The novel coronavirus—and our federal system of government’s response to it —has thrust states and their leaders into the spotlight. Governors ordinarily eclipsed by federal officials are now the focus of unprecedented attention; some deliver daily COVID-19 updates, watched by millions, describing the healthcare, procurement, and fiscal challenges their states face.
The states’ chief law enforcement officials—state attorneys general (“AGs”)—are also responding. As the COVID-19 crisis began, AGs in both parties focused on similar issues: cracking down on price gouging for masks and hand sanitizer; enjoining the marketing of bogus cures; warning about charity scams; and enforcing state orders limiting commercial activity. These short-term responses will continue, particularly if a “second wave” of cases crests later this year.
Yet the actions of AGs will evolve in the intermediate- and long-term, as state law enforcement turns its attention to systemic problems caused or exacerbated by the coronavirus, or the government response to it. AGs’ investigative tools, practices and litigation tactics will also change due to anticipated severe budget pressure. These shifts, on the horizon but starting to become visible, will both resemble and differ from the responses of state AGs to natural disasters and the Great Recession.
AGs’ Coronavirus Enforcement Will Resemble Natural Disaster-Related Enforcement Actions
The novel coronavirus in many respects resembles a natural disaster, like a hurricane or blizzard—naturally caused (so few claims to be brought against perpetrators), largely unforeseen but not unforeseeable (raising insurance and duty of care issues), and compelling government to respond with funding and other emergency measures (which often generate their own investigations). AGs have experience in responding to such events, and these responses illustrate how they likely will respond to COVID-19.
State False Claims Acts and Fraud Laws Provide AGs with Powerful Tools—Including Treble Damages and, in Certain Cases, Criminal Penalties—for Fraud Related to Government Programs
First, natural disasters can cause enormous economic damage, some of which may be covered by private insurance, with losses borne by insurers, while some losses may not be covered, leading government to provide backstop coverage or other assistance. AGs often take aggressive action to police such distinctions. For example, following Hurricane Katrina, Mississippi established the Homeowner Assistance Program to provide financial assistance to homeowners whose insurance did not fully cover their losses. Shortly thereafter, Mississippi Attorney General Jim Hood targeted several insurance companies pursuant to the state’s False Claims Act (FCA), alleging the companies purposefully misidentified damage as having been caused by flooding—which was not covered under typical policies—as opposed to wind—which was—such that they would not have to cover the losses. Hood secured hundreds of millions of dollars in recoveries. In 2016, after Hurricane Sandy, New York Attorney General Eric Schneiderman successfully prosecuted a construction company and its chief executive for falsifying engineering reports assessing structural damage of residential properties in connection with claims made upon the National Flood Insurance Program.
The coronavirus has already caused substantial insurance-related controversy, as disputes have arisen regarding whether business interruption insurance (BII) covers coronavirus and virus response related losses. Legislation designed either to force insurers to cover such losses, or to provide state funds that do so, has been introduced in at least eight states; Congress is also considering a federal insurance program to cover these losses. Should a government-funded or administered program be created, AGs will closely monitor compliance with its requirements and coverage limitations and may also—either independently or representing state insurance regulators—intervene in litigation concerning whether existing BII policies cover these losses.
AGs’ Medicaid Fraud Control Units Have Broad Nursing Home Investigative Powers and Can Bring Civil Claims or Criminal Charges
Second, natural disasters place extreme stress upon facilities that house and care for the elderly and the infirm. The response of nursing homes—which are heavily regulated by the state and receive large sums of Medicaid dollars—to such events can attract significant scrutiny. In Louisiana, for example, the state charged the owners of a nursing home for failing to evacuate the facility during Hurricane Katrina; 35 residents died. Attorney General Charles Foti prosecuted the owners for negligent homicide; they were acquitted at trial. The State Attorney’s Office of Broward County, Florida, similarly charged four employees (currently awaiting trial) of a nursing home where 12 residents died after the air conditioning system failed in the wake of Hurricane Irma.
The coronavirus is highly contagious, has a long incubation period, and is particularly lethal when contracted by the elderly and immune-compromised. Not surprisingly, nursing homes have been the site of large numbers of fatalities. AGs are well-placed to investigate nursing homes’ response to the coronavirus through their federally funded Medicaid Fraud Control Units (MFCUs). Indeed, New Mexico, New York, New Jersey and Pennsylvania have already announced such investigations. As the number of these facilities with COVID-19 outbreaks continues to soar, AGs’ MCFUs will become increasingly active.
State AGs Can Pursue Civil Claims, Including Penalties, Against Employers Who Fail to Abide by Worker Compensation Regulations
Third, some AGs can undertake enforcement actions where companies—or even their subcontractors—violate worker-related regulatory requirements that come with the award of government stimulus funds. For example, after Hurricane Sandy, AG Schneiderman reached an over $500,000 settlement with a general contractor whose subcontractors failed to pay workers the required prevailing wages on a reconstruction project. The CARES Act includes $10 billion in airport infrastructure funding, which requires the payment of prevailing wages; future federal and state stimulus programs will likely include similar requirements. Companies receiving this funding that fail to comply with the attached strings may find themselves subject to AG scrutiny.
The Coronavirus Recession Will Compel AGs to Reduce Costs, and Encourage Them to Raise Revenue
State AGs’ medium and long-term response is also likely to resemble that of the Great Recession. Yet these commonalities won’t come in the context of enforcement actions. While AGs took countless actions against banks, mortgage servicers, and others they alleged caused the inflation and subsequent collapse of housing and capital markets, assigning blame for the virus will not be a major focus, notwithstanding Missouri Attorney General Eric Schmitt’s lawsuit against China and Mississippi Attorney General Lynn Fitch’s plan to file a similar suit.
Instead, as occurred a decade ago, the coronavirus-inspired recession will force AGs to adjust their tactics to cope with, and respond to, a significant loss in resources. Even if Congress appropriates additional funding for states, state agency budgets will face cuts—the only question is whether the cuts will be big or huge. Already, several governors have proposed or instituted substantial budget cuts in the face of plummeting revenue projections. AG budgets will not be held harmless—Michigan Attorney General Dana Nessel already announced her office will lay off 100 employees, one quarter of its staff.
As they did during the Great Recession, AGs will be expected to raise state revenue—which often remains in or flows to their budgets—and reduce state costs. For example, hundreds of millions of dollars from the 2012 National Mortgage Settlement, spearheaded by the AGs, was paid to states, rather than victims. It’s also no coincidence that, with some federal prodding, ten states enacted or strengthened their Medicaid-related FCAs—which have treble damages provisions—during the Great Recession to maximize state revenue. In some states, the incentive to raise revenue is direct, as some AGs are funded in part by, or based upon, proceeds from settlements or enforcement actions. For example, approximately ten percent of the Massachusetts Attorney General’s Fiscal Year 2019 budget came from False Claims Act-based revenue or other civil penalties; according to one report, the South Carolina Attorney General’s Office retained over $13 million from 33 settlements over four fiscal years, keeping all of the proceeds from ten of these settlements.
AGs—and their states—will likely adopt similar tactics and strategies in the coming years. Whether due to budget requirements or less formal pressures, AGs will feel urgency to raise revenue or recoup costs. This will manifest in myriad ways. Given twenty states lack an FCA, and several states’ laws only apply to false claims upon the state’s Medicaid program, states may look to enact or expand FCAs to simultaneously punish fraud and raise revenue. On a more tactical level, AGs will likely more frequently demand to recoup their investigation costs in a settlement or litigation.
AGs also will be forced to reduce costs. Some states may impose hiring freezes. Budget cutting will be particularly painful for state AGs whose public profiles have grown significantly in recent years, leading their constituents and interest groups to demand that they take action against all manner of ills. In the face of these challenges, AGs will look for ways to maintain their impact with fewer resources; inevitably, litigation calculations—and negotiating positions—will be adjusted.
AGs also may increase their reliance on two outsourcing tactics: multistates and retaining private counsel. AGs have long utilized “multistates”—the term for collaborations with their counterparts in other states. Though they can become unwieldy when poorly organized or states disagree, multistates allow AGs to share resources and conduct investigations or litigation at lower cost. They are particularly beneficial for small states with limited resources to take on large corporate targets or the federal government. Thus, multistates will become more critical to AGs in the years ahead.
More controversially, an increasing number of AGs have deputized private counsel—plaintiffs’ lawyers—to litigate and, in some cases, investigate (including pre-complaint) on their behalf. These are generally contingency fee arrangements: outside counsel receives a percentage of any financial recovery. Such engagements raise several issues, as the incentives for government attorneys versus private firms differ, with the most obvious example being contingency fee attorneys may prioritize financial relief over conduct reforms. AGs may similarly utilize third party monitors to cost effectively ensure compliance with settlements. Monitors, prevalent in settlements with federal law enforcement, are usually paid for by the entity being monitored, but accountable to and effectively an arm of government. AGs with heavy expectations but light resources may adopt these outsourcing strategies to help fill that gap.
In recent years, state attorneys general have gained prominence, whether for suing federal agencies controlled by the opposing party or taking on private companies more aggressively than in the past. That will not change, particularly during an election year, in which several AG races will be hotly contested. Yet the coronavirus has fundamentally changed the country, transforming the issues that consume the public’s attention and plunging the nation into recession. Regulators at all levels will respond. While forecasting AG responses may seem difficult at first given the seemingly unprecedented nature of coronavirus, natural disasters and the Great Recession show how AGs across the country, in both parties, will tailor their targets, tools and tactics.
Reprinted with permission from the May 28, 2020 edition of the New York Law Journal© 2020 ALM Media Properties, LLC. All rights reserved.