalf of the government, in what are called “qui tam” cases. These qui tam cases are filed under seal, often unbeknownst to the defendant for years, while the government investigates...
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