New Compliance Challenges: False Claims Act Amendments - FERA With More Pending

Tuesday, June 30, 2009 - 01:00
Sheryl J. Willert

Sheryl J. Willert

Editor: What was the purpose of the amendments to the federal False Claims Act (FCA) embodied in the recently enacted Fraud Enforcement and Recovery Act (FERA)?

Willert: The intent of FERA was to expand the FCA to protect the U.S. and, in so doing, the citizens of this country against fraud associated with the trillions of dollars that will be expended for TARP and the economic stimulus package generally - including mortgages made available through federal funding.

Editor: Does FERA expand liability under the FCA?

Willert: It really does. First, it clarifies that false claims are actually claims that are made for money or profit regardless of whether the claims are presented to a government employee or official, regardless of whether the government has custody of the money or property in question, and regardless of whether or not the person or entity that is making the claim actually intended to defraud the government. This overrides decisions both by the U.S. Supreme Court and by some of the federal courts that have limited the application of the FCA. One such case is Allison Engine Co. v. United States ex rel. Sanders, 128 S.Ct. 2123 (2008).

The Allison Engine Co. case held that there is no liability where a subcontractor made a false statement to a prime contractor but did not have the requisite intent to have that statement used to get payment from the government. FERA amends the FCA to provide for liability if any person or entity knowingly makes, uses or causes to be made a false record or statement material to a fraudulent claim. What that really does is take the intention of the person who is making the statement out of the picture. The language of the statute now essentially says, if you make a false statement and the natural consequence of that statement would result in the collection of money from the government or is material in causing the government to make the decision to pay, then there may be liability for making that statement regardless of whether you intended to use the statement for that purpose.

Also, FERA broadens the definition of a claim to include any demand or request for money from either the U.S. government or any contractor, grantee, or recipient of money that is being spent by or on behalf of the United States government. That definition covers a substantially larger waterfront than previously covered under the FCA.

Editor: Does FERA expand the right of action for retaliation under the FCA?

Willert: We are seeing a considerable expansion of retaliation causes of action. FERA expands the retaliation concept under the FCA to cover a contractor or an agent. This definition does not even require an employment contract or relationship to exist before a retaliation claim can be made.

Editor: How does FERA expand the statute of limitations under the False Claims Act?

Willert: When someone files a qui tam action under the FCA, most of the time the action is secret during the period while an investigation takes place. Oftentimes the courts would provide the employer or the business entity that was the subject of this investigation or this secret qui tam action with the opportunity to essentially say that the statute of limitations has run on this claim because so much time had elapsed between the initial reporting and the ultimate bringing of the action. As a result of FERA, the delay in bringing the action against the employer is no longer a defense against the action.

Editor: What industries will FERA impact?

Willert: The financial industry is going to certainly feel a significant impact from this. However, any business that is directly or indirectly the recipient of federal money may now be exposed to qui tam actions as a result of FERA. Although well intentioned, it opens the door for disgruntled employees and disappointed competitors to bring qui tam actions.

Editor: Given the changes made by FERA, how can businesses reduce the risk of FCA violations?

Willert: This situation is similar to that of Sarbanes-Oxley when it was first enacted and business was given very little time to comply with its complex requirements. With respect to issues under the FCA, businesses need to step back and take a look at their bidding and accounting processes to ensure that they are truly complying with the FCA.

Businesses should consider setting up separate compliance systems to assure that there will be a function within the company, other than, for instance, the accounting office, that will monitor compliance and look into concerns or complaints, whether related to the correctness of claims being submitted to the government or the handling of reverse claims.

Editor: What do you mean by "reverse false claims?"

Willert: FERA expands the FCA to cover liability when amounts to which the government is entitled are withheld from it. The purpose of this amendment is to assure that the government receives every penny to which it is entitled including overpayments.

Editor: H.R. 1788 and S. 458 are both pending in Congress. I understand that both bills eliminate a defendant's ability to raise the jurisdictional defense of public disclosure/ original source. How often does this defense arise in qui tam litigation?

Willert: These bills would eliminate a provision in the FCA that a qui tam action can only be brought by a relator who is the original source of this information. Under that provision, a relator could not base a qui tam action on information available to the public. This interpretation of the statute has been used frequently in multiple circuits to cause defendants to be dismissed from cases because the relator was not the original source of the claim. The elimination of that defense is going to result in significantly more claims surviving motions to dismiss. And, given the current state of the economy, may very well result in an expansion of claims being brought.

Editor: Both H.R. 1788 and S. 458 eliminate the need for qui tam relators to meet the requirements of FRCP Rule 9(b).

Willert: The elimination of the requirements of FRCP Rule 9(b) is of great significance. FRCP Rule 9(b) requires that an allegation of fraud or mistake be pled with particularity with respect to the circumstances that constitute the fraud or mistake. This means that a qui tam case can now be brought based on a generalized statement that says this person has engaged in a course of conduct that constitutes fraud without being specific as to what the fraudulent action is.

The elimination of the requirement that the specific facts be pled will encourage fishing expeditions. Relators will hope to obtain through discovery either enough facts to proceed with the case or to achieve a settlement based on the defendant's desire to avoid the costs of discovery.

Editor: H.R. 1788 and S. 458 allow some government employees to bring qui tam cases based on information they learned as government employees.

Willert: Government employees regularly gain access to confidential information; they need that information for a myriad of reasons including bank audits, IRS audits, and audits associated with Medicare and Medicaid reimbursement - just to name a few. This provision places both the government and businesses in a very difficult situation. Business may become more reluctant to be cooperative with audits. The government may find itself in a conflict of interest situation.

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