Dramatic Changes To The False Claims Act Are No Laughing Matter

Sunday, February 1, 2009 - 01:00

The changes coming to Washington with a new Congress and the start of a new administration likely will usher in a call for sweeping changes to the federal civil False Claims Act ("FCA") and its unique " qui tam " enforcement mechanism. It is widely expected that bills proposed in the Senate and the House of Representatives in the last Congress will be re-introduced again this year. These changes will expand the coverage of the FCA and severely curtail many legitimate defenses. These bills, S. 2041 and H.R. 4854, had bipartisan support and were successfully voted out of their respective committees, despite unanimous opposition from every major industry group. During oral argument in a recent Supreme Court case, the justices and the audience laughed at an overly expansive interpretation of the FCA proferred by the Government in that case, yet that expansion is exactly what these bills would achieve - and then no one will be laughing.

Those not yet familiar with the FCA probably should be. The FCA already applies to every company, institution or person receiving or paying money to the Federal Government through contracts, grants, royalty programs or other means. FCA defendants include virturally every facet of the American economy - defense and civilian agency contractors, construction companies, cities, hospitals, universities, healthcare providers, energy producers and even churches have been defendants in these cases. The FCA is the Federal Government's primary tool for combating fraud in Government programs and contracts, and its success can be measured by the amount of money recovered in FCA cases - over $20 billion since 1986. The vast majority of these recoveries were not in cases litigated to judgment, where a judge and jury found the defendants intentionally defrauded the U.S. Treasury. Instead, over 99 percent of these recoveries came from cases settled because of the enormously punitive nature of the FCA, which includes:

• treble damages;

• penalties of $5,500 to $11,000 for each false claim;

• a low burden of proof; and

• a very low standard of intent - mere recklessness is enough.

Added to this are the enormous collateral consequences of an FCA judgment against a defendant. If a defendant is a Federal grantee or contractor, any adverse FCA judgment is grounds for automatic debarment from future Federal (and most state) contracts and grants. If a defendant is a healthcare provider, an exclusion from the Medicare and Medicaid programs is very possible. If the defendant is an individual, bankruptcy would be a welcome option - except that FCA judgments are not dischargeable in bankruptcy.

The FCA has a unique enforcement mechanism that increases the likelihood of frivolous and vindictive suits. An FCA case can be filed by a private party - usually a disgruntled employee or a jealous competitor - known as a " qui tam relator." The case, filed under seal, is investigated by the Department of Justice ("DOJ"), which has the right to intervene in the case. Even where DOJ investigates (often for years), finds no basis to prosecute, and declines to intervene in a qui tam case, a relator still has the right to prosecute the case in return for up to 30 percent of any settlement or judgment. Whistleblower lobbyists and plaintiffs' lawyers have convinced some Members of Congress that the defenses that have properly been used by courts to dismiss frivolous cases in the past should be eliminated, even though such cases have resulted in less than 3 percent of all recoveries.

The key provisions considered by the last Congress and likely to be reintroduced in this Congress are:

1. Expressly allowing Government employees to profit personally by bringing qui tam actions against those they audit and regulate.

Both the Senate and House bills would expressly allow - indeed encourage - Federal employees, under certain circumstances, to serve as qui tam relators and obtain any bounty recovered in an FCA suit brought by them. Currently, the FCA does not definitively prohibit Federal employees from being qui tam plaintiffs, but most courts have not allowed such suits to go forward.

For public policy reasons, Federal employees should not be allowed to profit from the information they gain as part of their jobs. As one court has explained, allowing Government employees to be relators would allow them to "spend work time looking for personally remunerative cases . . . rather than doing their assigned work; to conceal information about fraud from superiors and Government prosecutors so that they can capitalize on it for personal gain; [and] to race the Government to the courthouse to file ongoing audit and investigatory matters as qui tam actions before those cases have been sufficiently developed by the Government to justify a lawsuit . . . ." United States ex rel. Fine v. Chevron, U.S.A., Inc. , 72 F.3d 740, 741 (9th Cir. 1995). Despite these objections, the bills voted out of the committees allow Federal employees to be qui tam relators under some circumstances. This change would destroy public confidence in and respect for Government employees who receive - in their capacity as auditors, investigators, and the like - highly confidential and sensitive information.

2. Allowing a qui tam relator to use public information to bring a qui tam case while contributing nothing to the Government's investigation.

Both the Senate and House bills would, for all practical purposes, render toothless one of the most important innovations adopted by Congress to reward true whistleblowers. In 1986, Congress crafted what is known as the "public disclosure bar," which encourages true whistleblowers to come forward with allegations of fraud but also allows defendants to seek dismissal of qui tam cases that are parasitic and do not bring new fraud allegations to the attention of the Government. Under the current "public disclosure bar," a court must dismiss a qui tam case if that case is based on publicly disclosed information unless the qui tam relator is an "original source" to the Government.

Although the Senate and House versions differed somewhat, the amendments considered in the last Congress would have been a triple whammy for companies and institutions sued by a qui tam relator for violating the FCA. At bottom, the proposed changes (1) water down what qualifies as a "public disclosure," (2) strip defendants of their standing to challenge relators who fail to meet the jurisdictional bar, and (3) eliminate the requirement that the relator be an "original source." Eliminating this defense would greatly expand the settlement value of frivolous qui tam suits and ensure that such cases impose a greater burden on defendants and the courts.

3. Eliminating the requirement that a qui tam relator plead fraud with particularity and detail.

One proposed change approved only by the House Judiciary Committee (so far) would eliminate the need for qui tam relators (but, ironically, not the Government) to plead fraud allegations with the detail currently required by Rule 9(b) of the Federal Rules of Civil Procedure, which requires all averments of fraud or mistake to be made with particularity (in other words, a complaint must spell out the "who, what, when, why, and where" of the fraud or mistake), regardless of the nature of the underlying claims. The House's proposed bill, however, would carve out an exception for qui tam relators and allow even the barest of fraud allegations to go forward, breathing life into frivolous and unfounded qui tam suits that under current law would be readily dismissed.

4. Greatly expanding damages beyond loss to the Federal Treasury.

The FCA has always had one goal: recovering losses to the Federal Treasury. That early intent of Congress was carried forward in the 1986 amendments, where Congress emphasized, again and again, that the purpose of the statute was to recover amounts lost by the Government due to fraud. FCA damages are measured as the "damages which the Government sustains," 31 U.S.C. § 3729(a), and virtually every court, including the Supreme Court, has interpreted "damages" to be the actual loss to the Government.

The Senate bill, however, would eliminate "loss" from the calculation of damages and replace it simply with the "amount paid," whether or not the Treasury has suffered any actual loss. This change is unnecessary to protect the Government; if a product or service is worthless, current law already allows recovery of the full amount. This change is only important where a contractor or grantee provides significant value to the Government but violates some peripheral law, such as an environmental or ethics provision. In such cases, courts have limited the FCA recovery to the civil penalties and whatever portion of the claim that should not have been paid. This amendment will allow recovery of the full value of any invoice - trebled - despite the absence of any harm to the Federal Treasury.

5. Expanding the FCA's liability and punitive damage remedies to any situation in which Federal money is used, however remotely.

Perhaps the broadest, and most dangerous, amendment considered by the last Congress is the provision contained in both the House and Senate bills to redefine "claim" to include any invoice or bill sent to any person or entity where the Federal Government "has provided any portion of the money requested."

The expansion resulting from this amendment is, indeed, breathtaking. Almost every city, state, college or business receives some Federal money; and, with this amendment, every tort or contract breach will become an FCA case, enforced by private qui tam relators. It will trump state tort and contract law, swamp Federal courts with such cases, and raise the question: Does the FCA have any limits whatsoever ? During recent argument before the Supreme Court in an FCA case, Justice Breyer noted:

The difference is that Government money today is in everything. So if it's in everything, then everything is going to become subject to this False Claims Act. And of course I exaggerate by using the word "everything," but only a little. (Laughter.)

Tr. of Oral Argument at 36, Allison Engine Co. v. United States ex rel. Sanders (U.S. No. 07-214). Although the audience at the Supreme Court laughed at such a reading, that interpretation of the FCA is precisely what Congress now intends to adopt. There is real truth to Justice Breyer's observation about the extent of Federal money in this Nation's economy. The potential expansion of the coverage of the FCA to matters merely involving "Government money" and the elimination of many of the valid defenses to frivolous suits threatens to make the FCA - and private qui tam enforcement - the primary weapon for almost every tort or contract action.

These proposed FCA amendments are no laughing matter, and they deserve the attention of every company, institution, and citizen.

John T. Boese is a nationally recognized expert on the False Claims Act who represents a broad spectrum of defendants in FCA investigations and suits. He testified in opposition to these amendments before the Senate Judiciary Committee. His book, Civil False Claims and Qui Tam Actions, is routinely cited by courts and academics. Michael J. Anstett is an attorney at the firm who specializes in FCA litigation.

Please email the authors at john.boese@friedfrank.com or michael.anstett@friedfrank.com with questions about this article.