Congress Mulls Significant Expansion Of The False Claims Act

Tuesday, March 31, 2009 - 00:00

The federal False Claims Act, 31 U.S.C. §§ 3729-3733 ("FCA"), is a Civil War-era statute that prohibits individuals or companies from making demands for payment or withholding money from the United States government that they are not entitled to receive or withhold. The FCA requires a violator to pay back to the government three times the amount improperly received or withheld, plus a penalty of between $5,500 and $11,000 for each violation of the Act.

Amendments to the FCA in 1986 significantly increased the incentives for whistleblowers to initiate lawsuits by giving them a share of the funds recovered by the government or by whistleblowers on behalf of the government. (FCA actions initiated by whistleblowers are known as " qui tam " actions.) Since 1986, the government has recovered more than $22 billion as a result of FCA lawsuits, with more than 80 percent of the recoveries resulting from lawsuits initiated by whistleblowers.

Every entity that does business with the federal government (or does business with another company that does business with the federal government) is potentially the target of an FCA lawsuit. Because qui tam lawsuits are filed under seal, a company often does not learn about the existence of an FCA lawsuit until the government is already well into its investigation of the company, and the company's ability to affect the outcome of the government's investigation may be limited.

It is therefore critical that companies consult with counsel to take proactive steps to minimize their exposure to FCA lawsuits even if they do not believe they are currently the target of such a lawsuit. This includes setting up rigorous compliance programs, employee outreach programs, and putting structures in place to address potential areas of exposure. It is also critical that companies obtain experienced FCA litigation counsel promptly once they suspect they may be named as a defendant in an FCA lawsuit.

Congress presently is considering several proposed amendments to the FCA that would overturn a number of Supreme Court and lower court rulings that have limited the reach of the FCA and the prosecution of qui tam complaints. If adopted, the proposed amendments would extend liability under the FCA in both duration and breadth, and several of the amendments would restrict or eliminate commonly used defenses to qui tam actions. We expect the recent passage of the federal stimulus bill will spur efforts to amend the FCA, as lawmakers seek to assure the public that federal dollars will not be wasted.

The following are the more notable proposed changes under consideration.

Removing The "Presentment" Requirement Of 31 U.S.C. §3729

Under the laws of certain federal circuit courts - most notably the District of Columbia in an opinion authored by Chief Justice John Roberts when he was on the DC Circuit - in order for a claim to be actionable under the FCA, the claim for payment must actually be presented to an employee of the federal government. Thus, claims made to government contractors, rather than to the government directly, may not be actionable under the FCA because the claims have not been presented directly to an employee of the federal government. Since many companies do business as sub-contractors to other entities who receive money directly from the federal government, such sub-contractors can currently defend themselves in an FCA action on the basis that they did not present a claim for payment directly to the federal government. See U.S. ex rel. Totten v. Bombardier Corp , 380 F.3d 488 (D.C. Cir. 2004). The proposed amendment, however, would expand potential liability to any claim that involves "government money or property" regardless of whether the claim is made directly to the government or indirectly to the government through a third party. The effect would be to bring within the reach of the FCA any company that falsely makes a claim for payment where it can be established that the government was the source of the funds falsely claimed.

Eliminating A Defendant's Ability To Assert The "Public Disclosure Bar" To The FCA

The FCA prohibits qui tam lawsuits from proceeding when based solely on information openly available to the public, 31 U.S.C. § 3730(e)(4). The purpose of the "public disclosure bar" is to prevent private plaintiffs from filing parasitic lawsuits based on allegations that were publicly known and for which the plaintiffs do not have direct and independent knowledge ( i.e., they are not "original sources" of the information). Since the public disclosure bar removes subject-matter jurisdiction from the court, the Supreme Court has held that it may be raised by a defendant at any time, including after trial. See Rockwell Int'l Corp. et al. v. United States , 127 S.Ct. 1397 (2007). The proposed amendment, however, would prevent a defendant from directly asserting that a case had been publicly disclosed, and would vest the discretion to raise such arguments exclusively with the Attorney General of the United States.

Allowing Government Employees To File FCA Actions

One of the most controversial amendments being considered would permit government employees to file FCA actions as whistleblowers, when they have reported alleged violations to their superiors, the Inspector General, or the Attorney General, and no action is taken on the alleged violation for 12 months. At present, virtually every court has held that government employees may not file suit as whistleblowers, although the FCA itself is silent on this issue.

Removing The Requirement That An Actual False Claim Be Pled In The Complaint

Several circuits have held that an FCA complaint that does not specifically identify one or more actual examples of false claims must be dismissed under Rule 9(b) of the Federal Rules of Civil Procedure, because fraud has not been properly pled with particularity. See , e.g., U.S. ex rel Karvelas v. Melrose-Wakefield Hosp. , 360 F.3d 220 (1st Cir. 2004). One of the proposed amendments would nullify these decisions by deeming FCA complaints adequate where:

• One, conduct which permits the government to investigate the allegations is described; and

• Two, if proven true, provides a reasonable indication that one or more false claims were submitted.

This amendment effectively would eliminate the requirement that actual false claims be pled in the complaint, making it easier to sustain FCA actions based on notice pleading.

Applying 10-Year Statute Of Repose To Non-Intervened Cases

The FCA mandates a 10-year statute of repose, which permits the government to reach back 10 years from the date of the filing of a qui tam complaint to seek imposition of liability and damages on an FCA defendant. However, most courts have held that a private plaintiff may not take advantage of this 10-year statute if the government does not intervene in the lawsuit. Instead, the private plaintiff litigating a case without the government's participation is subject to the six-year statute of limitations provision in the FCA. See 31 U.S.C. § 3731(b)(1). The proposed amendment would expand the statute of limitations to 10 years for all actions prosecuted under the FCA whether the government intervenes in the claim. This amendment would increase dramatically the damages and available evidence on which a private plaintiff can rely in prosecuting an FCA action.

Prohibiting "Waiver" Of FCA Claims In Severance Agreements

A common feature of many severance agreements is for an exiting employee to waive all claims he or she has against the employer. Some courts have found that entering into such severance agreements bars the ex-employee from sustaining an FCA action against the employer. The proposed amendment would declare such provisions void as against public policy as applied to FCA actions. Waivers would be valid only if part of a court-approved settlement of FCA litigation.

Companies should also keep in mind that many states and localities have False Claims Act statutes that are similar to, and in some cases, exceed, the breadth of the federal statute. Moreover, as a result of the recent passage of the federal stimulus bill, substantial federal money will be allocated to state and local authorities for use in local projects. Accordingly, all companies that do business with federal, state, or local governments, either directly or indirectly, could be dramatically impacted by the progress of this legislation and should consider proactive steps to address their potential exposure to lawsuits and damages from federal, state, and local FCA provisions currently in effect.

An essential proactive step that has become a "best practice" for corporate America is the implementation of an effective compliance program. An effective compliance program operates to prevent and detect violations of law, and promotes an organizational culture that encourages ethical conduct and a commitment to compliance with law.

Steven R. Jenkins represents companies conducting mergers and acquisitions, reorganizations, commercial contracts, private placements and start-up companies in venture capital financings. His practice also includes day-to-day counseling on general corporate and business issues for private and closely held companies as well as start-ups in the biotechnology, nanotechnology, service and manufacturing industries.

Please email the author at sjenkins@daypitney.com with questions about this article.