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DOJ clarifies guidelines on settling cases based on ability to pay

Sep 18, 2020

In early September, the Department of Justice issued additional guidance that the Commercial Litigation Branch can consider when settling cases for less than the full amount of the claim based on the defendant’s inability to pay.

Under its statutory authority, the Civil Division has the ability to settle claims for less when an entity offers the maximum amount that it is able to pay and the federal government is acting as plaintiff. This new guidance is particularly relevant for cases brought by the DOJ pursuant to the False Claims Act (“FCA”). Because the FCA provides for treble damages, and because the DOJ often asserts tainted-claim theories of damages, the government’s demands in these cases can often far outstrip the ability of even the most well-funded defendant to pay.

The entity asserting that it is unable to pay has always borne the burden of proving its inability to pay and explaining why a higher amount would constitute an undue financial hardship. If an entity makes an assertion of an inability to pay, DOJ will analyze numerous factors in light of the entity’s financial circumstances. Initially, the entity must complete the Division’s certified Financial Disclosure Form, and provide any documentation requested by the Division, such as tax returns, audited financial statements and access to appropriate personnel.

This new guidance, signed by Acting Assistant Attorney General Ethan P. Davis,  highlights specific areas that the Department will focus on these reviews, including:

• Background on current financial condition including the entity's current financial condition, what gave rise to that condition, and the entity's projected earnings and expenses. In particular, these can include an assessment of whether the entity engaged in related party transactions, removed capital through dividends or other vehicles, or can reduce discretionary expenses by decreasing or eliminating executive bonuses.
•  Alternative sources of capital, such as the entity’s ability to borrow or otherwise raise capital through existing or new credit facilities or via a sale of assets or equity. This review also examines the existence of booked reserves, plans for the acquisition or divestment of assets, and an entity's forecasts.
• Timing of payments, including the amount that an entity can afford to pay immediately and over time, but typically not for more than a five-year period if doing so would increase the government’s overall recovery and is administratively feasible.
• Tax deductibility, including whether any proposed payments are tax-deductible.
• Contingency arrangements such as whether it is possible to accelerate a planned future sale of significant assets, a new product launch, contract, or other new earnings or growth opportunities.
• Collateral consequences, including whether a settlement will have a disproportionate impact on a defendant's ability to provide support to other family members, or an entity's operations and obligations.
• Third-party liability, and if, where appropriate, whether additional defendants, including family members or related parties, may be liable as a result of a fraudulent transfer, successor liability, or the Federal Priority Statute.

This new memo also emphasizes that any reduced amount is subject to the approval process provided for by statute.

Entities and individuals faced with outsized claims need to carefully consider the seeking an “ability-to-pay” settlement. While this new memo provides additional guidance, the DOJ has been entering into these types of settlements, particularly in FCA cases, for many years. Defendants seeing an ability-to-pay settlement need to know that they will be expected to turn over all relevant financial information. The DOJ, in turn, employs skilled financial analysts with deep experience examining these records. Defendants can, and should, expect that the DOJ will pose pointed questions regarding any irregularities, missing information, or potential avenues of recovery that the United States could avail itself of. As such, entities and individuals contemplating a potential ability to pay settlement should consider conducting a rigorous internal financial analysis considering the factors set forth above in advance of providing information to the government.